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India, Vietnam may take bite out of China’s Apple

Four days before Christmas, while China was battening down the hatches to survive the explosion of Covid-19 infections around the country, the world’s largest contract assembler of electronic gadgets quietly finalised plans to relocate some of its Apple iPad and MacBook production to Vietnam.

The move by Foxconn Technology Group, on the drawing board since late 2020, is expected to become reality this year, with the first products expected to roll off its plant in Vietnam’s Bai Giang province as early as May.

Neither Foxconn nor Apple has formally confirmed the shift. Yet the plan aligns with Apple’s strategy to make Vietnam the largest final assembler for its products outside mainland China. Taiwan’s Foxconn, also known by its corporate name Hon Hai Precision Industry, already has 60,000 people on staff in Vietnam, and announced a US$270 million investment last year to set up a new subsidiary there.

“The uncertainty of and dependency on China have really thrust the importance of knowing who your suppliers are, into the spotlight and into boardrooms”, said Sumit Vakil, the co-founder of Resilinc, a consultancy that provides advice on supply chain mapping, monitoring and resilience solutions. “There is no going back to how supply chains operated [before the onset of] Covid-19”.

Global manufacturers, which have helped to reinforce China’s reputation as “the world’s factory” for everything from cocktail umbrellas and clothing to aeroplane parts, have been reducing their reliance on China over the past few years, across a range of industries.

The confluence of several factors has added to the urgency: rising labour costs in China, Donald Trump’s tariffs on almost everything made in China, and output disruptions caused by the country’s previous zero-Covid approach.

Similar shifts are happening elsewhere up and down Apple’s supply chain, nowhere more significant than in India.

Apple has contracted Taipei-based Wistron Corp to assemble the iPhone SE since 2017 in India. Last September, the world’s most valuable company stepped up its Plan B, announcing that it would produce the latest iPhone14 in India within months of its worldwide release. In other words, Apple gave India a major leg up to take the step from making outdated models to fabricating latest releases.

“The iPhone 14’s mass production schedule in India is still about six weeks behind China, but the gap has improved significantly”, wrote TF International Securities’ analyst Kuo Ming-chi, perhaps the best-known tracker of Apple’s supply chain. “Therefore, it is reasonable to expect that India and China will be able to produce the iPhone 15 at the same time next year.”

For now, China is still several rungs above India and Vietnam, according to Bloomberg’s analysis of Apple’s global supply chain. As many as 121, or 17.7 per cent, of Apple’s 2022 suppliers were domiciled in China, operating 2,360 facilities in the country, or 19.3 per cent of the total. That made China the largest global source of Apple’s supply chain after the United States.

India was in eighth place, with two companies (0.3 per cent) and 278 out of 12,248 global facilities (2.3 per cent), while Vietnam was in 14th place with two companies (0.3 per cent) and 160 facilities (1.3 per cent).

“Apple really helped Chinese organisations be recognised as the leading electronic manufacturers, [so] losing this marquee brand will have other organisations looking to do this”, said Alan Day, the founder of the UK-based supply chain consultancy State of Flux.

The shifting supply chain is having profound effects on the stock prices of publicly traded Apple suppliers.

Luxshare Precision Industry, which makes chargers, connectors and cables used in Apple’s gadgets, had a topsy-turvy ride on the Shenzhen stock market within the first two trading days of the new year.

Its shares plunged 9 per cent on January 4 after Nikkei Asia reported that Apple has slashed its manufacturing orders for the US$169 AirPods earbuds, for which Luxshare is a top supplier. The stock soared the next day when the Financial Times reported that the Dongguan-based manufacturer had been picked by Apple to make iPhones.

Luxshare, founded almost two decades ago in the heartland of China’s manufacturing power base in Guangdong province, typifies the electronics contract manufacturers that have been lifted by the rising popularity of Apple’s iPhones, iPads and their range of accessories.

The company’s founder Wang Laichun, also known as Grace, worked at Foxconn for a decade before striking out with her brother – who also worked at Foxconn – in 2004 to set up a factory to produce power cables and chargers for Apple products. From 2017 to 2020, revenue contributed by Apple grew from 37 per cent to 69 per cent of Luxshare’s total revenue, before rising further to 74 per cent in 2021, as Luxshare started to delve deeper into the Apple supply chain, according to corporate filings.

