China’s iPhone factory stumbles give India a chance to swoop in

When Indian workers claiming they weren’t being paid trashed an iPhone factory in Karnataka state in December 2020, causing $60 million in damage, the state-owned press in China immediately saw a cautionary tale for multinational corporations. Two days after the incident, China’s ran an article consisting of quotes from pseudonymous commentators on internet forums. “Factories in China are safest to invest in,” read one. “The probability of smashing and burning in China is extremely low.” In early 2021 the news outlet cited the riot in a separate article that called Indian industry backward, while suggesting that “geopolitically charged” Western policies encouraging its manufacturing sector were “political stunts that are doomed to fail.”

The articles voiced opinions that are common far beyond Beijing about doing business in the world’s two most populous countries. Chinese authoritarianism, the story goes, has fostered a level of industrial efficiency that a messy democracy such as India cannot hope to replicate, no matter how uncomfortable that circumstance makes governments in Europe and the US.

Another factory riot broke out in late November, this one in Zhengzhou, China, home to the world’s largest iPhone production facility. Exhausted from being locked in unsanitary dormitories with inadequate food and furious over the prospect of not receiving the wages they’d been promised, workers clashed violently with security forces. The following week protests swept across the nation.

The unrest came after a half-decade of rising hostilities between the US and China, making the status quo for manufacturing in China seem less sustainable than ever. The Covid-19 pandemic has also highlighted the dangers of concentrating such a large proportion of global production in any one country. Taken together, these factors have begun to make the risks of major disruption in China look as scary as well-understood inefficiencies elsewhere, says Devesh Kapur, a professor at Johns Hopkins University and an expert in economic development in South Asia. “The traditional thing was that India is unpredictable, and China is predictable,” he says. “Covid has reversed that.”

Bloomberg News has reported that the situation in Zhengzhou is likely to result in 6 million fewer iPhone Pro units this year, and Morgan Stanley has said the goal is to move 10% of iPhone production to India within two to three years. Apple Inc.’s three key Taiwanese suppliers—Foxconn, Pegatron and Wistron—applied for and won financial incentives to boost Indian smartphone production and exports. As part of this plan, the three companies have committed that as much as 20% of volume will take place in India. A person familiar with Apple’s supply chain operations, who asked not to be named discussing nonpublic business information, says India is expected to account for 5% of iPhone production volume by spring 2023. Apple didn’t respond to a request for comment.

Even if these forecasts bear out, China’s status as the world’s factory would remain intact. Nor does concern about China necessarily translate to enthusiasm for India. The country’s decade-plus effort to lure manufacturers has often resulted in frustration. India can offer low-cost labor and access to an enormous domestic market but has a reputation for creaky infrastructure and gnarled bureaucracy. There are also other countries trying to capitalize on fears of multinational corporations about their overreliance on China. As it stands, India isn’t the best place to make phones if cost considerations are the only factor.

Another person familiar with Apple’s operations, also speaking on condition of anonymity while discussing private business, says it would cost only about 10% more to produce iPhones in India than in Vietnam, hardly an insurmountable premium. But India’s backers say it can best strengthen its hand by centering its pitch on geopolitics, arguing that companies may be willing to sacrifice maximal efficiency for geopolitical considerations. India—a huge country, a regional power and a US ally—has some inherent advantages. If it can draw enough production volume by presenting itself as a less politically fraught place to do business, it could begin to catch up on efficiency.

Foxconn, Apple’s largest supplier, began building facilities in the country more than five years ago in anticipation of a need to extend its geographic range. “In terms of a one-to-one comparison, direct threat to China, there’s really only one country,” says Alan Yeung, a former Foxconn executive who was involved in some of the early planning. (Yeung, now a professor at the University of Wisconsin, says he no longer speaks for the company.) Wistron—the company in charge of the plant where the 2020 riot took place—and Pegatron also already operate in India.

IPhones have been manufactured in India since 2017, initially older models in small numbers. It was little more than experimentation until India’s government began offering a package of generous incentives to suppliers in 2020, leading to a spike in activity last year. A major breakthrough will be when the latest iPhone models can be shipped from India on the day of their global release, a milestone that Foxconn’s Indian production facility was unable to reach for the iPhone 14, though production there began only three weeks later.

It took China well over a decade to build its smartphone manufacturing capacity, and India is just at the beginning of a similarly long-term process. The country has begun to master the first step: running the plants at which final assembly takes place. Now it needs to follow China in cultivating hundreds of smaller local suppliers that provide the Foxconns and Wistrons with components.

This development often meant sending employees to factories to help set up and run production for years before stepping back. It also meant persuading local governments to build train lines, highways and other infrastructure to move parts around. When China’s central government decided to pursue electronics manufacturing, it swept away any competing interests to satisfy the companies it was wooing. India’s has yet to show the inclination to move with such single-mindedness.

Some key components for consumer gadgetry—such as batteries, power adaptors and cables—are already being made in India. As the final assemblers increase their volumes, the economics for their suppliers improves. Indian officials have ambitions to develop localized production for every link in this chain, right down to the facilities that make semiconductors, displays and other advanced components. But supply chain experts are skeptical that the country can lure state-of-the-art chip factories and display production facilities anytime in the future.

One of the people familiar with Apple’s operations says that as it stands, no more than 15% of the factory gate value of an Indian iPhone (a measure that includes locally manufactured components and labor) comes from within the country. Suppliers have committed to increase that to as much as 35% by 2025, a development that could narrow the price gap between making devices in India and making them in China or Southeast Asia. This possibility presents significant opportunity for Indian companies including Tata Group, which is planning to hire 45,000 workers over the next 18 months to 24 months to increase production at a factory where it makes iPhone components.

Realizing this promise probably relies on India chipping away at the historic barriers to doing business there. Difficulties moving things in and out of the country, rivalries between various parts of government, and tax, labor and land policies have all led to India being ranked lower than other Asian countries where electronics manufacturing takes place.

There are signs of improvement. The Economist Intelligence Unit, a research group in London, ranks countries by their business environment. In its most recent rankings, which forecast conditions in the years 2023 through 2027, India passed China and the Philippines and drew closer to Indonesia and Vietnam. The only measure for which China continues to outrank India was the quality of its infrastructure.

Anupam Manur, an assistant professor at the Takshashila Institution, a public policy organization in India, says India continues to grapple with overcomplicated policies in areas such as labor law and taxes. One important indicator, he says, is whether India is able to overhaul its policies on the acquisition of land. This is a key part of any industrial project, and the process has consistently generated conflict in India. Small landowners may not be interested in giving up their farms to make room for a sparkling phone factory, and local officials see their control over land policies as a way to exercise their leverage. Manur says things are moving in the right direction, but he’s wary of getting too confident: “Any point in the last 30 years, I could have told you we were on the brink of cracking it.” Bloomberg