The end of Apple’s affair with China

https://www.economist.com/business/2022/10/24/the-end-of-apples-affair-with-china

by carlycue • 4 years ago

127 129 4 years ago

economist.com

carlycue• 4 years ago

https://web.archive.org/web/20221024221753/https://www.econo...

hmcamp• 4 years ago

Thanks

runnerup• 4 years ago

Less “affair” and more “long term partnership”. They both grew and developed a lot from it.

pcurve• 4 years ago

Very insightful. It corrected a lot of incorrect information I had on this issues.

1. Labor cost is an issue but at 530 per month as of 2020 Chinese mfr labor is still relatively cheap and only twice as expensive as India.

2. Sales in China peaked in 2015-6 in terms of percentage of revenue for Apple

3. Despite the move, analysts predict 80% of Apple products will still be made in China by 2025.

rapsey8• 4 years ago

1. Labor cost is an issue but at 530 per month as of 2020 Chinese mfr labor is still relatively cheap and only twice as expensive as India.

Only by US standards. You can pay that much for a factory worker in eastern/south Europe. The US is a huge outlier regarding salaries compared to practically anywhere else.

rocgf2• 4 years ago

The US is a huge outlier regarding salaries compared to practically anywhere else.

That is obviously not true, unless you exclude a lot of countries from "anywhere else".

Bayart• 4 years ago

You can pay that much for a factory worker in eastern/south Europe

You'd be well bellow the gross average everywhere in the EU, even the poorest countries. Outside of the EU you might have a shot in Albania or Moldova, but you'd lack all the infrastructure and stability you'd need for large scale manufacturing.

jamesdgb2• 4 years ago

From an European perspective labour in the US is cheaper

narag• 4 years ago

You can pay that much for a factory worker in eastern/south Europe.

I don't know about eastern Europe. In Spain, we are in the south, you can't pay 530 per month. Legal minimum salary is around double that number, then you need to add SS (30 to 40% of that) and just FYI, there's no way people will work in a factory for minimum wage anyway, so think of 2k for entry positions.

shagie• 4 years ago

The issue isn't entirely "how much you pay someone" but also a significant bit of "the supply chain for all of the parts are entirely within the city."

That supply chain part was traditionally a strong draw for electronics manufacturing to be done in China as you can get parts from down the street rather than the next city or state or country over.

stickfigure• 4 years ago

Labor cost is an issue but at 530 per month as of 2020 Chinese mfr labor is still relatively cheap and only twice as expensive as India.

The interesting question the article didn't answer is "how much labor goes into making an iphone?" The economics are very different if labor is 10% of the cost vs 70% of the cost.

etempleton• 4 years ago

I think at one point Steve Jobs had responded to a question on the topic of manufacturing location that the issue with moving manufacturing out of China, and specifically bringing more manufacturing back to the United States, had little to do with the cost of labor and more to do with the logistics networks. Building something as complex as an iPhone at scale and cost is basically impossible to do in the United States or really anywhere else right now.

UltraViolence3• 4 years ago

The kicker is that Apple has made itself too dependent on Chinese suppliers. It has outsourced much of the development of components and has lost in-house know-how on how to recreate those parts if a fall-out were to occur.

This is all according to Apple's "Don't leave money on the table" mantra where they want increasing profits year after year. In the end, it'll hurt them...bad.

gjsman-10005• 4 years ago

To me, I think that Apple's reliance on China, and Taiwan, was and is an extremely risky and misguided decision. Imagine if Apple had developed a total reliance on chip factories built in, say, Ukraine, back in 2018. That's about where we are now with Taiwan and China, I believe.

It's sure been profitable - but at, I would argue, obscene risk. A few years of TSMC being unavailable would have Apple on life support. Apple would actually be worse off than many companies and the ditching Intel decision would do a total 180 into a massive mistake. Nobody cares if you have higher-performance products if you can't make them.

Edit: For those saying that can't happen, think Ukraine in 2012 or 2018. Russia? Invading? Can't happen. For Taiwan, China, invading? Can't happen.

rapsey8• 4 years ago

There was no alternative at the time regarding overall production. China gave them the option to be extremely flexible and efficient. Other countries like India/Vietnam is copying the Chinese cookbook.

