By Tripp Mickle and Yoko Kubotda
Long before Donald Trump moved into the White House or the
coronavirus paralyzed the city of Wuhan, Apple Inc.'s operations
team began raising concerns about the technology giant's dependency
Some operations executives suggested as early as 2015 that the
company relocate assembly of at least one product to Vietnam. That
would allow Apple to begin the multiyear process of training
workers and creating a new cluster of component providers outside
the world's most populous nation, people familiar with the
Senior managers rebuffed the idea. For Apple, weaning itself off
a stubborn dependency on China, its second-largest consumer market
and the place where most of its products are assembled, has been
too challenging to undertake.
Apple's addiction to manufacturing in China has long frustrated
staff -- and more recently unnerved investors. The coronavirus
represents Apple's third major setback there in as many years,
including the fallout from tensions with the U.S. that included
tariffs and slower-than-expected iPhone sales in the country.
Factory production has been crippled as China has shut down
activities and sought to contain the outbreak, and Apple warned
investors it won't meet its own sales estimates in the current
quarter. Since that warning, Apple's market value has declined by
more than $100 billion.
"No executive will admit in a public forum: We should have
thought about" the vulnerability to China, said Burak Kazaz, a
Syracuse University supply chain professor and former researcher at
International Business Machines Corp. "But from this point on,
there are no excuses."
China has been a critical factor in Apple's once-soaring $1.4
trillion market value. The country provides a stable, efficient,
low-cost manufacturing base with an abundant network of suppliers
that have helped cement Apple's profitability.
Apple Chief Executive Tim Cook continues to play down the need
to significantly change Apple's supply chain. During an interview
Thursday with Fox Business Network, he said unpredictable events
are a facet of modern business and noted that Apple's operations
team has previously navigated earthquakes, tsunamis and other
"The question for us is: Was the resilience there or not? And do
we need to make some changes?" Mr. Cook said. "My perspective
sitting here today is that if there are changes, you're talking
about adjusting some knobs, not some sort of wholesale fundamental
Apple has recently started to experiment with small production
moves out of China. These attempts, including plans to assemble
wireless earbuds in Vietnam and produce iPhones in India and Mac
Pro computers in the U. S., have laid bare a number of
A clean break with China is impossible. Apple relies on a
workforce of more than three million indirect workers in China. Its
top manufacturer, Taiwan's Foxconn Technology Group, hires hundreds
of thousands of seasonal employees in China, many of whom manually
insert tiny screws and thin printed circuit boards during the
iPhone assembly process, people familiar with the process said.
Tens of thousands of experienced manufacturing engineers oversee
Finding a comparable amount of unskilled and skilled labor is
impossible, said Dan Panzica, a former Foxconn executive. The
population in China has allowed suppliers to build mega-factories
with a capacity for more than 250,000 people. The number of migrant
workers in China, who do much of Apple's production, exceed
Vietnam's total population of 100 million. India is the closest
comparison, but its roads, ports and infrastructure lag far behind
those in China.
"You're not going to be able to have mega-factories anywhere
else," Mr. Panzica said. "You're going to have to break them
Moving out could also jeopardize Apple sales in China, which
counts for nearly a fifth of its total revenue. Employing so many
local workers helped the company gain access to the market and any
reduction might weaken its standing with the government, which
wields tremendous influence over how global brands are perceived,
according to Neil Mawston, a technology researcher with the firm
Though Apple's brand remains strong in China, its share of the
smartphone market has declined to 7.5% from a peak of 12.5% in 2015
because of pressure from homegrown rivals such as Huawei
Technologies Co., according to Canalys, a market research firm.
Mr. Cook, who joined the company in 1998, is the architect of
Apple's China business. As head of operations, he assumed
responsibility for a company saddled with extra inventory and
reliant on its own U.S. manufacturing plants. Following the
practices of Dell, Compaq and other computer brands, he started
outsourcing to contract manufacturers in Asia.
Around 2000, he met Foxconn founder Terry Gou, who would become
the dominant contract manufacturer in Asia. Foxconn struck deals to
be one of the few manufacturers of iPods, which made its debut in
2001, and an early maker of the iPhone, which launched in 2007.
Beijing was supporting tech manufacturing because it wanted its
factories to make more-sophisticated products rather than plastic
toys and clothes. In 2001, Apple officially entered China with a
Shanghai-based trading company.
As iPhone sales surged, Apple, Foxconn and China scrambled to
meet the demand. In 2010, China took over farmland in Zhengzhou,
and within months, a Foxconn factory complex was built for 250,000
workers. The government also has helped funnel workers to Foxconn,
posting notices online.
Conditions in China challenged Apple. Suicides at Foxconn
factories and reports of employees exceeding a 60-hour workweek led
to criticism of the company, which publishes an annual supplier
responsibility report evaluating workplace conditions. Apple says
it holds suppliers to the strictest standards in the industry.
