Apple’s Damned Dependency On China
The fallout from the coronavirus outbreak has revealed Apple’s damned dependency on China and how quickly its business is compromised when things go awry.
With most of its iPhone production happening through manufacturing giants such as Foxconn, located across impacted areas of China, the closures and travel bans resulting from the virus has strained the tech giants’ business.
Just two weeks ago, Apple warned investors it would not reach predicted financial targets for the first quarter because of supply shortages and a decline in sales. Meanwhile, credible tech analyst, Ming-Chi Kuo, claims Apple only has one months’ worth of lens inventory left.
Apple’s dependency on China has been raised as far back as 2015, when some operations executives highlighted it as a potential risk.
It was suggested the company should have at least one product assembled in Vietnam – but the suggestion was rebuffed. China was viewed as being too valuable, with the second largest global economy and a large consumer market. Relocating would be too great a challenge.
But now, Apple’s reliance on China has unnerved investors. The coronavirus now marks the tech giants’ third significant setback over recent years, including the fallout from the US that included tariffs and a decline in iPhone sales.
The outbreak has crippled factory production in China, as the country shut down activities as a measure to try and contain the outbreak. The move then led to Apple’s announcement on its finances, leading to a market value decline of US $100 billion.
The benefits, however, of working out of China is its booming economy and consumer market, delivering Apple’s soaring market value and its stable, efficient and low-cost manufacturing operations.
Apple CEO, Tim Cook, continues to downplay the need to diversify its supply chain to include other countries. During an interview with Fox Business Network, Cook claimed that unpredictable events were a facet of business and highlighted Apple’s operations team having previously navigated crises, such as natural disasters.
‘The question for us is: was the resilience there or not? And do we need to make some changes?’ Cook said.
‘My perspective sitting here today is that if there are changes, you’re talking about adjusting some knobs, not some sort of wholesale fundamental change.’
Recently, Apple has started experimenting with small production moves away from China. Plans to assemble wireless earbuds in Vietnam, produce iPhones in India and Mac Pro computers in the US, for example.
But it’s also raised several difficulties. China’s workforce that Apple heavily relies on, through hundreds of thousands of Foxconn’s trained and skilled employees, are reliable. A further tens of thousands of experienced engineers then overlook the process to ensure standards are upheld.
Finding a comparable and competitive amount of skilled and unskilled labour is near impossible, former Foxconn executive Dan Panzica said. China’s large population has enabled suppliers to build factories with a capacity for over a quarter of a million people.
The number of migrant employees in China, who do a significant portion of Apple’s production, surpass Vietnam’s total population of 100 million. While India’s population comes close in comparison, its roads, ports and infrastructure are dwarfed by those of China.
‘You’re not going to be able to have mega-factories anywhere else,’ Panzica said, according to The Australian. ‘You’re going to have to break them up.’
Departing from China could also jeopardise Apple’s significant sales in the country, which accounts for nearly a fifth of its total revenue. Employing many local workers helped bolster the company’s access to the market and any reduction may compromise its standing with the government, which wields immense influence over the perception of global brands, according to tech researcher at Strategy Analytics, Neil Mawston.
Although Apple’s brand remains strong in China, its smartphone market share has dropped to 7.5 per cent, from a peak of 12.5 per cent in 2015. This is also influenced by pressure from homegrown rivals like Huawei, according to market research firm Canalys.
Cook joined Apple in 1998 and is the architect of the company’s China business. As the head of operations, he took on responsibility for a company managing extra inventory and dependent on its own US manufacturing hubs. Following the movements of Dell, Compaq and other tech brands, he began outsourcing to contract manufacturers in Asia.
In the early 2000’s, Cook met Foxconn founder Terry Gou, who would go on to become the dominant contract manufacturer in Asia. Foxconn then struck deals with the company to be one of the few manufacturers of iPods and the iPhone, which launched in 2007.
As iPhone sales surged, Apple, Foxconn and China shuffled to meet demand. China took over farmland in 2010 in Zhengzhou, and within months, a Foxconn factory complex was built for 250,000 employees.
The Chinese government also helped attract workers to Foxconn by posting notices online.
Over time, Apple, Foxconn and China developed a triangle of interdependency as Apple grew to depend on Foxconn to produce devices alongside Chinese consumers to purchase them.
Foxconn developed its business by depending on China’s vast workforce and control over land to develop factories.
China became reliant on Foxconn as the country’s largest private-sector employer and Apple as a trainer of new tech suppliers.
Apple is unlikely to transfer any iPhone production to India later this year – the supply chain isn’t in place and India’s workforce aren’t equipped to produce the high-tier, organic light-emitting diode models, a source told The Australian.
Efforts to resuscitate production in the US have also hit roadblocks.
Foxconn and Apple have declined to provide a comment.