Apple in china, p.37
Apple in China, page 37
This single event, three years into a global pandemic, dramatically exposed a risk to Apple that had been latent for nearly two decades: its deep concentration of manufacturing operations in a single country. “The Zhengzhou debacle is being talked about as a result of China’s zero-COVID policy, but what it really shows you is systemic weaknesses in the way manufacturing is organized,” a well-placed person involved in supply chain audits in China for more than a decade told the Financial Times. One analyst called the scene “an unprecedented nightmare for Apple.”
For years, Cook had resisted calls to really diversify Apple’s operations. Speaking to investors in April 2020, he said: “If you look at the shock to the supply chain that took place this quarter—for it to come back up so quickly really demonstrates that it’s durable and resilient. And so I feel good about where we are.” Some investors, journalists, and other executives at Apple believed Cook was being complacent. But it was only in November 2022 that clear proof came crashing down. The protests in Zhengzhou became a media spectacle, catalyzing similar demonstrations against COVID lockdowns in at least a dozen cities across the country. Together these protests formed the biggest challenge to Communist Party rule since students took over Tiananmen Square in 1989. Activists became famous for holding blank white sheets of paper, a poignant symbol of “everything we want to say but cannot say,” as one participant put it.
Apple was forced to issue yet another revenue warning—its third in four years, each due to problems in China—saying that supply chain disruptions would derail production of the highly sought after iPhone Pro, its most lucrative model. Later, it posted its first revenue decline in nearly four years. Trying to soothe, Apple offered some comments about sorting out its factories, but it was careful not to support the protesters. In fact, the company restricted use of its file-sharing tool AirDrop after it emerged that Chinese citizens were using it to organize. The move was similar to how, in October 2019, Apple removed from its App Store a mapping application used by pro-democracy protesters in Hong Kong, just days after being criticized by Chinese state media for allowing it to be downloaded. In the words of Democrat Mark Warner, chair of the Senate Intelligence Committee, removing AirDrop was tantamount to “doing the bidding” of the Chinese Communist Party.
Getting China Wrong
Both Hu’s unceremonious removal from China’s Congress and Beijing’s crackdown on its own tech giants for stepping out of line might have been on Tim Cook’s mind in early December 2022 when he was confronted by a reporter on Capitol Hill, en route to meeting privately with senior lawmakers. “Do you support the Chinese people’s right to protest? Do you have any reaction to the factory workers that were beaten and detained for protesting COVID lockdowns?” asked Hillary Vaughn of Fox News as Cook walked through the building. “Do you think it’s problematic to do business with the Communist Chinese Party when they suppress human rights?” Cook ignored Vaughn, eyes cast downward as he changed direction to avoid her.
One supply chain executive characterized the confrontation as “the worst forty-five seconds of Cook’s career.” But his biggest, most astute critic might have been… himself. In 2017, explaining why corporate executives should be more up-front about their values and “lead accordingly,” Cook had told journalist Megan Murphy that “silence is the ultimate consent.” He went on:
If you see something going on that’s not right, the most powerful form of consent is to say nothing. And I think that’s not acceptable to your company, to the team that works so hard for your company, for your customers, or for your country. Or for each country that you happen to be operating in.
The forty-five-second clip of Cook ignoring questions about China played repeatedly on US cable news. Cook’s silence—his ultimate consent—was highly indicative of just how beholden America’s most valuable company had become to an authoritarian state.
The point, however, isn’t to condemn Cook or Apple. It’s to convey the predicament they’re in. At the turn of the millennium, Washington made a bet on China—a bet that free trade would liberalize the country and perhaps catalyze the creation of the world’s biggest democracy. Instead, trade enriched China and empowered its rulers. Cook shouldn’t be blamed by politicians for enmeshing Apple’s operations in China two decades ago, but he has erred by doubling down over the past decade despite mounting evidence that Xi has been ramping up repression at home and taking a more combative stance in international affairs. “You can say that we read them wrong, that we misunderstood China. But Jack Ma read China wrong, too. Every entrepreneur read China wrong,” says a supply chain expert who has lived in the country. “You look at what Deng Xiaoping and Hu Jintao were promoting—the [business class] didn’t see this coming. Xi changed the game completely. He’s another Putin in the making.” This person adds, “Look, I’m not a Cook fan. But you have to be sympathetic. He didn’t know what he was dealing with. Nobody did.”
