Apple wants to cut down on manufacturing in China

By

Larry Kudlow
Tim Cook meets one of the people working on the iPhone factory line.
Photo: Apple

Apple has reportedly asked its main suppliers to evaluate the cost of shifting 15% to 30% of their production from China to Southeast Asia.

This is a response to the burgeoning China and U.S. trade war, which has already impacted Apple’s share price. If new tariffs go into effect, it could drive up the cost of Apple devices considerably.

It’s not only the risk of tariffs, however. While the urgency of Apple’s request may have been speeded up by this, there are other factors at play. According to a report by Nikkei:

“The California-based tech giant’s request was triggered by the protracted trade tensions between Washington and Beijing, but multiple sources say that even if the spat is resolved there will be no turning back.

‘A lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse factors are not going anywhere,’ said one executive with knowledge of the situation. ‘With or without the final round of the $300 billion tariff, Apple is following the big trend [to diversify production],’ giving itself more flexibility, the person added.”

Changing the location of manufacturing is likely to be “painful and difficult” for some suppliers. However, if they want to keep Apple’s business it might be necessary.

Companies named in the article include Foxconn, Pegatron, MacBook maker Quanta, iPad maker Compal Electronics, and AirPods makers Inventec, Luxshare-ICT and Goertek.

Potential countries for relocation include Mexico, India, Vietnam, Indonesia and Malaysia. India and Vietnam are two of the favorites, particularly for smartphone manufacturing. The report claims that Apple hasn’t set a deadline for manufacturers to finalize their proposals.

Suppliers are already trying

While disruptive to suppliers, a similar move has been on the books for some time. Apple supplier Wistronstarted producing iPhones in Bangalore, India a couple years back. Pegatron has also talked about moving iPad and MacBook production out of China. Wistron and chassis maker Catcher are also looking beyond China.

Recently, Foxconn revealed that it had the capacity to produce all U.S.-directed iPhones outside of China. Foxconn is currently working to build a 13,000-worker factory in Wisconsin. However, this project has run into various problems.

A long-term move

Given the complexity of Apple’s supply chain, this change isn’t going to happen overnight. In a note to clients sent today, Wedbush analyst Daniel Ives suggested that, “in a best case scenario Apple would be able to move 5%-7% of its iPhone production likely to India in the next 12 to 18 months.”

Moving 15% of its iPhone production from China to other regions, Ives thinks, would take at least two or three years. As a result, Apple is still likely to be invested in a long-term trade agreement being signed between China and the U.S.