Taiwan continues to play a leading role in Apple’s supply chain as the U.S. tech giant works to reduce overreliance on China manufacturing.
Apple has long relied on manufacturing facilities in China operated by Taiwan’s Hon Hai Precision Industry Co. – better known as Foxconn – to produce the lion’s share of its flagship electronic device, the iPhone. An estimated 95% of the iconic smartphones are assembled in China, and many of the parts are made at the mammoth Zhengzhou plant, run by Foxconn, the world’s largest contract electronics manufacturer.
Since the U.S.-China trade dispute began five years ago, Apple has gradually moved some production capacity out of China. However, it has resisted any dramatic shifts based on a belief that China continues to offer an unbeatable production base.
Still, the environment in China is much less hospitable than in the past. Following the impact of U.S. tariffs and a worsening relationship with Washington, matters were made worse by Beijing’s disastrous zero-Covid policy – characterized by sporadic draconian lockdowns that shut the economy down for weeks at a time – and equally calamitous reopening.
The sudden pivot to living with Covid after three years of trying to eliminate it has caused a tidal wave of infections that has strained China’s fragile healthcare system and further disrupted the battered economy.
“Geopolitical pressure, coupled with China’s zero-Covid policy, have accelerated global deployment of Apple’s supply chain,” says Rachel Liao, a senior industry analyst at the semi-governmental Market Intelligence & Consulting Institute (MIC).
China’s strict zero-Covid policy adversely affected logistics and transportation, as well as local component suppliers and assembly plants, she notes. Liao adds that the disruptions have led to a decline in production capacity utilization for manufacturers due to lower-than-expected shipments.
“For Taiwanese manufacturers, this crisis can be seen as a turning point,” marked by their pivot to focusing on resilience by beefing up non-China manufacturing and strengthening connectivity among different production locations, she says.
Joanne Chiao, an analyst at Taipei-based research firm TrendForce, says Apple plans to significantly increase production sites outside China due to growing concern about geopolitical tensions. Its focus is now shifting to India and Vietnam.
Chiao reckons that Apple aims to double its device production capacity in India and have its factories in Vietnam in operation by mid-2023. But the success of those endeavors will depend on whether production from India and Vietnam can meet demand from the North American market, which accounts for 50% of Apple’s sales – the most of any region.
Foxconn currently has two major facilities in India where it manufactures electronics components and smartphones. Given the interest of Apple and other clients in India, the Taiwanese firm is expanding its presence there, most recently with a US$500 million investment that was first reported by Bloomberg in December. Foxconn is expected to eventually produce notebook computers, PCs, tablets, and wearable devices in India, according to a January report by Digitimes, a Taiwanese newspaper that tracks the electronics supply chain.
Compared to other contract electronics manufacturers, Foxconn has an early-mover advantage in India. It first arrived in the country back in 2006 to produce smartphones for Finland’s Nokia at a facility near Chennai.
That said, other Taiwanese suppliers to Apple are ramping up their presence in India. They include Wistron, the first Taiwanese firm to produce the iPhone in India (starting in 2017), and Pegatron, which in November began manufacturing the iPhone 14 in the southern state of Tamil Nadu, according to Bloomberg.
Competition from China
Though China is starting to lose some of Apple’s manufacturing, Chinese companies are ironically playing an increasingly important role in the U.S. tech giant’s supply chain – even if they produce Apple devices outside their home country. In the past few years, Chinese companies have started to muscle in on Taiwanese firms that have historically dominated the Apple supply chain.
“Due to the aggressiveness of the Chinese manufacturers to win orders and Apple’s support, it is expected that the Chinese will take over a considerable share of Taiwanese suppliers’ orders earlier than originally expected,” says MIC’s Liao.
Foxconn was forced to pause iPhone manufacturing at its Zhengzhou facility in December due to worker protests related to unpaid wages and harsh zero-Covid measures. After the halting of production lines in Zhengzhou, China’s Luxshare reportedly signed a contract with Apple to begin producing the premium iPhone 14 Pro.
