APPLE INC PLACED its bet on China over a decade ago. China became Apple’s outsourced factory, churning out 95 per cent of Apple’s line-up of iPhones, iPads, iWatches and iMac laptops. That bet is unravelling.
The Covid lockdowns that cut iPhone production in China by 11 per cent in November 2022 are only the trigger. Apple’s top management has been worried for over a year about four problems that have created a perfect storm for China. Together they place a large question mark over whether China can continue to be the world’s factory of choice.
The first concern is wages. Chinese workers at Foxconn’s assembly plant in Zhengzhou, which employs up to 3,00,000 people, are no longer cheap. They earn wages upwards of $6 per hour. That’s 6x what Foxconn pays Indian workers in its Tamil Nadu iPhone plant. It’s also 3x higher than what it pays workers at its assembly units for Apple products in Vietnam and Indonesia. In fact, Apple executives worry that the wages of Chinese workers may soon start approaching the average wage of low-paid immigrant workers in the US.
The second concern for Apple is political. Chinese President Xi Jinping has cracked down on the tech sector. Alibaba’s legendary founder Jack Ma was hounded out of China and now lives in Tokyo. Fintech and edtech companies have been targeted by Xi’s army of bureaucrats and subjected to forensic audits. Some have been forced to shut down.
The crash in the real estate sector has shaved up to 40 per cent of the value of property assets. Since a significant portion of the net worth of most Chinese is tied up in real estate, that has caused widespread financial distress, leading to social tensions and possible future political instability.
The third concern for Apple is Xi’s refusal to import foreign-made vaccines despite China’s homegrown vaccines proving far less effective in immunising the population. The anger on the streets against lockdowns, which led to the abandonment of the zero-Covid policy, has eroded confidence in China’s reliability as a key production hub in a global supply chain.
The highest workforce per manufacturing unit in Vietnam, Apple executives believe, is 60,000. At its Indian units, the total number of Foxconn employees assembling Apple products will by 2025 be over 2,00,000. That is the scale Apple needs
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The fourth worry for Apple is China’s demography. The country is rapidly ageing. The average Chinese is nearly 40 years old. Apple’s manufacturing plants need a young workforce that often lives on campus in cramped dormitories.
Writing in The Wall Street Journal, Yang Jie noted: “In recent weeks, Apple Inc. has accelerated plans to shift some of its production outside China. Apple’s longer-term goal is to ship 40% to 45% of iPhones from India, compared with a single-digit percentage currently.”
India has two key advantages over China. One, wages are one-sixth of China’s. Two, the workforce is young and in plentiful supply. Vietnam is also an option for Apple but its population is one-fifteenth of India’s. The highest workforce per manufacturing unit in Vietnam, Apple executives believe, is 60,000. At its Indian units, the total number of Foxconn employees assembling Apple products will by 2025 be over 2,00,000. That is the scale Apple needs. At that scale, India would match China, and at a fraction of the cost.
India though has disadvantages as well. Its infrastructure is still well below China’s in terms of transport, logistics, ports, and shipment. To reach the Chinese scale of production and exports, India will not only have to encourage contract manufacturers to build large plants but also create rail, road and port infrastructure to ship tens of millions of iPhones and other Apple products globally.
Succeeding with Apple can open up other vistas for India. Intel Corp is planning to shift some of its chip manufacturing and design from China to India. According to Steven Long, Intel’s corporate vice president of Asia- Pacific and Japan, “We are seeing design and manufacturing opportunities for our partners here in India. Governance initiatives like Make-in-India are driving design opportunities from historical regions in Taiwan, China, or in other parts of Southeast Asia to India. We see a big opportunity here.”
From iPhones to semiconductors, India could over the next few years take a leaf out of the global success of its services exports. Starting at the cusp of the 21st century as basic service providers and BPOs, India’s services exports have risen to $350 billion a year by moving up the value chain to digital, cloud, Artificial Intelligence, and data analytics.
India’s manufactured exports now need to replicate this success by taking a big bite out of Apple.