Zero-Covid conundrum threatens iPhone shipments

There are no winners in China’s game of Whac-A-Mole that the government is calling “dynamic zero-Covid”, which has hammered the country’s economy and sent growth to lows not seen in decades. This has never been more apparent than when the world’s largest iPhone factory in Zhengzhou started restricting workers, spooking employees to the point of a mass exodus.

Foxconn, the world’s largest contract electronics manufacturer, has faced coronavirus-related troubles before. But this was the first time that the deep impact on Apple, the world’s largest technology company, was unmistakable. The company said it expected lower iPhone 14 Pro and 14 Pro Max shipments than previously, and Foxconn also revised down its fourth-quarter growth.

Zero-Covid is nothing new for China residents. They have been living with it for nearly three years. But the recent outbreak in central Henan province was an especially bad look. Workers at Foxconn’s premiere iPhone plant complained of terrible living conditions and a fear of falling sick because of poor medical care.

Some things have improved in the past couple of weeks, with workers saying they now have access to medicine while under quarantine. But this came after many workers left in droves.

Foxconn has scrambled to retain assembly line workers as the US enters the busiest shopping season of the year ahead of the holidays. The manufacturer offered a US$70 subsidy to try to woo some of its workers back, and it quadrupled its daily cash bonus to 400 yuan (US$56) to get people to stay.

While it is just one company, Foxconn’s size and role in the electronics supply chains of the world’s largest tech brands makes it strategically important for China. The Zhengzhou plant alone employed nearly 300,000 people at its peak.

Because the factory is a vital local employer, village cadres started reaching out to former employees to persuade them to return to work. In one county, the local veterans affairs bureau even urged People’s Liberation Army veterans to work at the facility.

For now, China remains too critical to supply chains for companies to ditch the market, but large tech firms are hedging their bets.

Apple has already been increasing manufacturing in India, and rivals such as Samsung have long since started building up capacity in other markets, with Vietnam being another popular destination.

China’s government has so far refused to ditch its virus-control policies. Yet, it recognises the damage to the economy and has promised more support to avoid a hard landing as the world appears to be headed for a recession.

However, zero-Covid was just a catalyst for companies to more rapidly expand supply chains outside China, as many tech-related operations have increasingly become caught up in geopolitical tensions.

An intensifying US-China tech war has already had immense implications for the semiconductor industry, and tech companies are feeling the heat.

Apple CEO Tim Cook said this week that the company would be buying chips from a plant in Arizona, likely referring to the US$12 billion Taiwan Semiconductor Manufacturing Company facility that is still under construction. This news came not long after Apple said it was ditching plans to source from Chinese memory chip maker YMTC.

Mainland China’s semiconductor plants cannot yet make the advanced chips needed to power an iPhone, but the country has been making headway in memory chips. When Washington again increased export restrictions in October, YMTC was among the hardest hit as the US weighed blacklisting the firm.

The semiconductor industry’s troubles illustrate how the tech war and zero-Covid are working together to hammer the world’s second-largest economy, which was already slowing before the pandemic. The domestic chip industry saw its largest monthly decline ever in October, and a decline in chip imports accelerated in the first 10 months of the year.

It is no coincidence that Shanghai, China’s semiconductor hub, saw a huge disruption earlier this year by a citywide lockdown. Shanghai-based Semiconductor International Manufacturing Corporation, the country’s largest chip maker, also said US export controls would affect fourth-quarter revenue.

Other Apple suppliers have been caught up in the same troubles. Shandong-based Goertek was seen as another victim of the push to diversify supply chains when Apple ditched its acoustics components used in AirPods.

Mainland China facilities of Pegatron, a Taiwanese manufacturer, were also hit by lockdowns in Shanghai this year. The company then became caught up in US-China tensions amid rumours that its shipments had been delayed, possibly over a labelling dispute, which the company denied.

Still, China is the undisputed leader in global manufacturing. Beijing may be betting on investment returning once zero-Covid restrictions are lifted – a day still nowhere in sight – but geopolitical tensions will not go away so easily. Whether it’s Apple, Samsung or any other multinational conglomerate carefully managing its brand, the trend of slowly diversifying supply chains away from China looks to continue. South China Morning Post