Ony TSMC is capable of producing the most performant chips.

gjsman-10005• 4 years ago

There was no alternative at the time regarding overall production. China gave them the option to be extremely flexible and efficient. Other countries like India/Vietnam is copying the Chinese cookbook.

Yes, and no. Apple has done manufacturing in America before, a long time ago (remember the Apple II?). Also with the $200B in cash they had, they could probably build every factory down to the screw factory they needed. Also worth remembering is that iPhone bodies don't change very much (iPhone SE is like, a decade of a design and still going). $200B would buy at least 5 or more latest-gen chip plants, easily, or at least give TSMC all the capital they needed.

If I was Tim Cook, I would have absolutely looked into segmentation. American manufacturing for American customers, Chinese manufacturing for European/Asian customers, Indian manufacturing for Indian customers.

hunterb1232• 4 years ago

For those saying that can't happen, think Ukraine in 2012 or 2018. Russia? Invading? Can't happen.

They "invaded" Crimea in 2013, a lot of people expected what's currently happening.

edit: 2014 not 2013. Also Crimea overwhelmingly supported being annexed into Russia as they were severely mistreated by Ukraine.

There were very clear tensions leading up to both Crimea and Ukraine events.

But using the political events of Ukraine/Russia to support tossing Taiwan to the PRC is not something I agree with.

gjsman-10005• 4 years ago

Incorrect. Crimea was invaded in 2014. My point was that in 2012, it was 2 years before the invasion, and less foreseeable despite how quickly in the grand scheme of things it came afterwards.

ZanyProgrammer• 4 years ago

2014.

e40• 4 years ago

There are a lot of companies dependent on TSMC, not just Apple.

gjsman-10005• 4 years ago

I don't dispute that - but Apple is still on the line the most of any company if TSMC were to become unavailable (in sales, in products requiring TSMC chips, lost sales, Apple Silicon on all of their devices, so forth). Also Apple had the most capital of any company and thus the least excuse for such dependency. 4 years ago, according to CNBC, they had $285 billion in cash reserves. That could've definitely bought some fabs in America that would be coming online right now.

NVIDIA still can make parts in Korea if need be, even if they are a generation behind. AMD could be manufacturing on Intel foundries before we know it. Samsung has Exynos in Korea as well, which is better than nothing.

tl• 4 years ago

That's a nice idea in theory. As much as I'm harsh on Apple for their decisions elsewhere, TSMC is the right choice, right now. Two things that are hard to ignore:

1. Apple held moving the Mac line on Intel for years despite clear indications that it was hurting them.

2. Intel has begun moving to TSMC to fab chips in order to be competitive with AMD who already moved.

What alternative move should Apple make? Move to Samsung, where a more expansionist China is still a problem? Start doing their own fabrication in the western hemisphere, a process that could take decades to complete.

It is likely that Apple wants to use proposed TSMC or Intel fabs in Arizona, but cannot today.

dragonwriter5• 4 years ago

For those saying that can't happen, think Ukraine in 2012 or 2018. Russia? Invading? Can't happen?

No one paying even a little bit of attention thought “can’t” since the invasion of Georgia in 2008. In 2012 they would have thought “has no reason to at the moment”, much as they would about Belarus today; what was unexpected in 2014 was the Maidan Revolution tossing out the Russia-aligned government, to which the invasion was an immediate response.

And in 2018 the likelihood of further invasion was widely discussed, while the scale and precise timing may have been unpredictable in 2018, that further invasion was likely, especially an attempt to seize the Donbas, where Russia has been supporting proxy forces since the 2014 invasion, was not.

For Taiwan, China, invading? Can't happen.

That’s... Not at all the general thought.

TillE• 4 years ago

No one paying even a little bit of attention thought “can’t”

Maybe that's true in the abstract, but how did those in power act based on this obvious threat?

