November 27, 2022

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Apple/China: Complicated supply chain makes it difficult to hang up

2 min read

Breaking up is difficult. Just ask Apple. The iPhone maker has sought to reduce its dependence on China, its third most important market and where most of its products are made. It has already shifted production of some of its products to Vietnam and India after coronavirus-related lockdowns caused massive supply chain disruptions during the pandemic.

The reality, however, is that America’s most valuable company remains overwhelmingly dependent on the Asian country. Beijing’s insistence on sticking to its zero-Covid policy means Apple’s troubles in China risk becoming a recurring feature.

Video material of workers at Foxconn, one of Apple’s main suppliers, scaling fences to escape from the factory they were working in – in the style of a prison break – provides a timely and vivid reminder of it.

The manufacturing complex in Zhengzhou, known as “iPhone City,” accounts for about 60 percent of Foxconn’s iPhone assembly capacity, according to analysts.

Foxconn agreed to move production to other plants. The disruption came just after Apple launched its new iPhone 14 and ahead of the all-important holiday season. According to one estimate, this could affect more than 10 percent of global iPhone production capacity.

Looking at Apple’s third-quarter results, one might shrug off recent supply chain issues. In an otherwise brutal earnings quarter for Big Tech, Apple’s revenue and earnings growth both beat estimates. However, some of that growth was due to production constraints that had delayed sales in the previous quarter.

Rising labor costs, a slowing Chinese economy, and growing tensions with the US over trade and Taiwan give Apple plenty of reasons to reduce its reliance on China. To be fair, Apple already sources many of its components from other vendors. But the vast majority of its products are still assembled in China

China’s reliable power grid and efficient transportation infrastructure, not to mention the network of local suppliers, make it particularly difficult for Apple to leave the country.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to login.

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