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Apple’s Chinese dream is over

Nov 30, 2022, 12:25pm EST
tech
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The News

Foxconn
Reuters/Ann Wang

Of all the conversations I’ve had this week with senior people who were once in charge of building Apple products in China, one comment stuck out: China is “not just a location. It was also an era.”

Note the past tense.

Worker protests in Zhengzhou have significantly disrupted the supply of iPhones and will cost Apple billions of dollars in holiday sales, according to analysts and news reports.

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Obviously, the technology manufacturing ecosystem in China isn’t about to disappear. But the people who built their careers and fortunes relying on China’s emergence as a production powerhouse have come to accept that the system they built is now in decline.

The current videos of unrest — which include young workers scaling fences to escape “iPhone city,” where they were locked in during a COVID-19 outbreak — are becoming indelible images.

Nobody could have predicted Covid and the ripple effects that led to the current protests. But China’s global ambitions, which include possibly acting on its claims to Taiwan, have long been a risk factor for companies dependent on manufacturing there.

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For years, even before the pandemic, U.S. officials have been pushing Apple — mostly behind closed doors — to move out of China, warning them that one day in the not too distant future, the U.S. will have to decouple from China.

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Reed’s view

Apple’s relationship with China was one of the biggest bets in the history of the technology business, and it turned Apple into one of the largest and most-admired companies in the world. Its end will threaten Apple’s decade-plus dominance.

Under the leadership of Tim Cook, Apple has added nearly $2 trillion to its revenues by taking advantage of China’s invitation. Credit for Apple’s growth also goes to Terry Gou, founder of its most important contract manufacturer, the Taiwan-based Hon Hai Precision Industry, better known as Foxconn. And there are countless other Taiwanese firms that have helped build out the supply chain for Apple and other companies in China.

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The consumer products that Apple made in China it changed the way we all live. But both Chinese and American tech figures have been thinking for years about what to do when the party’s over.

The reasons are political and practical. China learned from the influx of technology companies, and now challenges the United States in everything from hypersonic missiles and semiconductors to artificial intelligence, contributing to the national security competition between the countries. 

China is also no longer cheap. Wages have skyrocketed, with the average factory worker making $6 per hour on average in 2020, up from less than a dollar in 2006. The average wage of a Chinese factory worker will very soon surpass the U.S. federal minimum wage. For comparison, the average rate for a Mexican factory worker has stayed stagnant at $2 per hour.

So far, Apple has simply paid those rising labor costs out of its huge profit margins and its ability to ruthlessly cut costs. Apple has already moved some iPhone manufacturing to India and Vietnam, but it’s important to understand the difference between the production of electronics and the development of them. You could move all iPhone production out of China, but Apple would still need China in order to develop new generations of products.

Making a new iPhone requires running back and forth between component suppliers and contract manufacturers, hand-carrying parts multiple times a day to get products to market before holiday season. Every hour is crucial. Each of the thousands of component suppliers require a backup supplier. There are backups to the backups — each thoroughly vetted by Apple, down to the supplier’s financial health.

If any company can make the monumental shift away from China, it’s Apple. Its robust supply chain is the reason it was able to keep output going after the 2011 flooding in Thailand disrupted component makers. And it’s why Apple saw only minor product shortages during the height of the pandemic. The chip shortage that crippled Detroit automakers was a blip for Apple’s customers.

But it will cost billions and take years.

The biggest question is whether it will be the same Apple when the process is over. Will the new Apple be stronger and even more resilient? Or will it be unable to recreate the magic of China’s boom years?

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The View From Outside Cupertino

Apple is facing challenges elsewhere, too. It has had a rocky relationship with app developers for years over the 30% fees it charges for the majority of sales that happen inside of apps on iPhones. But on Monday, one of Apple’s most prominent app developers — Twitter boss Elon Musk — lashed out at the firm. He accused Apple of pulling its advertising and threatening to take Twitter off the App Store. And then Musk turned to the topic of anti-competitive practices. “Did you know Apple puts a secret 30% tax on everything you buy through their App Store?” he tweeted.

Epic Games can probably commiserate. Musk’s complaint is a pivotal factor in the antitrust lawsuit Epic filed against Apple in 2020. A federal appeals court will soon rule on the case’s outcome. European regulators also aren’t fans. They’ve forced Apple to get rid of the proprietary Lightning charging port on its phones and threatened to force Apple to open up iMessage (goodbye green bubbles). The U.S. Congress is watching: they’ve drafted legislation that would regulate the control Apple has over its App Store. Republican lawmakers also pounced on Apple after Musk’s tweets.

Apple is additionally under fire for its move in 2020 to cripple advertisers’ ability to track iPhone users across the web, with some like Facebook parent Meta Platforms questioning whether the stated purpose — user privacy — wasn’t the only motive. Apple has since quickly expanded its own online advertising business and is already facing a lawsuit for its data collection practices around targeted ads.

Apple’s ability to earn more revenue, from the commissions it charges on its App Store to the advertising dollars it hopes to one day rake in, will be crucial if its global supply chain challenges make its hardware businesses less profitable.

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