Can Apple Hit Reset on Its China Production?

supplies to assemble their phones? Last gek iPhones were producing China alone. Escalating tensions between China and the US have raised the stakes across the board and the US restricting China's access to chips has implications for some of the biggest tech names, including Apple. What does this mean for the future of Apple, the iPhone and the iPad. Let's bring in. Stephen Zong is senior technology analyst with Bloomberg Intelligent. Stephen, Welcome to the podcast. Hi Tom, Hi John. Glad to

be here. Stephen. Why does Apple rely so much on China to make its iPhones. There's a few key strands in China. Apparently they have a very abendent supply of skill labors. They have a very good supply chain which you can basically source all the key components there, and they have very good logistic efficiency. China also happens to be the one of the biggest market for iPhone so they have an account for rough of the iPhone shuman per year. So it's more than just cheap labor that

draws Apple to China. If you want to look for chip labors, China is no longer the place to go. But then if you constitute the skilled labored or engineers, then China certainly has one of the largest population of skill labors, so that's obviously one of the strands. So if you look at the like India, obviously you can make product there, but you may need to spend extra Kina money to trend those vapors, so the efficiency may

be jepodized on time to time. China just locked down the world's largest iPhone plant, the fox Con plant, to come back a COVID outbreak. Can Apple still stay invested in China and yet deal with all this unpredictability over whether it can even get its product out in a near turn. The only thing they can do, or the fast Con can do, is that they can reokay part of production to other side. In this case, we heard

that they moved part of that to Shinjin. The longer term, obviously hope that that when they seem back to normal, they can still catch up interns of production. Well, obviously this cannot go on forever. I think India obviously become sort of backup capacity, but it takes times to something instant.

Apple hide behind its peers in terms of this past the relocation, Like if you look at the same for example, they already have like almost sixty of its filmmade in Vietnam Stephen with the latest lockdown, will this impact the production targets of for Apple? It seems to be. I think some report talking about like up to which I think is possible, but just that depends on how long

they lasts. If just a couple of weeks, I think it's manageable, and particularly when you know that small phone demand, it's not particularly gray at this point for they actually progress the really for the supply chain, So it's it's largely depends on how long this latter will last. If it's just a couple of weeks, I think it's a manager. Has Apple mentioned that they want to diversify production away

from China. Obviously it didn't say our law. I guess it's probably a little bit too sensitive to say out loud, but they did the For example, if this year the iPhone fourteen the made in India, they DIEP made the announcement basically confirm they actually started making I from fourteen India. That really happened before, so I guess they at least they shoot a commitment to reduce the reliance and China, Stephen. One of the biggest risks to Apple in executing this

decoupling and then recoupling from China to India. The immediate issue is really the cost. Right assembly is not really a difficult process, but then the efficiency can have major impacts on the final production cost. And also we're talking about at the moment, you don't have a lot of components in India, so you have to import everything from China to India. The shuman from China to India by sea is roughly three weeks, so it depends on the

cost of component. If it's expensive part, you should buy air which is usually three to four times more expe and ship Stephen. Some analysts believe of iPhones can be produced outside of China by two. Is this realistic? What's your expectation? It's definitely possible, right, but just that a lot of things has to happen. Yeah, we're talking about that. You have to get some supplier component supplier also move into India, and then also they have to come up

with arrangement like how to allocate the extra costs. Would it be possible to raise iPhones retail price too? So that's probably difficult. But we all know that the Apple is so has a very pie control on the supply chain, which means that will have a very detailed certification all the supplier and all their process takes time. Well, I would say it's quite difficult in our view in b I I mean we're actually spent. Probably only single digit

change may happen in the nest few years. Centuly, Yes, twenty thirty may seem more reasonable to me at least, I mean to sort of that a quarter of iPhone can be made in India. Stephen, is there any way you can describe just how deeply embedded Apple supply chain is in China? Everybody is thinking about diversification to manage the uncertainty. So now it looks like an Apple, it's folding behind on that progress. So so from that perspectively,

actually expoied themselves into a pretty big risk. Let's talk a little bit about that diversification that you just mentioned. Is it a foregone conclusion that Apple became so entrenched in China, so dependent on China or could it have been avoided? And what did they miss? They know what kind of a risk they are taking, maybe the thing that's risk worth taken, or maybe because they are reading not there's not a the better choice at the moment,

but it's clear that their supply chain are death. They look in outside China the new capacity. The company actually released their top two hundreds of Priier lists every once in a while. Based on the latest list, China's number I think it's like two hundred sixty something. It's actually not changed a lot. It's still the biggest country obviously in terms of a number of factories located. But then a lot of other Southeast Asian countries. We're talking about Malaysia,

about Thailand, Vietnam, even Singapore. Actually they all growing, will increase in terms of number of factories. They definitely moved towards ossium even though the reliance on China is still very high, but I think increasingly. But you can see they're trying to match that geopolitical risk. If we compare Apple with its biggest competitor, Samsung Electronics, Samsung makes its phones in seven countries around the world. If Samsung can

do it, why can't Apple. I think one of key difference is that a sens on actually can produce a lot of key components in house. Right they have their own processor or memory chips, they can produce panel, and that they also have subsidiaries that making other components, so they can be very efficient if they want to relocate their capacity to a certain country. Right, But Apple is different.

Apple really households to to Asia all three so obviously they have a very good arguing power in the supprice chain. China is an important consumer market for Apple. If Apple diversifies production away from China, what would be the ramifications for Apple that? That's actually good question, because it can be a concern. I guess it depends on how Apple manages that process. If it just build capacity like gradually and they didn't really cut down the capacity in China,

then I guess it's okay. Because he can argue that, okay, that's capacity to support the growth in China. Maybe it's not expanding. I think it should be. You can be okay, but then yeah, Apple actually downsized the capacity in China. Then there could be an issue, right because as you know that the China can maybe they can pick up pick it up as its cues to do something drastic against Apple. So I guess given the concern, I think Apple is very likely to work with the supplier to

maybe more like engage in the more gradual expansion. So still keep China as the major production half, but obviously he's spent elsewhere. Two diversify the risk that what they will do. This year, the US implemented the Chips Act. The US also banned the sale of advanced semiconductors used in ai and supercomputers to China. Does this impact Apple at all? So far, it doesn't seem so because obviously Apple doesn't make those chip in China and it is small.

I mean they're working with t SMC mostly and TSMC is mainly in Taiwan. So no, But with that, the impact going forward, that really depends on what the US government want to do going forward. But now no, if Apple iPhones are made outside of China. Does this mean higher prices for US consumers? It is very likely obviously, unless he has those sold by the supply chain right or by Apple yourself. So that's a very obvious question, and I will assume Apple are not willing to do that.

It's so one or a few of the suppliers have to take that hit, and that depends on how substantial that he will be. This is why I think a lot of supplier of Apple usually when they have a very efficial and operation in place, they want change white bother to fix something already running. So well, that can be an issue, and I'm sure Apple is aware of that. So I guess what they would do is that I really want to diversify, but they won't do with it like drastically. They do it on a gradual manner, so

the incremental costs will become easier to manage. Our guest has been Stevensung, senior analyst at Bloomberg Intelligence covering the technology space. Steven, thanks for joining us. Thank you, Tom, Thank you John, and I'm John Lee. Thank you for listening to the AHA Centric podcast.