In-Depth

'Apple held hostage by its Chinese puzzle'
'Apple held hostage by its Chinese puzzle'
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Apple in China

4

May 20, 2021
BIG IDEA | "The massive and complete supply chain ecosystem in China is key to the iPhone maker's success, but it has also created a gigantic organism that would struggle to move somewhere else."

‘Soon after Tim Cook was hired by Apple's founder Steve Jobs in 1998 to whip the company's U.S.-focused supply chain into shape, he made a bold decision.’

  • ‘Within two years he began shutting Apple's U.S. factories and outsourcing production to China.’

‘His decision drove down costs and gave Apple the resources it needed to develop its next blockbuster products, the iPod and iPhone.’

  • ‘It also created a competitive manufacturing base, capable of mobilizing hundreds of thousands of workers with just a phone call.’

‘But eight years after Cook became CEO, this strategy is being called into question.’

  • ‘This has left Apple dangerously exposed in the trade war between Washington and Beijing.’
  • ‘And Apple's failure to diversify its production beyond China has tied it to a country where wages are rising, growth is slowing, and where Huawei has the advantage.’

‘ "The massive and complete supply chain ecosystem in China is key to the iPhone maker's success, but it has also created a gigantic organism that would struggle to move somewhere else," says Jeff Pu, a veteran analyst at Hong Kong-based GF securities.’

  • ‘ "It is impossible for suppliers to move away from China in just one night ... It might take at least 10 years and we still would not be done moving," Pegatron CEO S.J. Liao recently said.’

‘The difficulty lies both in the complexity of iPhone manufacture, where much is still done by hand, and in the ecosystem of components, logistics and talent that has been built up in and around Apple manufacturing sites.’

  • ‘There is also China's generous system of government support to companies working for Apple, which has helped to keep suppliers' costs low and its margins high.’

‘Apple's dilemma is that its own high standards have created a uniquely competitive supply chain that would take years to replicate.’

  • ‘ "Apple is an extremely demanding customer ... Many [suppliers] struggled with achieving acceptable and economically viable yields, and many lost a lot of money in the process ... This forces the suppliers to develop capabilities that in many cases are quite extraordinary," Willy Shih, a professor of management at Harvard Business School, told Nikkei.’

‘Cook has repeatedly insisted that Apple is no longer in China for reasons of cost. Now, it is about access to a deep pool of manufacturing talent and labor.’

  • ‘ "In the U.S. you could have a meeting of tooling engineers and I'm not sure we could fill the room," Cook once said. "In China, you could fill multiple football fields." ’

"The smartphone supply chain is the most complicated one in the world ... and it's the most difficult one to shift to anywhere else given its deep roots in China," Kao said.’

  • ‘Complicating matters, China still offers the best combination of infrastructure, supplier networks and labor flexibility, industry executives say.’
  • ‘ "When you are making so much money, and the formula is work so well as it has for Apple for so many years, it's hard to change," Professor Shih of Harvard Business School said.’
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