Apple Remains Totally Dependent on China

In the wake of the U.S.-China Trade War last year, Apple began looking to move some of its supply chain out of China, but it now looks like it really hasn’t worked out the way some had expected. While the trade war itself is basically over, the recent coronavirus outbreak has demonstrated how heavily dependent Apple still is on its Chinese supply chain, despite the company’s efforts to move production into other countries, and it doesn’t look like that’s going to change.

A new report in the Wall Street Journal reveals that Apple’s operations team has actually long been concerned about the company’s huge dependency on China, and was raising alarms even before the U.S.-China trade war began to complicate things.

According to the Journal, as far back as 2016 operations executives began pushing Apple to relocate assembly of at least one product to Vietnam, as the first step in what would have been a “multiyear process” to shift more of its production out of China by training workers in other countries and setting up clusters of new component providers.

Senior executives, however, decided that the move was “too challenging to undertake,” partly since China is the second-largest consumer market and it presumably wanted to avoid upsetting that particular apple cart (no pun intended).

This string of decisions has kept Apple almost completely dependent upon China, which has long frustrated many within Apple, but also remains a sore point for investors as the company encounters its third major setback in China in recent years.

While problems caused by the U.S.-China trade war and the coronavirus were a direct result of Apple’s supply chain being almost entirely based in the country, Apple’s dependency on China goes beyond that, as China forms the second-largest consumer market for its products. Slowing smartphone sales in China in general forced Apple to revise its revenue guidance for the first time in almost two decades, and then history repeated itself only a little over a year later with the emergence of the coronavirus.

In fact, this latest crisis has hit Apple on both fronts, since the coronavirus has resulted in the closure of both factories that make Apple’s products as well as the stores that actually sell them. Only time will tell whether this has diminished demand for the iPhone and other Apple products, but it’s certain that right now it’s not selling as many iPhones as it could be.

A Critical Factor

According to analysts, China has been “a critical factor in Apple’s soaring market value,” since it traditionally provides a stable and low-cost manufacturing base plus a huge network of component suppliers all in one relatively small geographic area.

It’s also a simple economic reality that with almost a fifth of the world’s population located in China, it’s one of the only countries on the planet that can build factories that can field 250,000 skilled and unskilled workers. In fact, as the Journal notes, the number of migrant workers in China—who make up a large part of Apple’s supply chain—actually exceed the total population of Vietnam, which is 100 million.

There’s simply nowhere else in the world where Apple can produce the hundreds of millions of iPhones that are demanded by consumers every year, let alone its other insanely popular products. India comes close, but doesn’t have nearly the same level of infrastructure that China has that would be needed to support a massive supply chain.

In fact, the Journal reveals that Apple had been looking to at least partially manufacture the iPhone 11 in India, which would have marked the first time a current iPhone model has been made outside of China, but was forced to cancel those plans before even setting up a single manufacturing line, since India simply doesn’t have the skilled labor or “robust infrastructure that Apple expects.” This isn’t likely to change in the near future either, as the report adds that “workers in India aren’t ready to produce the high-end, organic light-emitting diode” screens required by the newest iPhones.

Apple’s Reputation in China

It’s not just about the raw supply chain numbers either. Apple’s profile in China is greatly helped by the amount of money it pours into the Chinese economy and the jobs it creates, and while it already walks a fine line with Beijing, it still curries more favour with the Chinese government than most other foreign companies, and the government not only controls access to the market but also wields a great deal of influence on how foreign brands like Apple are perceived. In short, moving a significant amount of its production out of China could effectively torpedo its product sales in that country.

Although Apple has been losing ground to homegrown Chinese rivals like Huawei—the only company that’s seen an increase in smartphone sales in China over the past year—Apple’s brand in China remains the strongest of just about any foreign company, and the iPhone 11 has been helping it bounce back.

Meanwhile, Apple CEO Tim Cook continues to downplay Apple’s reliance on China, sharing in an interview last week that the coronavirus situation is getting under control, and that unpredictable events are simply a fact of life in the modern economy. Cook added that apple’s operations team has navigated many similar crises, and that Apple is “fundamentally strong” and will weather this current storm as well. Cook acknowledged that some changes may be necessary, but he equated these to “adjusting some knobs” rather than looking to a “wholesale fundamental change.”

At the end of the day, however, while Apple has experimented with moving some smaller elements of its production to countries like Vietnam and India, it still doesn’t really have any choice but to continue relying on China and its workforce of millions of workers to support the kind of production necessary to keep up with a global population of customers that are always hungry for its latest products.