Europe completely refused to even begin to diversify its natural gas sources until this year, even though that obviously should have happened after the annexation of Crimea at the very latest. They invited catastrophe by relying on Russian energy.

In practice, they didn't take the threat seriously. They thought it wouldn't happen, they gambled quite a lot on that outcome.

baryphonic• 4 years ago

All of that being said, I wrongly predicted that Russia wouldn't invade, because I rightly predicted the invasion would be a disaster for Russia.

A CCP invasion of Taiwan would be even more disastrous for the PRC. They would need to conduct an amphibious assault, gain air superiority against "the quad" (no easy task), and would be unlikely to gain control of TSMC.[0]

I think my reason for miscalculating the Russian invasion had to do with reasons unrelated to the actual military campaign: Putin felt that Russia's culture was existentially threatened by the West, its ability to invade was monotonically decreasing, and believed that a largely ineffectual, predictable US administration that appears to follow the mantra "speak loudly and carry a paper straw" wouldn't resort to extreme measures to stop Russia. In other words, invasion made total sense from a certain political-cultural calculus.

I'm much more worried about the CCP, who have become increasingly ultra-nationalist, including concentration camps and racial-superiority indoctrination in schools (including something like a "stabbed in the back" narrative). The political crackdowns have become quite severe, and the Chinese financial is in bad shape, so an attempted invasion of Taiwan may increasingly be the thing the Party sees as bolstering their position domestically.

The invasion would still be a disaster, and I have a feeling that the US & Taiwan already have plans to relocate the personnel from Taiwan's TSMC facilities to the US in order to use their specialized knowledge in order to keep producing superior chips.

[0] https://www.jonstokes.com/p/why-a-chinese-invasion-of-taiwan

yamtaddle• 4 years ago

> For Taiwan, China, invading? Can't happen.
That’s... Not at all the general thought.

Indeed. AFAIK the general sentiment is that the only way they don't invade some time this century is if they manage to Hong Kongize them to transition them toward full annexation, through soft power.

twawaaay• 4 years ago

That's like super naive.

First, you mentioned it. "It has sure been profitable". That's kinda the whole point. You get more profits, you use those profits for R&D to further distance yourself from the competition.

If there is any way to reduce your risk it is building a technological edge over competition and sizeable cash reserves.

Second, even if Apple faced complete stoppage in production, its situation is different from other companies. It not only can do things that other companies can't (like pull cash to build entire supply chain in some other place), it also has devout user base that will mostly just wait for Apple to come back. People who buy say Samsung laptops and phones will switch to another brand with no second thought if they can't buy Samsung, while people who buy Apple will try as much to wait and will not switch easily.

Third, the US is currently the guarantor of Taiwan's safety so maybe the risk isn't as big as you think.

Fourth, if TSMC is unavailable they will spin the production somewhere else. And who do you think will get the first chips out of it -- the companies that are the most ready (Apple, they already have all the know how and designs), the companies that are ready to pay the most for the privilege (Apple, because of their cushy margins) and the companies that have the most weight behind them (again Apple).

So no, I think that saying Apple's risk is obscene is just naive. Apple has positioned itself to be best at weathering any storm that might happen, it knows the competition will be hit even more and is using this to reap as much benefits as it can while the party lasts.

smoldesu• 4 years ago

Fourth, if TSMC is unavailable they will spin the production somewhere else.

Where?

Intel would sell them their fabs, but they don't have a process as advanced as TSMC 5nm. Samsung might be able to compete, but their yields are wickedly low and still slightly behind TSMC. GlobalFoundries might accept Apple as a customer, but then we'd basically have two Qualcomms.

What is Apple's plan-b for Taiwan?

AbrahamParangi• 4 years ago

If China invades Taiwan, it will not be possible to do business with China or Taiwan and every company with substantial exposure to this risk should be preparing for the possibility that all resources in China are instantly "lost" or unavailable for many years.

Apple's production capacity has taken decades to build and will take years at minimum to restore. Their exposure is so immense that it would make sense for them to spend a percentage of their cash position just on lobbying to try and prevent the outbreak of war.

