The end of Apple’s affair with China

Oct 24th 2022 |

CHENNAI AND CUPERTINO

By a dusty stretch of the deafening road from Chennai to Bengaluru lie three colossal, anonymous buildings. Inside, away from the din of traffic, is a high-tech facility operated by Foxconn, a Taiwanese manufacturer. A short drive away Pegatron, another Taiwanese tech firm, has erected a vast new factory of its own. Salcomp, a Finnish gadget-maker, has set one up not far away. Farther west is a 500-acre campus run by Tata, an Indian conglomerate. What these closely guarded facilities have in common is their client: a demanding and secretive American firm known locally as “the fruit company”.

The mushrooming of factories in southern India marks a new chapter for the world’s biggest technology company. Apple’s extraordinarily successful past two decades—revenue up 70-fold, share price up 600-fold, a market value of $2.4trn—is partly the result of a big bet on China. Apple banked on China-based factories, which now churn out more than 90% of its products, and wooed Chinese consumers, who in some years contributed up to a quarter of its revenue. Yet economic and geopolitical shifts are forcing the company to begin a hurried decoupling. Its turn away from China marks a big shift for Apple, and is emblematic of an even bigger one for the world economy.

Apple’s packaging proclaims “Designed by Apple in California”, but its gadgets are assembled along a supply chain that stretches from Amazonas to Zhejiang. At the centre is China, where 150 of Apple’s biggest suppliers operate production facilities. Tim Cook, who was Apple’s head of operations before he became chief executive in 2011, pioneered the firm’s approach to contract manufacturing. A regular visitor to ChinaMr Cook has maintained good relations with the Chinese government, obeying its requirements to remove apps and to hold Chinese users’ data locally, where it is available to the authorities.

Now a change is under way. Big tech is showing strains. On October 25th Alphabet and Microsoft presented disappointing quarterly results. Meta, which lost another fifth of its value after reporting the second straight quarter of declining sales, is a shadow of its former self. Apple’s latest earnings, due out after The Economist went to press on October 27th, may be dented by creaky Chinese supply chains and softening demand from Chinese consumers. So Mr Cook, who has not been seen in China since 2019, is wooing new partners. In May he entertained Vietnam’s prime minister, Pham Minh Chinh, at Apple’s futuristic headquarters. Next year Apple is expected to open its first physical store in India (whose prime minister, Narendra Modi, is a fan of gold iPhones).

Apple also increasingly sees locals as potential customers, particularly in India, the world’s second-largest smartphone market. Though iGadgets are too pricey for most Indians, that is changing. Apple said in July that its revenues in India had nearly doubled in the past quarter, year on year, driven by the “engine” of iPhone sales.

An iWire act

This points to perhaps the biggest reason for Apple’s shift: geopolitics. Rising Sino-American tensions are making China an awkward place to do business. Heightened Chinese sensitivity is adding friction. This summer Apple reportedly had to ask Taiwanese manufacturers to label their products “Made in Chinese Taipei” to appease newly finicky Chinese customs officials (at the risk of angering Taiwanese ones).

America, for its part, has become more aggressive in its competition with China’s domestic tech industry. On October 7th America announced a ban on “us persons” working for some Chinese chipmakers. On the same day it added 30 Chinese companies to a list of “unverified” firms its officials had been unable to inspect. Apple had reportedly been about to sign a deal to buy iPhone memory chips from one such company, ymtcwhich can offer low prices thanks in part to Chinese government subsidies. Following America’s export controls that deal was put on ice, according to Nikkeia Japanese newspaper.

The question is whether shifting production out of China will be enough to avoid future crackdowns. Even as Apple makes more of its gadgets outside China, it is no less reliant on Chinese-owned companies to build them. Chinese manufacturers such as Luxshare, Goertek and Wingtech are taking an increasing share of Apple’s business beyond China’s borders.

Luxshare and Goertek are reported to be making AirPods in Vietnam, helped by the fact that some Taiwanese rivals, like Inventec, have scaled back their work for Apple in recent years. In September press reports hinted that the Indian government might let some Chinese companies set up production facilities in India. Chinese companies’ share of iPhone electronics production will rise from 7% this year to 24% by 2025, believes JPMorgan Chase, which predicts that in the next three years Chinese companies will increase their share of production across Apple’s range of products.

Could Chinese manufacturers outside China be targeted by American sanctions? For now this is unlikely, believes Nana Li of Impax, an asset manager. “There are no handy alternative [suppliers] available with the same level of experience, efficiency and cost-effectiveness,” so cutting them off would hurt American firms, she notes. In time, that may change. Countries like India and Vietnam are keen to cultivate their own suppliers. Tata is reportedly in talks with Wistron, a Taiwanese manufacturer, about making iPhones in India. Indian firms report that “the fruit company” is discreetly on the hunt for local suppliers.

Given the growing rift between America and China, it is sensible for Apple to place some side-bets, before restrictions go any further. Chinese firms outside China are safe for now, says one Western investor in Asia. But “the noose is tightening”. ■

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This article appeared in the Business section of the print edition under the headline “The end of the China affair”