Goertek, which has been making acoustic parts for Apple’s AirPod earbuds and other devices in eastern China’s Shandong province for two years, is another example. The Shenzhen-listed company slashed its 2022 earnings estimate by 60 per cent, citing a request by a “major overseas client” to halt the production of a smart acoustic device. Even though the company did not name the client, analysts including Kuo have pegged the device as Apple’s AirPods Pro.

Ofilm, which produces optics and iPhone camera components in the Jiangxi provincial capital of Nanchang, was expelled from Apple’s supply chain after it found itself on a sanctions list under the Uyghur Forced Labor Prevention Act, which became US law in December 2021. Ofilm’s sales and profit have plunged since, and its stock price has lost three quarters in value.

Apple’s adjustments of its suppliers – in compliance with US laws, and in response to consumer and technology demands – yield a constant roster of winners and losers. In the year that ended in September 2021, Apple added six Chinese suppliers and discontinued seven.

China’s draconian zero-Covid approach upended everything, as intermittent lockdowns in Shanghai, Zhengzhou and dozens of Chinese cities where Apple and its suppliers operated wreaked havoc with the supply chain.

Shanghai’s citywide lockdown last summer disrupted production and shipments among Apple suppliers in the Yangtze River Delta, one of the main engines of China’s manufacturing industry.

A Covid-19 outbreak last November in Zhengzhou, where Foxconn has an estimated 200,000 workers on staff in one of Apple’s biggest stand-alone assemblies, disrupted production of a range of Apple products, especially the iPhone, forcing the company to issue a rare warning that shipments would be delayed, just before the crucial year-end holidays.

The latest developments in China have spurred the diversification of supply chains. India, which may officially dethrone China as the world’s most populous country, and Vietnam are emerging as the winners.

India may produce one in two of the world’s iPhones by 2027, compared with the current state of less than 5 per cent, according to a forecast last week by Luke Lin, an analyst at the research unit of Taiwan’s DigiTimes newspaper.

The forecast is more aggressive than JPMorgan’s earlier prediction that India would assemble 25 per cent of total iPhones worldwide by 2025, but is in line with the rapid surge in India’s share of iPhone deliveries.

India’s iPhone shipments doubled from April to December 2022, from the same period in 2021. Vietnam’s share of making Apple’s MacBooks and AirPods is also expected to rise as contractors, including Chinese ones, rushed there to set up plants.

Meanwhile, China remains a key sales market for Apple with strong sales growth. Apple reported 36 per cent growth in the third quarter of 2022 in China, while all its major local competitors, from Oppo to Xiaomi, saw declining sales over the same period, according to data by market research firm Canalys.

Chinese suppliers also proved their competitiveness in certain areas. Apple was reportedly considering using the memory chip from YMTC for smartphones in China, but the plan was abandoned amid US scrutiny over China’s semiconductor industry.

The Chinese screen maker BOE has beat South Korean semiconductor giant Samsung Electronics to win over most new iPhone 15 and iPhone 15 Plus display orders for the second half of 2023, in a fresh sign of the codependence between Apple and China, said TF International’s Kuo. BOE plans to invest US$400 million to build two factories in Vietnam, according to a Reuters report.

The realignment of Apple’s supply chain is a mix of changes. Apple has moved orders between different suppliers within China. Luxshare has been picked by Apple to assemble certain iPhone Pro models, orders that would have been reserved for Foxconn.

It has also moved orders in different countries under the same supplier such as the Foxconn factories in Vietnam and China, and it shifted orders between suppliers in different countries particularly after the Indian conglomerate Tata Group’s purchase of a local plant from Wistron.

But this process is likely to become a drag on the agility of Apple’s supply chain, Day said.

“A key question will be how long the Indian suppliers … can ramp up to meet these standards”, he said. “Apple has worked with, or developed their Chinese suppliers for years and this will not be achieved overnight. Taking this ‘driver for perfection’ catalyst out of the market may lead to standards slipping within the supply chain”. South China Morning Post

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