Apple is Leaving China

Posted by Jacob Radke

Steve Jobs in the early 2000s right before he was planning on releasing the iPhone to the world decided that he wanted iPhone screens to be made out of glass instead of plastic. He spoke with US manufacturers and asked if they could produce iPhones with glass screens instead of plastic by the release date. The US manufacturers said they couldn’t, as the planning alone would take too much time.

Luckily for Jobs and Apple China could, Jobs sent manufacturing of the iPhone over to China, and low and behold China manufacturers worked 24-hour days and retooled factories to start mass producing glass-screened iPhones.

The company today that produces most of the world’s iPhones is the Taiwanese company Foxconn. Foxconn is the world's largest technology manufacturer and service provider. While headquartered in Taiwan, the company is the largest private employer in the People's Republic of China and one of the largest employers worldwide.

Foxconn workers at the Taiwanese firm’s Zhengzhou factory walked out over a pay dispute with the company. The Zhengzhou factory is estimated to account for more than 70% of Apple’s global assembly of iPhones. Employees took to social media to air their grievances over what appeared to be a delay in bonus payments. Foxconn’s factory was also hit by a Covid-19 outbreak last month leading to workers fleeing the facility as the company moved to control the outbreak by isolating infected people.

Needless to say, if 70% of iPhone production is paused for too long, Apple’s revenues will be hit and subsequently their earnings.

Right now there is a 37-day wait time in the US for the iPhone 14 ProMax, that’s 10 weeks after the launch. Generally by week 10 wait times substantially drop to 2-10 days.

Recently Apple has been accelerating the shift in manufacturing away from China. Apple is telling suppliers to plan more actively for assembling products elsewhere in Asia, particularly India and Vietnam, and looking to reduce dependence on Taiwanese assemblers led by Foxconn.

Foxconn’s worker disruption coupled with China’s zero Covid policies it was is driving the dramatic shift.

China over the last several years has been slowly, now quickly, discounting itself and the world’s manufacturing epicenter, basically because they have become unreliable. Apple sent manufacturing over to China in the early 2000s not because it was cheaper, though it was, but because they could quickly plan and complete projects. Now Apple is faced with the opposite, citizen unrest and government controls have damaged China’s once prosperous manufacturing status.

Businesses in general no longer feel comfortable having much of their business tied up in one place.

Now what it means for you, Apple, and China.

For you. It doesn’t mean much. If you have ordered a new iPhone expect to wait longer, it’s the world we are living in. If you are an investor in Apple expect some depreciation in shares, but I think the overall impact won’t be substantial. If you are looking to accumulate shares in companies, Apple is one of the best-performing stocks of 2022 (which could be a good or a bad thing) but some short-term weakness could provide for a strong entry point.

Most of the time things like these are short-term market noise that causes volatility in share prices. Will Apple ultimately sell fewer iPhones, probably not. iPhone sales may fall in the short term just on the fact that they can’t produce as many, but as they ramp up production once again, likely away from China sales will likely recover.

Apple and China on the other hand will likely have more political fallout.

In Zhengzhou currently, Foxconn employs about 300,000 people to make Apple-related products.

A move from Apple to diversify away from that city will cause some workers to be laid off as production falls.

China won’t like that one of its largest employers is bleeding because as an emerging economy China needs people’s lives to consistently increase to become a fully developed economy.

The technology sector in China employs a lot of Chinese citizens, which is why China has been so reluctant to heavily regulate Chinese tech companies. Companies like Alibaba, Tencent, and are free to be as “capitalist” as they’d like and the Chinese government can’t do all that much about it.

If they were to do something about it they would risk having people’s lifestyles drop and a potential revolt, kind of like we are seeing already.

Protests in Chinese cities over the past week, during which some demonstrators called for the ouster of President Xi Jinping, suggested criticism over Covid-19 restrictions could build into a larger movement against the government.

China on Sunday reported two additional deaths from COVID-19 as some cities move cautiously to ease anti-pandemic restrictions following increasingly vocal public frustrations. A move that was likely to calm the people of China down.

I’m no expert in international affairs and politics but I do know that China has a serious problem that they are trying to solve with a delicate balancing act.

Apple will ultimately be fine, it may take a while to offshore manufacturing from China, but that was already in their plans long ago to do, it’s just going to happen faster now.

So anyways, let me know what you think about China and Apple’s move to diversify supply chains away from it in the comments.

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