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Apple's Tech Supply Chain Reveals Challenges of Ditching China

Apple is far more reliant on China than many other major tech companies. While firms like Amazon.com, HP, Microsoft, Cisco Systems, and Dell Technologies all depend on China to produce hardware for servers, storage, and networking products, none of them are as reliant on the country as Apple is.

September 30, 2022
15 minutes
minute read

There have been a number of reasons why American companies have been downgrading their ties with China in recent years. These include former President Donald Trump’s tariffs, Beijing’s stringent Covid lockdowns, the US-Sino standoff over Taiwan, and political pressure to move supply chains away from China and toward nations that are aligned with Washington.

Breaking up is never easy, as the saying goes. It's hard to let go of someone you care about, even if the relationship isn't working out.

According to a Bloomberg Intelligence analysis, Apple Inc. is trying to reduce its dependence on China. The Cupertino, California-based company has already started producing some iPhone 14 models in India, in an earlier than usual move for new models. And Apple’s largest supplier, Foxconn Technology Group, has recently agreed to a $300 million expansion of its production facilities in Vietnam.

It is not impossible to untangle the US-China technology supply chain, but it is certainly difficult. This is according to a new report from Business Insider. The report looks at the various factors that make untangling the supply chain so difficult, including the fact that many US companies rely on Chinese suppliers. However, the report also notes that there are some companies that have been able to successfully untangle the supply chain, and offers some advice on how others can do the same.

According to Bloomberg Intelligence, it would take around eight years to move just 10% of Apple's production capacity out of China. This is because there are scores of local component suppliers in China, as well as modern and efficient transport, communication, and electricity supplies.

According to a report from Business Insider, China's dominance of the global smartphone market makes it difficult for other companies to compete. With Chinese vendors accounting for nearly half of all shipments, the region has a well-developed supply chain that Apple could lose access to if it decided to move production elsewhere.

Apple has not responded to requests for comment on this matter.

It's one thing to look outside China for other manufacturers of toys and t-shirts. However, US technology companies have invested billions of dollars and decades of effort into setting up complex production chains to provide essential goods for the e-commerce boom. Undoing those ties could take just as long, and could result in lasting damage to the already struggling global economy.

Deep economic integration can create systemic risks, as the recent rift between Europe and America and Russia demonstrates. This shows how quickly decoupling can occur when unexpected events occur.

Political tensions between the United States and China have been on the rise in recent years, culminating in a trade war under President Donald Trump that saw tariffs imposed on billions of dollars worth of goods. Under President Joe Biden, the relationship has cooled further, with US sanctions on key Chinese technology companies like Huawei Technologies Co Ltd.

The outbreak of the coronavirus pandemic led to President Xi Jinping implementing strict virus-containment policies, which have effectively barred travel and left major areas locked down for extended periods of time. This has led to rising tensions between the US and China over ties with Taiwan, as well as China's unprecedented military exercises in the Taiwan Strait, which have further fueled the case for decoupling the two economies.

According to Scott Kennedy, a senior adviser at the Washington-based Center for Strategic and International Studies, the trade war and the pandemic have created some momentum for decoupling. The Shanghai lockdown was a major accelerant, and the cross-strait crisis in August added more fuel to the fire.

The Biden administration's reshoring strategy, or "friend-shoring" as termed by US Treasury Secretary Janet Yellen, remains a lofty but unfulfilled ambition, according to the data.

According to data compiled by China's commerce ministry, US firms had $90 billion directly invested in China at the end of 2020, and despite all the talk of decoupling, added another $2.5 billion in 2021. The actual total is likely even higher, because some businesses are thought by analysts to route some investments through Hong Kong, or via tax havens like the Cayman and Virgin Islands.

US tech companies that source components from China are increasingly reliant on Taiwanese and other foreign suppliers, as well as domestic Chinese firms. This dependence could pose a risk to the US tech industry if relations between China and Taiwan deteriorate or if Chinese firms are unable to meet demand.

America's allies are not convinced by Yellen's "friend-shoring" concept. Key US partners like Singapore have warned the Biden administration that isolating China could destabilize the global economy and potentially lead to a dangerous conflict between the world's largest economies.

Following Biden's visit to the region in May, Singapore's Prime Minister Lee Hsien Loong said that such actions shut off avenues for regional growth and cooperation, deepen divisions between countries, and may precipitate the very conflicts that we all hope to avoid.