Their risk is obscene. They're poorly positioned because their manufacturing base is undiversified and in the case of "complete shutoff of goods from China" it will be years before they're back at capacity.

nrclark• 4 years ago

A few years of TSMC being unavailable would cripple consumer electronics in general. Lots of chip vendors all buy their dies from TSMC. It's not just Apple by a long shot.

This is a known problem, potentially one even at the scale of being a national security issue. It's a big part of why there are all these new federal subsidies to try and bring advanced chip-fab back to the US.

paxys• 4 years ago

Apple went from the brink of bankruptcy to a $3T market cap, all on the back of Chinese/Taiwanese manufacturing. It's pretty safe to say that the move wasn't "misguided".

UltraViolence3• 4 years ago

I don't see China invading Taiwan, since the U.S. has made it abundantly clear that they'll intervene militarily, and the Chinese know they are (as of yet) no match for the U.S. They'll bide their time. Chinese think in terms of centuries, not decades. The hive's important, not the individual worker.

I do think they'll need to wait a very long time since if the West decouples they'll be thrown back decades if not more, with no hope of ever catching up.

But if a spat were to occur, Apple would definitely be hurt...BIG TIME. In fact, I could even see the company collapse if it were to be cut-off from its supplier base in China and Taiwan.

fomine32• 4 years ago

So the alternative is Samsung fab located in South Korea. Technically Korean war isn't ended and North Korea actively developing missiles.

waynecochran3• 4 years ago

How was Apple able to maintain its production of iPhones in China during the height of Covid-19 in China?

qikInNdOutReply3• 4 years ago

There is the truth, as in the party wants zero covid. And there is the truth. The party wants to earn money, no matter what. So work is allowed, and ignored, just dont tell Xi and some excessive Covid measures are driven into some unimportant areas for show.

The ilusion of a strong state, the same as russias military ..

andsoitis• 4 years ago

If you had massive outbreaks at a factory like Foxconn’s largest in Zhengzhou which employs 300,000 people, you would have massive interruptions to production.

Instead, they do extensive testing and quarantining to prevent outbreaks at a factory like that.

So no, it isn’t “performative zero COVID”.

xadhominemx5• 4 years ago

COVID impacted EMS production facilities in the off peak season, so suppliers were able to move production around to different sites to dodge outbreaks. But it did impact production in Spring 2020.

waynecochran3• 4 years ago

Different sites in China? Was Covid-19 that localized?

makeitdouble3• 4 years ago

I tried looking around to get how much of the iPhones are actually made in India and couldn’t find any clear information.

Apple seems to be relying on Foxconn’s Indian subsidiary, and it is described as an assembly partner, so I’d expect all the parts and chips to be coming from neighboring countries (so mostly China?)

It is still a pretty big deal, but my assumption would be that aside from the trumpeting headlines, Apple and Foxconn are still deeply depending on China at this point and will stay so for many years to come ?

joezydeco• 4 years ago

You're talking about turning a ship 10000x the size of the Titanic.

A company like Apple with a CEO that built his career on logistics and production? You can be sure there's a plan. You just aren't allowed to see it.

traceroute66• 4 years ago

A company like Apple with a CEO that built his career on logistics and production? You can be sure there's a plan. You just aren't allowed to see it.

This, this and THIS !

Do not underestimate Apple when it comes to supply chain management, they are the kings.

Don't believe me ?

Look at the COVID-induced semi-conductor shortage.

Every other manufacturer out there that relies on a very strict definition of Just-In-Time supply chain has had issues with stupid-long lead times.

Meanwhile Apple ? Most of their product range has remained on next-day delivery throughout, and custom-build stuff has only been delayed by a few weeks rather than the months and years seen at other manufacturers.

Apple work much much closer with their supply chain than the majority of other manufacturers out there.

makeitdouble3• 4 years ago

That's very generous to Apple. They have a history of success, but for better or worse we're in uncharted territory. I mean, if the transition takes 10+ years, wil Tim Cook even be at the helm as it happens ?

