Apple production in china

Comment: Coronavirus justifies a fresh take on Apple production outside China

— Mar. 6th 2020 4:42 am PT

Apple’s reliance (some would say over-reliance) on China has been a hotly-debated topic for some time. The company’s efforts to boost Apple production outside China have never been of greater interest than now, however, when the coronavirus outbreak is having a substantial impact inside the country.

India has been one of the countries making a concerted effort to win more of Apple’s manufacturing business, but a couple of reports have highlighted some of the challenges to making this a workable option …

Earlier this week, a WSJ report claimed that Apple had planned to make the iPhone 11 in India but subsequently abandoned the effort.

One of the great challenges, as we’ve discussed before, is the scale and complexity of Apple’s component supply-chain, much of which is located within a specific region in China.

It’s no accident that much of Apple’s manufacturing happens in and around Shenzhen. First, the city is strategically-placed, serving as the gateway between mainland China and Hong Kong. It is one of the largest shipping centers in the world, with a massive container port.

Second, the Chinese government established Shenzhen as the first Special Economic Zone in the country. SEZs are designed to encourage enterprise through relaxed planning regulations and generous tax incentives – and, crucially, to facilitate foreign investment in local companies. It is this, as much as its geographical advantages, which has enabled it to grow at such a pace.

Third, that SEZ was established way back in 1980, meaning that the city has had 37 years to grow into the manufacturing center of the tech world. Apple relies on a huge network of suppliers and sub-contractors, some of which may make just a single tiny component. The majority of them are based in Shenzhen and its immediate surrounds, so the logistics of bringing everything together in one place for assembly are straightforward.

So when we talk about Apple production outside of China, we really need to be talking about component manufacturing as well as final assembly.

A report from The Information yesterday said that Apple had indeed investigated the feasibility of component production in India, but the results of that investigation weren’t encouraging. Among the difficulties faced were:

• Lack of skilled labor
• Inability or unwillingness to comply with Apple’s Supplier Responsibility standards
• Poor quality of local roads, making transportation challenging

Much of this, however, is a Catch-22. Suppliers aren’t willing to make the large investments needed to comply with Apple’s environmental policies, for example, because of the substantial capital investment costs. Large orders are needed to amortize these costs, which Apple can’t offer yet because of all the difficulties mentioned.

So far, Apple’s approach appears to be ramp things up gradually over an extended period of time. For all the talk there has been of large-scale shifts in manufacturing capacity, the reality so far has been rather modest.

I’ve said before, however, that over-dependence on one country is a risk Apple needs to address.

Long-term, the idea of Apple moving more production out of China does make sense. Apple has long aimed for diversification of its supply-chain, preferring to have multiple suppliers for as many components as possible, and having diversification geographically makes sense too if the logistical barriers can be overcome. Over-reliance on China does represent a risk, and it’s one that Apple will want to gradually mitigate.

What wasn’t clear then was just how suddenly that risk could make itself felt. The impact on Chinese manufacturing created by the coronavirus outbreak has changed that. While the Chinese government and Apple suppliers are painting an optimistic picture right now, we still have no idea how realistic that picture may turn out to be.

Whatever challenges Apple faces in geographical diversification in its supply chain, they are ones that do need to be overcome. I would hope and expect that the company is putting much more effort into accelerating these efforts now.

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Apple (AAPL) Reducing iPad, iPhone Manufacturing in China

Apple Inc. (AAPL) reportedly is planning to move significant amounts of iPad and iPhone production outside China, partly because the new Biden administration in the United States is, so far, leaving tariffs on Chinese goods imposed by the Trump administration in place, and partly because rising labor costs are spurring other companies as well to seek lower-cost manufacturing locales. If the reports prove to be accurate, iPad production will commence in Vietnam starting in the middle of 2021, while iPhone production will increase in India. The iPhone 11 already is produced in India, and manufacturing of the iPhone 12 may start there soon. 

• Apple reportedly is moving significant amounts of iPad production out of China for the first time, to Vietnam. Other Apple products already are, or will be, made in Vietnam.
• iPhone production is slated to increase in India, including the iPhone 12.
• In 2019, Apple reportedly began implementing a plan to shift 15% to 30% of its production in China to other countries.

Apple’s Shift From China Is Already Underway

In June 2019, a report emerged that Apple had plans to move between 15% and 30% of its hardware production out of China. The trade war with China begun by U.S. President Donald Trump – which included, at the time, 25% tariffs on devices such as phones, laptops, and tablets made in China – was one motivation for Apple to diversify its international supply chain. 

In that 2019 report, an executive at an Apple supplier offered this additional reasoning for reducing manufacturing exposure to China: «A lower birthrate, higher labor costs, and the risk of overly centralizing its production in one country. These adverse factors are not going anywhere … with or without the final round of the $300 billion tariff.» 

At the time, another supplier warned that shifting production out of China could be «painful and difficult.» The reason was the vast business ecosystem that had grown in China to support Apple, plus that country’s huge numbers of skilled workers and a more reliable infrastructure in key areas such as power generation than lower-cost countries. 

Apple already has moved some AirPods Pro manufacturing to Vietnam, and the tech giant reportedly is planning to expand HomePod mini production and shift some MacBook production there as well. Meanwhile, some Mac mini production has been moved to Malaysia. 