CHAPTER 40 PLAN B—ASSEMBLED IN INDIA?
The Shanghai lockdown and COVID-related protests in Zhengzhou were a major moment for Apple—like the CCTV-led attacks a decade earlier—to pause and really digest the vulnerabilities of being so dependent on a single authoritarian regime. The assessment was sobering: Chinese brands had accounted for just 23 percent of global smartphone shipments in 2013, the year of Apple’s political awakening. But their share surpassed 50 percent in 2020. Brands led by Huawei, Xiaomi, and Vivo gave Chinese companies, in 2022, a cumulative market share in both China and Russia of 79 percent; in Indonesia, 73 percent; in India, 66 percent, per Counterpoint Research. In fact, Samsung and Apple were the only two sizable non-Chinese companies still making smartphones. Taiwan’s HTC, Korea’s LG, Canada’s BlackBerry, and Finland’s Nokia were all basically gone; Motorola was now owned by China’s Lenovo; and global sales of Google Pixel were so low as to be subsumed into the “other” category. Moreover, Samsung didn’t share Apple’s vulnerability. After peaking in 2013 with 20 percent of China’s smartphone market, Samsung’s share collapsed to just 1 percent. It closed its Chinese plants in 2019, diversifying its supply chain to such an extent that more than three-quarters of its handsets were assembled in six countries from Argentina to Vietnam; less than one-quarter of its units were outsourced to contract manufacturers in China. The ascent of China’s smartphone sector spoke volumes about Apple’s dependence on the very capabilities it had orchestrated, underscoring how China had gone from a land of cheap labor to one of sophisticated automation. Now, the important players in the country were no longer just manufacturers but design-driven brands taking significant market share around the globe.
Until the Shanghai lockdown, there’d been no major plans to shift iPhone production out of China. To avoid the threat of tariffs on China-made goods during the Trump administration and to take advantage of lower labor costs, Apple had made notable shifts in where it manufactured some of its other products, diverting them to Vietnam and Thailand. According to Apple insiders, by 2022 more than 70 percent of AirPods production, nearly a third of Apple Watch assembly, and about a quarter of iPad manufacturing had moved out of China. That’s a far faster shift than recognized by independent market intelligence groups, but it hasn’t been in Apple’s interest to tout these moves given political sensitivities in China. An analysis of 1,000 financial filings from Apple’s four biggest Taiwanese manufacturer partners supports the conclusion that diversification efforts have been substantial. According to TD Cowen, the research arm of investment bank TD Securities, from 2018 through 2023, these four groups spent $16 billion—on land, construction, and machinery—diversifying production away from China to India, Mexico, the United States, and Vietnam. By contrast, iPhone production had barely diversified before the Shanghai lockdown, owing to its complexity and a lack of will at the highest echelons of Cupertino.
Apple, with partner Foxconn, had tried manufacturing iPhones in Brazil since the early 2010s, but volumes had been negligible—estimated to be 1 percent or less of all production. The expansion was a matter of avoiding heavy tariffs in the region, not creating a manufacturing hub for exports. But engineers who worked on the Brazilian project called it a disaster. There were still lots of taxes to pay; none of the factories rivaled the scale of China; the political environment was unstable; and the labor force was unreliable. One Foxconn worker sent from the Czech site says there were even problems with armed gangs attacking the factories.
