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As the trade war between the U.S. and China worsens, and sanctions against Huawei get thrown into the mix, Apple and its suppliers are beginning to hedge their bets by relocating more of the company’s supply chain to places outside of China.
Key Apple suppliers Foxconn and Pegatron, have been preparing for this for a while, with The Financial Times reporting back in January that both companies were beginning to make financial and land investments in India, Vietnam, and Indonesia. While simple diversification is at least partially behind the moves by both companies, the U.S.-China trade war has lit a fire under them to pick up the pace at the risk of significant cost increases to doing business in China itself.
According to Digitimes, it looks like Pegatron now has all of the pieces in place to begin assembling MacBooks and iPads in Batam, Indonesia, with production slated to start next month. The work will be subcontracted by Pegatron to PT Sat Nusapersada, a local manufacturer in Batam, and although the company’s CEO stopped short of naming the clients it would be working for, sources are almost certain that the orders are coming from Apple.
Pegatron also had similar plans to open a facility in Vietnam, but ended up investing $300 million to refurbish plants in Indonesia after the company determined that a better supply of workers were available in Batam.
The setting up of new production facilities outside of China is simply the latest casualty in a trade war that shows no signs of slowing down under the Trump Administration. U.S. tariffs on most Chinese imports were raised to 25 percent earlier this month, and while Apple’s premium products like the iPhone, iPad, Apple Watch, and MacBook have managed to escape the tariffs so far, President Trump suggests that by the time the dust settles, there will likely be no exceptions at all to the sweeping tariffs being levied by the Trump Administration.
Why is Apple Doing This?
Moving production and assembly outside of China would help Apple to avoid any new tariffs that might be imposed in the trade war, but would also protect the company against possible sanctions that could come from the Chinese government itself, as the economic war between the two countries heats up on an entirely different front. The recent ban on Huawei, one of China’s biggest smartphone manufacturers, and a favoured son of the Chinese government, has raised anti-Apple sentiment to a fever pitch in the country, to the point where many Chinese users are actually getting rid of their iPhones out of embarrassment and to show solidarity with Huawei.
While this will do nothing to help Apple’s already struggling iPhone sales in China, there’s potential for it to get much worse with suggestions that the Chinese government may issue a retaliatory ban against all Apple products in the country — a move that Goldman Sachs analysts suggest could cost Apple a 29 percent drop in global profits — over $15 billion in annual net income.
While a simple iPhone ban would only affect the availability of the iPhone to consumers, it’s also not outside the realm of possibility that the Chinese government — and the rising tide of vitriol against Apple — could also make it difficult for Apple’s supply chain to operate effectively in China by levying additional fees on factories where iPhones are manufactured and choking the supply of labour available to those plants.
China has been a hub of global technology manufacturing for over two decades, but even before the trade war began, the downturn in the Chinese economy had many electronics manufacturers and suppliers looking to other markets anyway, so the current tensions between the U.S. and China may simply be accelerating the demise of the Chinese manufacturing economy.