It is already happening to some extent that the tech supply chains linking the US with China are being untangled. A report from Goldman Sachs Group Inc. on Sept. 23 found that the share of US tech imports coming directly from China has declined by 10 percentage points since 2017, due to moderating exports of Chinese mobile phones.

Apple is far more reliant on China than many other major tech companies. While firms like Amazon.com, HP, Microsoft, Cisco Systems, and Dell Technologies all depend on China to produce hardware for servers, storage, and networking products, none of them are as reliant on the country as Apple is.

According to Bloomberg Intelligence, the tech industry's dependence on China could be reduced by 20%-40% by 2030. For hardware and electronic manufacturers, BI calculates that their reliance on the Chinese market could be reduced by 20%-30% over the next decade.

The Biden administration is taking a two-pronged approach to weakening economic ties with China. On one hand, it is offering subsidies to companies that shift their production away from China. On the other hand, it is imposing tariffs and export controls on investment in China.

This summer, Biden signed the Chips and Science Act and the Inflation Reduction Act, which contain provisions to help bolster domestic manufacturing of strategic goods like semiconductors, electric vehicles, batteries and pharmaceuticals.

The new legislation will prevent companies that receive federal funding through the program from expanding their production of chips beyond 28-nanometers in China or any other country of concern for 10 years. This will help to ensure that American companies remain at the forefront of chip technology.

This year, the US administration expanded curbs on sending US semiconductors to China, with new license requirements to sell chip-making equipment to factories that produce 14-nanometer or more advanced chips. This is in addition to the existing restrictions on selling chips to China. These new measures are designed to prevent China from gaining an edge in the semiconductor industry.

Industry officials in the US are preparing for more trade barriers between the US and China, and expect the Biden administration to implement additional export restrictions in the fall.

Although Biden and Xi may have the opportunity to reset their relationship at the upcoming Group of 20 leaders summit in Bali, it is unlikely that they will be able to achieve a grand détente.

Wendy Cutler, a former US trade negotiator and vice president at the Asia Society Policy Institute, does not believe that the Xi-Biden meeting will produce any breakthroughs.

Private sector sentiment has also declined.

The US-China Business Council's recent survey found that US companies' optimism about China has already fallen to a record low. Evolving challenges like China's Covid Zero policy, power cuts and geopolitical tensions have caused more than half of surveyed companies to delay or cancel planned investments in China.

Covid-19 has emerged as the leading challenge for businesses and governments around the world, overshadowing geopolitical tensions as the top concern. The pandemic has upended supply chains, disrupted global trade, and caused widespread economic uncertainty. Businesses have had to rapidly adapt to the new reality, and many are still struggling to keep up. The pandemic will continue to shape the business landscape for years to come.

According to the survey, nearly a quarter of respondents have moved segments of their supply chains out of China over the past year. This suggests that many companies are rethinking their reliance on China as a manufacturing hub.

Many companies are adopting a "China Plus One" approach, whereby they maintain a core production base in China while adding additional capacity in South and Southeast Asian nations like India, Vietnam, Malaysia, Thailand, and Indonesia. This allows them to diversify their production and reduce their reliance on any one country.

According to a recent report, American companies have pledged to invest nearly $750 million in Vietnam this year, which is the highest amount since 2017 and more than double the amount invested in 2020. This surge in investment is likely due to the country's strong economic growth and favorable business environment.

Taiwan is a vital but vulnerable part of US supply chains. Taiwan Semiconductor Manufacturing Co. Ltd. is the island's leading chip manufacturer, responsible for more than 90% of the world's most advanced chips used for military and corporate computing services. Apple, MediaTek and Qualcomm, which control more than 85% of the global handset chip market, all rely on TSMC's supply.

According to a recent report, Chinese chip companies have outperformed their global counterparts when it comes to sales growth. Over the past four quarters, these firms have posted an average sales growth of XX%. This is a significant achievement, considering the competitive nature of the chip industry.

According to a Bloomberg Intelligence report, Taiwan is expected to remain the key manufacturing hub for cutting-edge chips over the next five years. This is due to the island's strong semiconductor industry and its skilled workforce.

China's booming market is a reminder of the opportunity cost for US suppliers. On average, 19 of the world's 20 fastest-growing chip industry firms are based in China, according to data compiled by Bloomberg.

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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