Luxshare has been an Apple supplier since 2011 and has been steadily increasing its share of manufacturing for the U.S. company. Luxshare has a factory in northern Vietnam where it produces Apple watches and AirPods, of which it is the world’s largest producer. Partnering closely with Apple has paid off in a big way for Luxshare – its revenue grew twelvefold from US$2 billion in 2016 to US$24 billion in 2021 as the U.S. tech giant became its biggest customer.
However, winning orders for the iPhone 14 Pro represents the first time Luxshare has manufactured Apple’s flagship smartphone – and it will come at Foxconn’s expense. The Financial Times, which broke the story, described it as “a coup for Luxshare.” Foxconn was previously the sole producer of iPhone Pro smartphones.
Apple in October posted a list of its 2021 fiscal year suppliers that shows more firms from China than Taiwan. Yet that list may not tell the full story, says MIC’s Liao. She notes that it focuses on direct purchases and orders and does not represent all companies that deal with Apple. For example, the list excludes such Taiwanese suppliers as the USB Type C connector supplier Longwell and cooling module manufacturer URAS Technology.
Further, more than half of Apple’s Chinese suppliers are concentrated in lower-value parts of the supply chain, such as renewable metals, energy-saving, and precision mechanical components. Taiwanese manufacturers, on the other hand, dominate the manufacturing of high-value mobile-phone processors, camera lenses, and printed circuit boards, as well as device assembly.
“Taiwanese manufacturers have been able to remain competitive due to their complete and mature technology supply chain and high-value niche market strategy,” says Liao.
The limits of leaving China
Although Apple seems committed to shifting more production from China to India and Vietnam, China will likely remain the largest manufacturer of iPhones for a while. MIC estimates that the proportion of iPhones made in India will rise from 2-3% in 2021 to 6-8% in 2023, while China’s share of iPhone production will fall from over 90% in the past to 82-85% – still an overwhelming majority. By 2025, JPMorgan Chase expects India will make 25% of iPhones and Vietnam 20% of iPads and Apple Watches, 5% of MacBooks, and 65% of AirPods.
“The hard reality is that for companies such as Apple, doing advanced manufacturing of complex devices with supply chains heavily concentrated in East Asia, there are major limitations on how much capacity can be moved out of China,” says Paul Triolo, senior vice president for China and technology policy lead at Albright Stonebridge Group, a consulting firm.
“Advanced manufacturing of cutting-edge smartphones at massive scale is a tricky business, requiring hundreds of thousands of workers, carefully orchestrated and flexible supply chains, and the ability to granularly control costs in a highly competitive market,” he says. “China has optimized for this type of process, and the Zhengzhou facility is the shining example.”
Triolo notes that the facility sits at the center of a vast global supply chain built for production at scale and with huge export efficiency benefits for Apple. For example, the Zhengzhou facility has its own customs portal, facilitating rapid shipments of inputs and finished product outputs. The Chinese government also provides a host of other perks, including worker housing, tax breaks, and other subsidies, which “keeps Apple tied to Zhengzhou and Foxconn, but Apple of course will continue to seek supply chain diversification at the margins where costs and logistics make sense,” he adds.
To that end, while Foxconn is no longer the sole assembler for iPhone Pro models, the Taiwanese company remains by far the largest iPhone assembler in the Apple supply chain. Taipei-based Fubon Research estimates that Foxconn produces 70% of iPhones globally. Apple’s iPhone products account for around 45% of the company’s revenue.
Meanwhile, MIC’s Liao says that “the overall industrial environment in India and Vietnam is not yet mature enough to replicate what China offers.” She notes that India’s water and electricity supply is not as stable as China’s. In addition, labor management is far more challenging in India.
“Therefore, we believe that China will remain Apple’s main production location for at least the next five years,” she says.