Significance for Investors

Apple’s pivot away from dependence on China as its main manufacturing hub comes with both pluses and minuses. The major plus is that this hedges against the possibility that the United States and China will remain locked in a protracted trade war, with U.S.-imposed tariffs persisting. Another plus is that Apple will realize savings by moving production to lower-cost locales.

On the minus side of the ledger, Apple is moving production away from a country with, as noted above, a well-developed business ecosystem and infrastructure that has served Apple well. As a result, it is possible that Apple’s further diversification of production across international boundaries actually may do the opposite of the expected and increase risk. One example was the recent worker riot in India, due to the missteps of a subcontractor under pressure from Apple to ramp up production rapidly at a new plant, in a country whose laws and culture it did not understand. 

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Apple production in China 2010-2020

Apple production volume in China from 2010 to 2020 (in million metric tons)

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Apple production in China 2020, by region

Apple production in China in 2020, by region (in 1,000 metric tons)

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Rice production in China 2020, by region

Wheat production in China in 2020, by region

Corn production 2020, by region

Citrus fruit production in China 2020, by region

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An iPhone’s Journey, From the Factory Floor to the Retail Store

(And Why the Product Costs More in China)

The iPhone is Apple’s most profitable and best-selling product. More than a billion have been sold since the first one was released.

About half of all iPhones now are made in a huge manufacturing facility in the central Chinese city of Zhengzhou. This is the story of how an iPhone made there can end up in your hands.

Getting the Parts

Components from more than 200 suppliers go into each iPhone.

Apple buys many of the components for iPhones — like the memory chip, the modem, the camera module, the microphone and the touch-screen controller — from more than 200 suppliers around the world. Foxconn, the Taiwanese company that runs the Zhengzhou facility, even produces some smaller parts, such as metal casings.

Apple orders many of the components from global suppliers, and then sells them, en masse, to one of its contract manufacturers based in China. In Zhengzhou, that means Foxconn.

Building the Phones

Roughly 350 iPhones can be produced each minute in the factory.

Foxconn’s facilities in Zhengzhou cover 2.2 square miles and can employ up to 350,000 workers, many of whom earn about $1.90 an hour. The operation does what is called F.A.T.P., or final assembly, testing and packaging.

There are 94 production lines at the Zhengzhou manufacturing site, and it takes about 400 steps to assemble the iPhone, including polishing, soldering, drilling and fitting screws. The facility can produce 500,000 iPhones a day, or roughly 350 a minute.

After the iPhone rolls off the assembly line, it is placed in a sleek white fiberboard box, wrapped and put on a wooden pallet, and then wheeled out to waiting trucks.

Passing Through Customs

A government customs facility sits just outside the Foxconn factory.

The newly assembled iPhone is transported a few hundred yards beyond the factory gate, where China built a large customs facility. The customs operation sits in a so-called bonded zone, which allows Apple to sell the iPhones more easily to Chinese consumers.

As the final point of assembly for the iPhone, China also serves as a starting point for Apple’s global tax strategy. In Zhengzhou, often in the customs facility, Foxconn sells the completed iPhones to Apple, which in turn resells them to Apple affiliates around the world.

The process, most of which takes place electronically, allows Apple to assign a portion of its profits to an affiliate in Ireland, a tax-advantageous locale. The system is not unique to China.

Shipping Abroad

Smartphones travel in Boeing 747s.

IPhones bound for the United States and other parts of the world leave customs by truck and are transported three miles to the Zhengzhou airport. The airport has been significantly expanded in recent years, as production of the iPhone has increased.

Some years ago, personal computers that were made in China were transported to the United States by container ship, with a trip lasting about a month. Smartphones are small enough to be shipped by plane in huge quantities — and cost effectively. A single wide-body Boeing 747 can easily carry 150,000 iPhones tucked into its aluminum canisters.

From Zhengzhou, UPS, FedEx and other freight carriers typically fly United States-bound iPhones to Anchorage. There, they refuel, before going on to Louisville, Ky., a major logistics hub, or other points in the country.

Staying in China

It takes almost as long to get a phone to Shanghai as it does to San Francisco.

For an iPhone headed for the China market, customs officials use an electronic system to virtually stamp the goods as “exports” and then restamp them as “imports.” In Zhengzhou, the process happens in the same customs facility just outside the factory.

Once the products are declared an import, customs can collect a 17 percent value-added tax, a kind of national tax, based on the import price. Afterward, the goods are approved for transport around China.

Domestic-bound iPhones are typically loaded onto a large truck and taken on an 18-hour drive from Zhengzhou to Shanghai, in eastern China, where Apple has set up its national distribution center. A single tractor-trailer holds up to 36,000 iPhones. Because the vehicles have about $27 million worth of freight on board, they are equipped with cameras and sometimes accompanied by armed security guards.

After the iPhone leaves the Foxconn factory in Zhengzhou, it takes two days, on average, to get to a store in Shanghai, a 590-mile trip. It takes three days, on average, to get a store in San Francisco, some 6,300 miles away.

Differing Prices

IPhones can sell for nearly 20 percent more in China than in the United States.

Chinese customers can pay much higher prices, because of currency fluctuations and the country’s hefty value-added tax.

A 32-gigabyte iPhone 7 sells for about $776 at the Apple Store in Shanghai. In New York, it goes for $649.

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