BTW I didn't mean my comment as a critique of Apple, I think they did get everything right on the logistics side given what has been hapenning for the last decade (they weren't immune, but they clearly navigated it extremely well). But I would be warry of being too optimistic on their diversification efforts or looking at it as a done deal.

Kinda reminds me of the effort to have the Mac Pro assembled in the US. A lot of people were looking at it im very simple terms, when it's a really difficult thing to do in any viable economical fashion.

evgen2• 4 years ago

It is worth noting that a lot of components of the iPhone are not sourced from within China. China is where it is assembled, but the screens, RAM, CPU, and storage are produced in other countries. Of the remaining parts I think batteries and radios are the ones that will probably retain production in China the longest.

dirtyid• 4 years ago

Apple has ~150 suppliers in PRC, other countries barely break 30. They have some of the higher value components, but PRC pockets ~25% of BOM since iPhoneX, so likely higher now with BOE, YMTC (if it survies), Winstron and Luxshare, as as far as I know, a lot of the hardware design shifted to SZ during covid.

Reality is apart from shifting final assembly to other countries (insert 8$ per phone meme), PRC is moving up value chain in Apple. And if Apple wants to keep PRC market access, they'll keep the affair happening. Hence US gov had to drop the boot with YMTC.

Kon-Peki• 4 years ago

My M1 Mac mini from 2020 says "Made in Malaysia" on it.

The diversification has been happening longer than many people believe.

makeitdouble3• 4 years ago

To note, the "made in xxxx" denomination can be pretty fuzzy. You can source pre-assembled/fully functional blocks from anywhere, put it in the final enclosing at the last destination, and stamp it as made there.

Countries can be more or less strict about what threshold needs to be passed to be accepted as made locally, but I'd expect Malaysia to not be against computers production getting attributed to them.

shubhamjain• 4 years ago

The cynical side of me senses that what would land with India and Vietnam is labor-intensive, commoditized assembly of parts. "X% of iPhones manufactured in India" is sort of misleading if the bulk of parts are still coming from China. In some ways, I think this is going China's way. They are moving up the ladder into specialized manufacturing and away from manual labor. A smart strategy considering the demographic decline they are to face in upcoming decades.

On the other hand though, it would be foolish to expect the whole industry moving away from another country overnight. It would be a slow process that would start from the labor intensive parts of manufacturing. I think, it'd be a win-win for everyone, including China.

bmer• 4 years ago

Yeah, this makes sense to me.

I have not read the linked article, but I wonder, does it discuss this?

I caught another comment lower down that says the article mentions that labour costs in India are "only 2x" less than the labour cost in China.

As if "only 2x" is "trivial"...

throwawaymaths• 4 years ago

There is momentum due to large capital costs associated with building the facility and getting the hardware to perform the manufacturing over there in the first place, etc. When labor costs are low, capex can be a bigger piece of the pie and a larger contributor to the effect

quesera• 4 years ago

2x a small number is sometimes also a small number.

I speculate that labor is not a significant contributor the cost to produce an iPhone.

qikInNdOutReply3• 4 years ago

Its not going fast enough. And to develop a creative class with smart products, they would have to liberalize which they cant. Cant discuss about crypto, if the stasi on the barstool next to you reports you for detention.

Subversive and disruptive industries, need a state that turns a blind eye on them , or else they will not thrive.

xadhominemx5• 4 years ago

The bulk of the parts are not coming from China. Maybe some very commodity assembly and back end steps. But the vast majority of the manufacturing value add happens in Taiwan (semiconductors) and Korea (display).

onlyrealcuzzo• 4 years ago

I imagined the storage and RAM also come from Korea.

Though I wouldn't be surprised if the battery comes from China.

sudosysgen• 4 years ago

iPhone displays are also made in China by BOE. They were also intending to use YMTC for NAND but didn't because of political pressure.

bergenty2• 4 years ago

You need to start somewhere. I presume over time more of the components will be made closer to the factories where the phones are actually being manufactured.

dontbenebby2• 4 years ago

This isn't news -- Apple opened factories in a bunch of SE Asian countries IIRC, and now stands poised to play them off each other since the old model of showing up and being shocked there are human rights abuses in... not just Xinjiang.

