China has become the backbone of iPhone assembly; change can take years

In early November, weeks before the peak holiday shopping season began, Apple issued an unusual warning: customers would have to wait longer for new iPhone 14 Pro models.

That’s because one of its main assembly facilities in the Chinese city of Zhengzhou was “operating at significantly reduced capacity” due to Covid restrictions.

For years, Apple relied on a vast manufacturing network in China to mass-produce the iPhone, iPad and other popular products found in homes around the world.

But its dependence on the country has been tested this year by China’s “Covid-zero” strategy and strict lockdowns, including recently at the so-called iPhone city production center in Zhengzhou.

Now, the world’s most valuable company is trying to accelerate plans to move production out of the world’s most populous country – but reducing its significant reliance on China could take years, if ever.

In an investor note earlier this week, an analyst at Wedbush Securities estimated that it would take Apple at least until 2025 or 2026 to move most of its iPhone production to markets like India and Vietnam, but only if it “acts aggressively”.

Gad Allon, a professor at the Wharton School at the University of Pennsylvania whose research focuses on operations and supply chain management, seems to have an even more conservative assessment of the schedule. “I don’t think we can talk about any significant changes beyond a few percent before 2025,” he said.

To get a sense of how crucial China is to Apple: Before the Covid outbreak in October, which brought shutdowns in Zhengzhou, that factory produced 85% of iPhone Pros, according to an estimate by market research firm Counterpoint, provided to CNN 🇧🇷

“Apple wouldn’t be the company it is today without China as a manufacturing base,” said Eli Friedman, a professor at Cornell University whose research focuses on labor and development in China.

Even as Apple signals it wants to move production out of China, Friedman said, “It won’t entail a separation from China – there will be Apple products made in China for a long time to come.”

Ultimately, Apple is “in some ways as much a Chinese company as it is an American company,” Friedman said, “although, of course, it is headquartered in the United States.”

Apple did not respond to Apple’s request for comment. CNN 🇧🇷

There are a number of crucial factors involved in assembling and producing iPhones, for example, “that simply cannot be replicated in other countries,” he said.

This includes the availability of materials and components from nearby suppliers; world-class infrastructure that is already installed at scale; access to a large workforce of engineers, as well as low labor costs; and the availability of the necessary strips of land to build the factory towns that can house hundreds of thousands of workers, as well as the extensive production facilities.

“Other countries may have some of that or another, but they don’t have it all,” Friedman said.

Apple CEO Tim Cook, who helped build the company’s global supply chain, acknowledged China’s manufacturing strengths in a 2015 interview.

“You can take all the tooling and mold makers in the United States and probably put them in a room that we’re currently in,” he said. “In China, you would have to have several soccer fields.”

Steve Jobs, the late CEO of Apple, raised the labor issue during an October 2010 meeting with President Obama. He called America’s mediocre education system an obstacle for Apple, which needed 30,000 industrial engineers to support its factory workers at the time.

“You can’t find that many to hire in America,” Jobs told the president, according to his biographer, Walter Isaacson. “If you could educate these engineers, we could move more factories here.”

Apple, for example, has been hinting for some time that it will move production to India.

While India has a large workforce and many workers with the necessary technical skills (unlike the United States, which has long had a shortage of engineers), creating large assembly centers for Apple in India faces a lot more bureaucracy. than in China.

“At least in India, access to land is not as easy,” Friedman said, noting how the Chinese Communist Party faces fewer barriers to expropriating land quickly for causes it deems important.

Labor costs in China, while rising over the past decade, are also “artificially cheap because of political repression against unionists,” according to Friedman.

In Vietnam, another longtime candidate for Apple to shift production, “the government has a little bit more capacity, but there’s a lot less land,” according to Friedman.

Vietnam also has a significantly smaller population (98 million) compared to China (1.4 billion) and India (nearly 1.4 billion, according to World Bank data).

Another key element that explains why Apple “is really reluctant to rock the boat with China is that China is also a big market for Apple,” according to Wharton’s Allon.

Apple reported $74 billion in sales in the Greater China market during the 12-month period ending in September, or nearly 20% of its global sales for the year.

“If you look at other companies [de tecnologia] American companies, Google is not in China, Meta is not in China, Amazon is not in China,” said Allon, noting that Apple was really the only one to successfully tap into the lucrative market.

“So Apple is very reluctant and very careful to make sure that, definitely now that things are very, very sensitive, it doesn’t rock the boat — or at least not rock the boat publicly.”

The company may not be able to afford to be so dependent on China’s supply chain, but neither can it afford to leave the country behind.