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As The Romance Deteriorates, Apple looks Beyond China’s “iPhone Factory.”

In order to avoid becoming overly dependent on China, a tech giant wants to move its supply chains to India and Vietnam.

Taiwan’s Taipei

Last month, workers at Foxconn’s huge factory in Zhengzhou, China, got into fights with security officers because they were angry about the COVID-19 quarantine and not getting paid their wages.

At the end of the year, Apple’s busiest sales season, the unprecedented protests at “iPhone City” have caused significant delays for the most recent iPhone models, jeopardizing its 14-quarter growth streak. There is no quick fix for Apple, which manufactures approximately 90% of its products in China.

Shehzad Qazi, managing director of the consulting firm China Beige Book, stated to Al Jazeera, “This can’t be fixed in the short term, you can’t build iPhone cities that easily in other parts of Asia.”

Qazi added, “Apple’s supply chains are extremely vulnerable because they are concentrated almost exclusively within China.”

The crisis has increased the urgency of the tech giant to reroute its supply chains and highlighted the rising costs of operating under China’s “zero-Covid” strategy, which Beijing is frantically trying to end after nearly three years of lockdowns and border controls.

The Wall Street Journal reported earlier this month that Apple is accelerating plans to have more of its new products manufactured elsewhere, particularly in Vietnam and India.

Pham Minh Chinh, the Prime Minister of Vietnam, was entertained at the Apple Park campus in Cupertino, California, in May by Chief Executive Tim Cook, who cultivated friendly ties with Beijing by agreeing to remove politically sensitive apps and store Chinese users’ data within reach of local authorities.

Apple made the announcement in September that it had begun producing its flagship iPhone 14 in India, where it had been putting together previous models since 2017.

Al Jazeera contacted Apple for a comment, but they did not respond.

In recent years, China’s dominant position in Apple’s supply chain has gradually decreased. About 44-47 percent of the production sites of Apple suppliers were located in China prior to 2019. China’s portion tumbled to 41 percent in 2020 and afterward 36% in 2021.

Apple is predicted by JPMorgan to produce 25% of all iPhones sold in India by 2025.

The pattern has led some to believe that Apple’s investment in China may have reached its limit. However, despite the shift in production, Apple’s firmly established presence in the nation, where at least 95% of all iPhones are still manufactured, is likely to make diversification difficult.

An anonymous former Apple executive who worked in China told Al Jazeera, “Apple is not leaving China.”

The former executive stated that China’s optimized labor market to accommodate Apple’s seasonal production cycle has been a significant contributor to the company’s profitability.

Apple’s on-demand access to a large pool of migrant workers in China, for example, enables assembly lines to grow to as many as one million workers ahead of a new iPhone launch and to a fraction of that number during slower times.

“There is no such thing as this in India and Vietnam presumably doesn’t have the populace required for Apple’s scale,” the previous chief said.

He added that the company also benefits from China’s industrial clusters. When Apple partners with them, many of the best suppliers are willing to work less to learn from Apple’s supply chain skills and win more contracts with Chinese brands that want to be as successful as Apple.

The executive stated, “Apple’s business model is about forcing suppliers to compete against each other to avoid becoming excessively dependent on any one supplier.”

It appears that Apple is expanding its use of that strategy to mitigate risks in the supply chain.

Apple intends to sign contracts with a wider range of suppliers in China in addition to expanding its diversification into Vietnam and India. The reasoning is that eliminating single points of failure will be prevented by selecting more winners from the pool of competing businesses.

Washington’s new restrictions prevent American businesses from doing business with the most innovative companies in China’s tech ecosystem, adding to the difficulties caused by Beijing’s COVID snafus.

Apple ended its contract with Yangtze Memory Technologies, a major manufacturer of memory chips in China, in October after the company was blacklisted as part of President Joe Biden’s growing effort to impede China’s tech sector due to alleged concerns about national security. Apple had initially planned for the Chinese company to eventually supply up to 40% of all iPhone models’ required transistors.

Apple is forced to increase its reliance on the US-led supply chain as a result. DigiTimes reported last month that Apple has since hired Samsung, a rival in South Korea, to produce the NAND flash memory it had hoped Yangtze would provide.

In the meantime, the company is going to increase its reliance on the largest advanced chip manufacturer in the world, Taiwan Semiconductor Manufacturing Company (TSMC). This month, Apple said it would use the four-nanometer and three-nanometer chipmaking processes of the Taiwanese chipmaker for its custom A-series and M-series chips.

Apple’s perspective on China is complicated by geopolitical tensions over Taiwan, which Beijing claims is its own territory that must be “reunified” by force if necessary. Biden has repeatedly stated that he would commit US forces to defend the island in the event of a Chinese invasion, despite the fact that Washington does not officially recognize Taipei.

Apple must now navigate the intensifying geopolitical competition between the world’s two largest economies, which includes one of the most dangerous flashpoints, after years of stability between the US and China.

Philip Elmer-DeWitt, a seasoned tech journalist who has covered Apple for almost four decades and now runs the online publication Apple 3.0, stated to Al Jazeera, “The possibility that China might invade Taiwan raises alarm bells in Cupertino as well as Washington.”

Elmer DeWitt added, referring to a recent event at which TSMC announced it would increase its investment for the US-based semiconductor plants from $12 billion to $40 billion. “Notice that both Tim Cook and Joe Biden showed up in Arizona for the start of TSMC’s new US-based factories.”

China’s exit from “zero-Covid” is still not clear, and neither is how quickly. Even though some of Beijing’s strictest restrictions have been lifted in recent weeks, others, like the quarantine for international travel, are still in place. Additionally, the rapid spread of the virus throughout the population has raised the possibility of significant disruption and death.

Qazi stated, “Investors need to understand the end of zero-COVID is going to be a process, not a one-time event,” adding that restrictions that have been lifted may be reimposed until a sufficient number of people have received mRNA vaccines.

Qazi stated, “China has become an increasingly complicated place for foreign companies to operate, especially American companies.” As a result, China’s social and political policies will have a significant impact on Western nations and businesses.

 

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