Over time, Apple, Foxconn and China formed a triangle of
dependency. Apple grew to depend on Foxconn to make devices and
Chinese consumers to buy them. Foxconn built its business by
leaning on China's vast workforce and control over land to
construct factories. And China became beholden to Foxconn as the
nation's largest private-sector employer and Apple as a trainer of
new technology suppliers.
The entanglement unnerved some Apple executives, who encouraged
company leaders to look outside China to minimize the risks of
labor unrest or a change in Beijing's position on Apple.
President Trump's policies rocked the relationship. After
winning the election, Mr. Trump said in Time magazine that he told
Mr. Cook that he wanted Apple "to build a great plant, your biggest
and your best, even if it's only a foot bigger than some place in
China." The administration later started levying tariffs on imports
of goods made in China.
Mr. Cook managed to avert tariffs on Apple's bestselling
product, the iPhone, telling President Trump it would put the
company at a competitive disadvantage to its biggest rival, South
Korea's Samsung Electronics Co. But Apple wasn't able to avoid
tariffs on headphones and other devices.
Samsung isn't subject to the tariffs because it moved most of
its smartphone manufacturing out of China in recent years. It is
now assembling its signature phones in Vietnam, India and South
The shift out of the country came after Samsung's share of
China's smartphone market had already collapsed. It went from
selling one in every five phones in 2014 to claiming less than a 1%
share of the smartphone market, as homegrown rivals outmaneuvered
it, and a plan to install a U.S. missile-defense system in South
Korea upset Beijing, triggering a Chinese consumer backlash.
Assembling a Samsung Galaxy in Vietnam is simpler because the
company uses larger and more pre-assembled components, such as its
display, according to former operations executives. The company
also glues the phones together, a process that is easier to
automate than inserting the tiny screws on an iPhone, said Kyle
Wiens, founder of iFixit, a firm that analyzes smartphones.
Apple's design team has long adhered to the philosophy of its
former chief designer, Jony Ive, who believed that a well-made
product required just as much precision and care on its interior
design as its exterior look-and-feel.
"It's extremely intricate and complicated," said Mr. Panzica,
formerly of Foxconn.
Tariffs imposed on headphones were a catalyst for Apple to shift
manufacturing of the AirPods Pro wireless earbuds from China to
Vietnam, said Jeff Luo, a supply-chain analyst with Isaiah
Research. He said Chinese contract manufacturers Luxshare Precision
Industry Co. and GoerTek Inc. were told late last year to set up
production by March at plants that should be able to make about 4
million units monthly of AirPods Pro.
Luxshare said it couldn't comment on specific clients or
products. GoerTek didn't respond to a request for comment.
AirPods are easier to shift out of China because they have about
a third as many components as an iPhone, which has about 1,000.
They are also glued together rather than screwed, Mr. Luo said.
A Communist country, Vietnam offers some of the same benefits as
China. Labor is cheap, and officials have encouraged the
development of industrial parks with lower tax rates.
It also has its drawbacks. Few people speak English and
manufacturing lines are typically run by people from China, which
creates a communications gap. The manufacturing procedures are
slightly more inefficient and the factories are still learning
processes such as work orders, operations executives who have
In India, Apple set up iPhone manufacturing partly to avoid the
country's 20% tax on imports. It also wanted to comply with a law
requiring single-brand foreign retailers to buy at least 30% of
their manufacturing materials from India.
In 2017, after several years of planning, it completed its first
trial run for an iPhone SE using the contract manufacturer Wistron
Corp. It has since begun making iPhones at a Foxconn factory near
Apple has been cautious as Indian workers gain experience. Last
year, it was hurtling ahead with a plan to make the iPhone 11 in
India, a manufacturing first for a company that had long relied on
China to assemble its newest models.
But the technology giant halted the effort before setting up a
single manufacturing line for that device, a person familiar with
the matter said. India wasn't ready to supply skilled labor or the
robust infrastructure Apple expects. It opted to make the iPhone 11
in China instead.
Apple is unlikely to shift any of the production of its most
expensive iPhones to India later this year, a person familiar with
Foxconn's overseas operations said. The supply chain isn't in
place, and workers in India aren't ready to produce the high-end,
organic light-emitting diode models, this person said. Foxconn
didn't immediately respond to a request for comment.
Efforts to restart production in the U.S. have also hit snags. A
plant that has made the niche Mac Pro desktop in Austin since 2013
ships product only to North and South America. The models sold
around the rest of the world are made in China.
And when it came time to choose where to make a new model of
iPhone analysts expect Apple to launch in the coming weeks, China
got the nod.
--Newley Purnell and
contributed to this article.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
March 02, 2020 13:16 ET (18:16 GMT)
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