Apple had also been making iPhones in India since 2017. As with Brazil, volumes were limited and the shift had largely been driven by the desire to avoid tariffs. But unlike with respect to Brazil, there were forces within Cupertino lobbying for a much bigger push. The effort hadn’t received much traction, but the Shanghai lockdown of 2022 proved a major catalyst for change. “Overnight,” a former executive says, “China went from being a reliable supplier to a completely unreliable supplier.” Plan B for iPhone manufacturing got approved.
Made in India
The push to India has been led by Priya Balasubramaniam, VP of iPhone operations. Former colleagues describe her as great at negotiating with vendors, running the supply chain, and rolling up her sleeves to figure things out. One manufacturing design engineer says she is “very, very sharp—can cut right to the chase.” But they say she’s not necessarily all that technical or inventive. “She’s a person who will work harder, work harder—not smarter,” says one. Several people say the jury is still out on whether she can lead a major shift from China to India. The implication: If the skill set needed is brute force and sixteen-hour days, then Priya—as everyone at Apple calls her—is great for the role; if it requires fundamentally rethinking things, she might not be.
India, a democracy with English as a second official language, offers fewer geopolitical risks than China and, with its rising middle class, could become a huge market in the coming decades. As an internal memo prepared for Tim Cook in October 2018 put it: India is poised for a “China-like trajectory.” The memo compared India’s economy to China’s in 2008, cited projections that GDP would grow 7 percent a year for the next five years, and referenced an estimate from McKinsey, the consultancy, saying “India’s ‘consuming class’ is expected to almost triple to ~90M households by 2025.” India, in 2018, was already the third-largest smartphone market in the world, with 124 million users, and it was projected to soon surpass the US market of 176 million users. The memo called India’s smartphone market “a vast pool to be exploited.”
But Apple’s push to India was tepid in the five years following that memo, until the Shanghai lockdown. The slowness had reflected Cupertino’s caution and New Delhi’s unwillingness to be as welcoming as Beijing had been two decades earlier. When Cook had personally met with Prime Minister Narendra Modi in 2015, he lobbied to open an Apple Store in the country. But protectionist rules required that foreign companies selling goods directly to consumers must source 30 percent of components locally, and Modi wouldn’t offer an exception. When the rules were relaxed in 2017, Apple suppliers began assembling some iPhones in India—with Taiwanese partner Wistron—a move that allowed Apple to avoid hefty tariffs. That made the iPhone more affordable to a rising middle class. But in India an online Apple Store didn’t launch until 2020, and the first physical Apple Stores didn’t open until three years later—fifteen years after the first store in China.
Priya’s team has made tangible progress since 2017. They’ve moved from making the entry-level iPhone SE models to, in 2020, producing the flagship models. In addition, they’ve sped up the mass launch in India, trimming the lag between iPhone distribution from China and iPhone distribution from India from many months to just a few weeks. By 2023, there was actually no lag at all—made-in-India iPhones were available on the same day. Another milestone was reached in September 2024 when Pro models were made in India, too. And Apple wasn’t just supplying the local market; consumers in Europe, among other places, took to social media with their surprise that their newest iPhone was “made in India.”
Despite this progress, Apple is only in the earliest phases of diversifying iPhone production. As Morgan Stanley analysts estimated in mid-2023: “90–95% of Apple’s production is still in China; we believe a full decoupling would likely require hundreds of billions of dollars of investment at least, which would prove an outsize burden for the supply chain.” Indeed, the pace of growth in Apple’s operations in India is nothing like that of China a decade earlier. From 2016 to 2023, iPhone production in India grew from zero to around 15 million units, accounting for 7 percent of global shipments. China, between 2006 and 2013, ramped production from zero to 153 million units. So, at best, India is taking on iPhone orders at one-tenth the rate China did a decade earlier.
