Manufacturers in China’s supply chain are getting ready to tackle global challenges. Known as “the world’s factory,” China has been a key player in the global manufacturing industry for many years. It has developed an extensive network of suppliers, manufacturers, and logistics providers, which gives it an edge in terms of production capacity, cost-effectiveness, and efficiency.
However, China’s manufacturing industry is now facing major problems including increasing labor costs, environmental concerns, and geopolitical risks. As a result, many companies, including Apple, have been actively diversifying their supply chains to reduce their dependence on China.
Apple and China have always had a tightly interwoven relationship, where each party heavily relies on the other. For Apple, China is an important market with a vast consumer base and a rapidly growing middle class. Likewise, Apple relies on Chinese manufacturing for its products, sourcing components, and assembling its devices in China.
For Apple, Southeast Asia is looking to be its most promising transfer destination. Thailand may become the leading producer of MacBooks. Beyond supplying domestic demands, India will increase its international supply to 40-45% of global demand. Vietnam has also become a popular location for Apple to transfer its industrial chain.
Hence, while Apple has not announced a complete shift away from China, the company is accelerating its strategy of diversifying its supply chain beyond China and reducing its dependence on Chinese manufacturing. The departure from China is inevitable in the long term as the global supply chain continues to undergo transformation.
Delayed Production
At the end of November 2022, China’s COVID-19 restrictions disrupted production at an assembly facility in Zhengzhou, China. Apple warned of iPhone shipment delays as the production of the mobile phones fell as much as 30% at Foxconn in Zhengzhou. For the first time, iPhone customers were faced with a much longer waiting time to receive their new purchases.
The disruptions at Foxconn’s Zhengzhou factory resulted in a 16.9%month-on-month decline in November 2022, affecting about 10%of global iPhone production. It was estimated that the production of the iPhone could slump by at least 30%.
In early November, Apple disclosed that there would be reduced iPhone 14 Pro and iPhone 14 Pro Max shipments. At that time, Apple may not have anticipated or been prepared that the Foxconn shutdown would last for such a long time. This incident served as an impetus that pushed Apple to speed up its migration of the supply chain.
Going Overseas with Chinese Manufacturing Companies
Apple will likely reduce Foxconn’s orders and urge its other Chinese manufacturers, such as Luxshare Precision, to set up factories overseas. In fact, Luxshare Precision built a factory in northern Vietnam in 2016 and invested an additional USD 250 million there in 2019. Foxconn, Goertek, and BYD have all also opened factories in Vietnam.
However, the size of these Vietnam-based factories cannot be compared with those in China. Zhengzhou Foxconn is the world’s largest production base for Apple with 300,000 workers, the equivalent of a small city. In Vietnam, it took 31 companies to gather 160,000 people to produce iPhones, AirPods and other products.
Manpower aside, another serious concern worrying manufacturers is the loss of large economies of scale and efficient management personnel. Once large-scale relocation occurs, manufacturers will have to abandon the domestic production lines that cost a lot of money to build, as well as the management personnel that have taken years to train.
The expansion of the overseas business requires an additional investment of money and time. Taking Luxshare Precision as an example: its factory in Vietnam lost RMB 7.34 million (USD 1.07 million) in 2018, and its net profit only reached RMB 100 million (USD 14.5 million) in 2019. While the company was able to bear the loss at the Vietnamese factory, the same may not apply to factories with less capital to tide them through the initial year.
The Future of Chinese Supply-Chain Manufacturing
Apple’s shift away from China could have significant implications for the Chinese manufacturing industry. Apple is one of the largest customers of Chinese manufacturers, and its departure could lead to a loss of revenue and jobs for Chinese manufacturers.
Many Chinese manufacturers are taking steps to adapt to this new reality by diversifying their customer base and investing in emerging technologies and high-value manufacturing. In fact, some Chinese manufacturers have already started to shift their production to other countries in Southeast Asia, such as Vietnam and India, to take advantage of lower labor costs and other advantages.
Overall, while China may face some challenges in maintaining its status as “the world’s factory,” its established manufacturing network and ongoing investment in technology could help to ensure that it remains a significant player in the global manufacturing industry for years to come.
The risk of the global supply chain shift will only be significant if China’s production costs increase and its efficiency becomes lower than those of neighboring countries. This may be caused by a serious shortage of manpower, or it may come after India has formed a mature and stable manufacturing environment.
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While the shift is unlikely to be a concern anytime soon, it is critical for Chinese factories to find some domestic customers now. When the world starts turning to other countries for manufacturing, China will need to look inwards for new customers to support the industry.
Hence, while Apple’s departure from China may have some short-term impact on the Chinese manufacturing industry, it’s likely that the industry will continue to adapt and evolve in response to changing market conditions and global trends. It can continue to be a major player in the global market, particularly as it shifts towards high-value manufacturing and continues to invest in innovation and emerging technologies.