Analysis: Apple's supply chain data shows declining exposure to China as risks rise

Analysis: Apple’s supply chain data shows declining exposure to China as risks rise

SHANGHAI, Nov 30 (Reuters) – Apple Inc’s (AAPL.O) broad exposure to Chinese manufacturing, notable for both its low costs and growing risks, has declined since the start of the COVID-19 pandemic , according to the company’s supply chain data.

With the world’s largest iPhone factory, operated in central China by Foxconn (2317.TW), battling production shortfalls and social unrest spurred in large part by Beijing’s strict virus containment policies , analysts expect the risks – and Apple’s pullback – to accelerate.

A Reuters analysis of Apple’s supply chain data shows that China’s importance in the company’s global manufacturing is declining: in the five years to 2019, China was the top location for 44 % to 47% of its suppliers’ production sites, but this proportion has fallen to 41%. in 2020 and 36% in 2021.

Apple did not respond to a request for comment.

Data shows how a drive to diversify Apple and its suppliers, with investments in India and Vietnam and increased purchases from Taiwan, the United States and elsewhere, is reshaping the supply structure world, although analysts and academics say it will remain heavily exposed to China. for many years to come.

“The Chinese supply chain is not going to evaporate overnight,” said Eli Friedman, an associate professor at Cornell University who studies labor in China.

“Decoupling just isn’t realistic for these companies right now,” he said, although he expected diversification to accelerate.

Concentration of suppliers in China, Foxconn’s production site which accounts for 70% of iPhones made globally, has been a key feature for Apple, the world’s most profitable smartphone supplier.

But the strategy is changing, driven not just by COVID-related lockdowns and restrictions in China, but by rising trade and geopolitical tensions between Beijing and Washington that pose potential long-term risks.

Foxconn is accelerating its expansion in India, with a plan to quadruple the workforce at its iPhone factory over two years, government officials familiar with the matter told Reuters earlier this month.

JPMorgan expects Apple to shift about 5% of iPhone 14 production to India from the end of this year and manufacture one in four iPhones in India by 2025, and estimates that around 25% of all Apple products, including Mac PCs, iPads, Apple Watches and AirPods will be made outside of China by 2025 compared to 5% currently.

Data from Apple’s suppliers through 2021, however, so far shows no locations that stand out as substantial gainers to match China’s decline, according to Reuters analysis.

The United States grew the most at 10.7% in 2021 from 7.2% in 2019, followed by Taiwan with an increase to 9.5% from 6.7%. India was still a relatively minor presence, rising from less than 1% to 1.5%, while Vietnam rose from 2.2% to 3.7%.

“Vietnam and India are not China. They can’t produce at this scale, with the quality and the turnaround time, with the reliability of the infrastructure,” Friedman of Cornell University said.

Apple’s annual data covers more than 600 locations among its top vendors, which account for 98% of Apple’s direct spend. Apple doesn’t disclose how much it spends with each vendor, and those on the list may change each year as different companies cut through Apple’s thousands of vendors.

They include contractors who assemble iPhones, iPads, watches and wireless headphones, as well as suppliers of chips, glass, aluminum cases, cables, circuit boards and other components.

As Apple’s shift from China is increasingly evident, including in its own supply chain data, so are the risks of concentrating operations there.

Labor issues at Foxconn’s Chinese factory are largely due to the demands of Beijing’s COVID containment policy, which requires workers to be isolated from the rest of the world in closed-loop systems to maintain factory lines in operation.

The unrest has caught the attention of investors, who are aware of human rights aspects as well as production goals.

“The important thing is that the company executes these orders in a way that respects people’s rights,” said Pia Gisgard, head of sustainability and governance at Swedbank Robur, which held Apple shares worth of about $1.3 billion at the end of September according to Refinitiv data. .

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Reporting by Josh Horwitz; Additional reporting by Sarah Wu in Taipei and Simon Jessop in London; Editing by Miyoung Kim and Edmund Klamann

Our standards: The Thomson Reuters Trust Principles.

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