Apple's real affair, along with the rest of the tech industry, is with countries like Ireland and Austria are "neutral" in the sense that they allowed untaxed gains to flow into them much like Switzerland did in WWII.

They need to adjust to a world where people may buy their devices every two, three, even five years and hold onto them -- especially since China has control of those rapidly depleting rare earth mineral deposits that you need for the overly thin batteries.

Or folks can switch to Android, who seemed to have gone full Pirates of Silicon Valley and stolen the good features from iOS, last I poked around someone's phone.

(Let's be real: at this point they're just doing tweaks, not coming up with major enhancements.)

gambiting3• 4 years ago

>who seemed to have gone full Pirates of Silicon Valley and stolen the good features from iOS

.......I'm sorry, what? It seems like iOS is "stealing" features from Android every few years, they basically let Samsung and others implement something first, improve it for a couple iterations, then finally they add it to iOS and say "look this is a massive step for iOS!", and I'm sitting there being like......we've had this for at least 5 years, what's the big deal? Just that it's nice and polished? Cool, well done, have a cookie.

Apocryphon4• 4 years ago

I still think that widgets are an unnecessary Android import that bloats the simplicity of the iOS UX. At the very least they should’ve called it something else. Gadgets?

dontbenebby2• 4 years ago

.......I'm sorry, what? It seems like iOS is "stealing" features from Android every few years, they basically let Samsung and others implement something first, improve it for a couple iterations, then finally they add it to iOS and say "look this is a massive step for iOS!"

Who knows -- there may have been a time where one was superior and the other inferior but slowly pilfering features, but for right now moving from iOS to Android is like an American considering emigration...

(Where you gonna go... Montreal? If I rolled my eyes any harder, my retinas would literally detach.)

yalogin• 4 years ago

The thing with outsourcing is, the vendor will themselves set up shop wherever the customer wants. In this case all the chinese companies are simply setting up plants in India and Vietnam, so they end up not losing any business in the short term. Same thing happens with software. All of the India consulting firms set up shop all over the world, for example Mexico to provide similar time zones to their US customers yet reduce costs. The customer gets to say we are not relying on country X and the vendor still has that contract.

bergenty2• 4 years ago

It makes a difference though. The Indian factories hire all Indian staff and this makes it resilient to any trade war issues that may arise between China and the U.S.

checkyoursudo• 4 years ago

Secondary sanctions may hit the Chinese-owned Indian companies, which could make them no more resilient at all. No? It seems like doesn't matter so much who is employed there as much as who owns them.

biztos• 4 years ago

I realize the US-India tech relationship is very resilient, but don’t Indian companies run the same risk in principle by staffing the contract shops in Country X with Indians?

UltraViolence3• 4 years ago

This is all part of the "Great Decoupling" that will happen in the next decade. Apple will be hurt by this, no doubt, since it will not be able to find suitable replacement suppliers for some of its components, and it's loath to buy from Samsung, its biggest rival.

Ergo, Apple may go down when push comes to shove and the U.S. government gets into a tangle with China.

ksec• 4 years ago

Chinese companies’ share of iPhone electronics production will rise from 7% this year to 24% by 2025,

I have been repeating this for years [1] [2] but every time gets downvoted into oblivion on HN. Not only that, there are no signs of Apple turning ship either. Those that were forced out by Geopolitics doesn't count.

But yes, doing assembly in India gets their PR win.

At least, judging from the 141 comments so far. There are a few people finally getting it.

Edit: And my quick glance of Economists data suggest they simply classify company by their HQ location. But not by their ownership and shareholding structure. Not that it makes substantial differences, just the numbers are higher than what is shown.

[1] https://news.ycombinator.com/item?id=29489132

[2] Wrote about YMTC on SemiWiki in 2018. And their relationship with Apple.

pasabagi• 4 years ago

As I understand it, assembly is also the most manual part of the process, so presumably the wage differential between China and India favours the move regardless.

The end of Apple’s affair with China

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