san francisco The walls along the factory site in the southern Chinese metropolis of Shenzhen are kilometers long. Hundreds of thousands of workers are said to toil here. The operator, the Taiwanese company Hon Hai Precision Industry, better known by the brand name Foxconn, has a customer who is pushing for the greatest possible secrecy: Apple.
It is a particularly delicate phase at the moment. Production for the next iPhone generation is starting. Apple is expected to debut the iPhone 14 to the public on September 7th. Sales could start just under two weeks later. So far, the production of the devices has been almost exclusively from the factories in China. This year could be different.
“Apple is in the process of moving its production out of China to other countries, particularly India and Vietnam,” KC Quah, supply chain expert at market researcher Gartner, told Handelsblatt. TF International Securities analyst Ming-Chi Kuo has close ties to contract manufacturers like Foxconn. And he is convinced that this year Apple will not only produce the iPhone 14 in China, but also in India.
The financial agency Bloomberg reports that production in India will start in November, two months after the presentation of the new iPhone generation. The reports agree that India is set to play a major role in iPhone production for the first time. An Apple spokesman declined to comment on changes in Apple manufacturing.
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So far, the production of iPhones outside of China has hardly played a role. According to Bloomberg analysts, around one million iPhones are said to have been completed in India in the first quarter of this year. For comparison: Market researcher IDC estimates the total number of iPhones produced by Apple during this period at 56.5 million devices – almost all of them are Chinese-made.
The Apple technology group is more dependent on the People’s Republic of China than on any other country in the world. When Hon Hai and other contract manufacturers were affected by closures due to strict corona regulations and disruptions along the supply chains, Apple CEO Tim Cook warned: “We are not immune.” CFO Luca Maestri put the possible impact in the current year at four to eight billion dollars.
Tim Cook aligned Apple to manufacture in China
Tim Cook himself is responsible for Apple’s dependence on China. Founder Steve Jobs brought Cook into the company in 1998 to make the company more efficient. He went to work by closing Apple’s own factories and relying more on outsourcing manufacturing to outside companies. Foxconn boss Terry Gou knew Cook from his time at the computer company Comaq. Under Cook, Foxconn rose to become the most important contract manufacturer – and China the most important manufacturing country.
Even if Apple has recently purchased more components from countries such as the USA, Japan, India or Vietnam, the company is still heavily dependent on China, said analyst Quah: “The weeks-long corona lockdown in Shanghai had hit Apple hard.”
The group relies on Shanghai in particular for the production of the Macbook Pro and iPads. There are now reports that Apple is relying more on Vietnam for iPad production. “But that will take years. A factory can be set up in other countries, but the complex network of suppliers is not easy to relocate,” Quah warned.
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This makes the company very dependent on everything that happens in China. An anecdote is often told at Apple in this context. At a meeting in 2008, supply chain expert Sabih Khan reportedly pointed out to Tim Cook a problem with manufacturing in China. “Someone should solve this in China,” Cook reportedly said.
Thirty minutes later, he reportedly looked at Khan during the meeting and asked, “Why are you still here?” Khan then drove to the San Francisco airport and caught the next flight to China. Today, Khan is Vice President of Operations, making him the chief executive of the company’s supply chains.
Under Khan, India is coming into focus as an alternative to manufacturing in China. The most important partner for the new strategy is Foxconn, as it was 20 years ago. In 2017, Apple had iPhones manufactured in India for the first time – not the top models, but the entry-level iPhone SE.
Personnel costs are also increasing in China
In April, Apple then confirmed that it was now also manufacturing the latest iPhone 13 model series in India. According to Reuters, the device will be assembled in a Foxconn factory.
The contract manufacturer has a plant in India near the city of Chennai and employs around 17,000 people there. In December, however, the factory was temporarily closed after reports of food poisoning among more than 250 workers.
“We have taken a number of remedial actions to ensure this does not happen again,” Foxconn said. The company had announced that it wanted to improve the living conditions for local employees. Work resumed in January.
Although Foxconn has so far been Apple’s partner of choice in India, other Apple contract manufacturers have also opened factories in India. These include in particular Wistron and Pegatron, which are already manufacturing for the company in China.
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Shifting production of iPhones is a far-reaching step for Apple. After all, it took years to build up capacities in China. Foxconn, Wistron and Pegatron operate dozens of locations in China with hundreds of thousands of employees. Foxconn’s factory in India is tiny in comparison.
Supply chain expert Quah suspects another reason behind the decision for other locations. “Personnel costs in China are rising sharply. That’s especially true for Shanghai,” Quah said. Wages in India or Vietnam are significantly lower. However, this does not automatically translate into lower production costs.
“In China there is high quality in production and all the suppliers are local. It’s not that easy to replicate in India or Vietnam,” Quah said. He was convinced that Apple would nevertheless diversify its supply chains. “The risk of being too dependent on one country is simply too high,” Quah warned.
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