And yet, even that vastly overstates things. Most operations that suppliers have set up for Apple in India are FATP—final assembly, test, and pack out—a labor-intensive process performed with components largely flown in from China and then assembled mostly by Taiwanese companies Wistron and Foxconn. One manufacturing design engineer says, only slightly joking, that the phones “made in India” are assembled in China, disassembled there, and then sent to India for reassembly. As of late 2024, Apple’s India operations are only in the early stages of building up capacity for “new product introduction,” a much wider effort involving a greater depth and breadth of operations to source components, build prototypes and test them, and ramp to mass production. Apple does intend for India to become fully capable in every respect—but that’s likely to take a minimum of five to ten years, if it can be accomplished at all.
A former senior Apple engineer agrees Cupertino now has major ambitions to orchestrate “next-door” suppliers in India—industrial clusters comprising operations from a diverse set of vendors close to final assembly. But, this person says, the pace of development hasn’t been quick. If those clusters can be established, it would be a big deal, but in the interim, having iPhone assembly in both China and India dependent on the same supply chain adds more complications than resilience. “You have to add in that time cycle—from that part coming from China and into India,” this person says, pointing out that the lower labor costs of India get offset by the added logistics of sending freight from China. Historically, this engineer points out that when Japan, then Taiwan, and then China made their mark in global electronics manufacturing, they all started by supplying components, creating a foundation of technical expertise. Only afterward would a supplier of, say, motherboards, begin to vertically integrate and expand into taking on final assembly, test, and pack out; by contrast, Apple in India has been doing FATP for seven years and is only now trying to build up the competency of suppliers making parts. “My sense of it is, [Apple is] doing it ass-backwards,” this person adds.
Rivaling China
Engineers and executives with years and decades of experience at Apple are deeply divided on whether India has what it takes to rival China—and to what extent Apple’s investments can be a game changer. There are some who are extremely bullish. One current Apple operations engineer, having just returned from both countries, estimates that India will account for a stunning 60 percent of Apple’s manufacturing by 2030—meaning that more Apple products will be made in India than in China. Several former engineers believe that’s feasible, but many others find it wildly overconfident, exuding hubris in Apple’s abilities and ignorance regarding just what a unique, crafty, determined, and powerful role China has played in the prior twenty-five years. If anything even resembling this operations engineer’s prediction is accomplished, it would be an extraordinary achievement that would significantly de-risk Apple’s operations and, in the process, accelerate India into a manufacturing powerhouse.
The two major arguments supporting India’s potential are its enormous workforce and its cheap labor. In 2023, its population of 1.43 billion overtook that of China; that number of willing hands could be a major asset versus, say, the resources that exist in Vietnam, which has a skilled population but is only one-fifteenth the size. Average monthly manufacturing wages in India, as of 2024, were just $195, versus $1,139 in China (and $5,912 in the United States). It’s common to hear that India today is similar to the China of two decades earlier. Certainly, the potential is enormous. Bain, the global consultancy, estimates that manufacturing exports from India could more than double from $418 billion in 2022 to more than $1 trillion in 2028, driven by policy support and low costs. Bain further estimates that electronics exports alone will grow at an annual rate of up to 40 percent. And Apple is playing an active role making changes on the ground. In 2023, Apple and Foxconn successfully lobbied for a landmark bill in the Indian state of Karnataka to liberalize labor laws. The new legislation allowed factories to run twelve-hour shifts, up from nine hours previously. Karnataka also eased rules on nighttime work for women, who dominate electronics production lines in Southeast Asia.
But these “India is the new China” arguments can feel superficial. China’s strength has been less about the abundance of labor and more about their allocation and flexibility. Jenny Chan, coauthor of Dying for an iPhone, which details the lives of Foxconn workers who assemble Apple products, argues that state support in filling factories with migrant labor has been critical. “This is really important, because you will not get [much interest from workers] in assembling an iPad or iPhone,” she says. “It’s repetitive work and you are just rendered as a robot—a tiny cog in a huge machine.” But India doesn’t have a culture of internal migration. In one study, India had “the lowest rate of internal migration” among eighty countries.
