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.
Mumbai photo: PHD Media
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2020-03-06 12:55:23Z
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