TOKYO — Apple Inc. AAPL 0.17% has told some of its contract manufacturers that it wants to increase production outside of China, citing Beijing’s tough anti-Covid policy among others, people involved in the discussions said.
India and Vietnam, which are already sites for a small portion of Apple’s global production, are among the countries the company is eyeing as alternatives to China, the people said.
According to analysts, more than 90% of Apple products such as iPhones, iPads and MacBook laptops are manufactured in China by external contractors. Apple’s heavy reliance on the country is a potential risk due to Beijing’s authoritarian communist government and clashes with the US, analysts said.
Any move by Apple, the largest US company by market cap, to emphasize manufacturing outside of China could influence the thinking of other Western companies that have been considering how to reduce their reliance on China for manufacturing or key materials. That consideration has intensified this year after Beijing failed to criticize Russia for its invasion of Ukraine and implemented lockdowns in some cities to combat Covid-19.
An Apple spokesman declined to comment. When asked broadly about Apple’s supply chain in April, Chief Executive Officer Tim Cook said, “Our supply chain is truly global, so products are made everywhere.” He also said, “We will continue to look at optimization.”
Apple tried to diversify away from China before Covid-19 spread around the world in early 2020, but those plans have been complicated by the pandemic. Now the Cupertino, Calif.-based company is pushing again, telling contractors where to look for new manufacturing capacity, people involved in the talks said.
Lockdowns in Shanghai and other cities as part of China’s anti-Covid policy have caused supply chain bottlenecks for many Western companies. Apple warned in April that the resurgence of Covid-19 threatens to hurt sales by up to $8 billion in the current quarter.
China’s travel restrictions have led Apple to restrict executives and engineers from sending to the country for the past two years, making it difficult to inspect manufacturing facilities in person. Last year’s power outages have also tarnished China’s reputation for reliability.
A closed plant near Chennai, India, of Foxconn Technology Group that assembles iPhones; Apple is discussing expanding production in India, possibly for export as well.
Photo: Sudarshan Varadhan/REUTERS
While many Western companies in China face similar problems, Apple’s size gives it bargaining power with contractors, said Ming-chi Kuo, supply chain analyst at TF International Securities. “Only a company like Apple can push for such supply chain shifts,” Mr. Kuo said.
Still, people in the industry said many of the reasons Apple has long maintained China as a manufacturing center remain: a well-trained workforce, low costs compared to the US, and a deep network of parts suppliers that’s hard to find anywhere else could recreate years of effort.
With the exception of India, the pool of qualified workers in China exceeds the total population of many alternative countries in Asia. Local governments in China have been working closely with Apple to ensure its contractors have sufficient land, labor and supplies to assemble iPhones and other electronics in massive factories.
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Chinese Premier Li Keqiang said Thursday Beijing wants to be a hotspot for foreign investment and work closely with foreign companies to ensure its rules are predictable.
Another benefit is that Apple can sell many of its Chinese-made phones and computers in the same country, with China often accounting for about a fifth of Apple’s global sales. Apple’s Mr. Cook said in January that the company had the four best-selling phones in urban China.
“Given the size of the domestic market and well-established manufacturing ecosystem, China would stay on top and do more value-added work for companies like Apple,” said an industry leader involved in the Apple supply chain.
People who have spoken to Apple about its production plans said the company sees India as the closest to China due to its large population and low cost.
Taiwan-based assemblers Foxconn Technology Group 2317 -0.47% and Wistron Corp. 3231 -0.89% have already set up factories in India to produce iPhones mainly for the domestic market of that country where Apple sales are growing fast. In April, Apple announced that it had started manufacturing the latest generation of iPhones, the iPhone 13 series, in India.
Wistron Corp., a Taiwan-based manufacturer of iPhones, operates factories in India, including a facility near Bengaluru.
Photo: Stringer/Reuters
Apple is now in talks with some existing suppliers about expanding in India, including possible production for export, the people said.
One problem with India is the difficulty for China-based fitters to settle there as relations between New Delhi and Beijing are chilly, analysts and suppliers said. The two countries’ militaries fought a deadly clash along their disputed border in 2020 and recently had a diplomatic row over the treatment of Chinese smartphone maker Xiaomi Corp. by the Indian regulators.
For this reason, China-based manufacturers that do business with Apple are looking more to Vietnam and other Southeast Asian countries, according to people familiar with the matter.
Vietnam borders China and is already a hub for manufacturing smartphones for Apple’s leading global competitor Samsung Electronics Co. South Korea-based Samsung has generally limited its exposure to Chinese manufacturing.
India manufactured 3.1% of the world’s iPhones last year, according to research firm Counterpoint, and the share is expected to rise to 6% to 7% this year. China makes up almost all the rest.
A China-based manufacturing contractor, Luxshare Precision Industry Co., manufactured AirPods earbuds for Apple in Vietnam.
In recent calls with investors, Luxshare executives said some customers are concerned about power issues and pandemic restrictions – an indication of China’s challenges. The executives did not name the customers.
According to Luxshare, these customers asked manufacturing partners to look outside of China when conducting critical preliminary work for mass production, a phase known as New Product Introduction or NPI. In this phase, contractors translate a brand’s product designs and prototypes into a detailed manufacturing plan.
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Apple has told its manufacturing partners that they want to conduct more NPIs outside of China, people familiar with the discussions said. In this case, the non-Chinese sites would develop into full-fledged production centers rather than simply copying plans developed in China.
Such moves will require significant investment from suppliers, analysts and suppliers said, worrying them at a time when the global economic outlook is clouded by high commodity prices, the war in Ukraine and volatility in stock markets.
Cash is important in uncertain times, a contractor executive said, but suppliers need to go where Apple goes if they want to keep the business.
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