TAIPEI -- Apple will produce millions of its popular AirPods wireless earphones in Vietnam for the first time this quarter, sources familiar with the matter told Nikkei Asian Review, in a sign the company is accelerating its diversification of production out of China amid the coronavirus pandemic.
Some 3 million to 4 million units, or around 30% of total classic AirPods production this quarter, will be "made in Vietnam," the sources said. The production relocation does not yet include AirPods Pro, a high-end version with noise-cancellation features that Apple introduced last October.
The majority of the AirPods range -- including AirPods (priced at $159) and AirPods Pro (priced at $249) -- are still produced in China, despite some wearable electronics devices being hit with additional tariffs imposed by the Trump administration last year. Apple's other top sellers, iPhones and MacBooks, have not yet been hit by tariffs and are still mainly assembled in China.
"The mass production of AirPods in Vietnam started as early as in March," a person familiar with the matter said. "The Vietnamese officials even granted special permits for a key Apple AirPods assembler to help the company bring in engineers to the country for smooth production during lockdowns." Vietnam began easing some lockdown measures in late April.
In mid-January, when the U.S. and China inked the first phase of a deal to ease a yearlong trade conflict, Apple slowed efforts to shift production out of China, its biggest production base. But the global pandemic has served as an additional reminder for tech companies of the importance of diversification and manufacturing sustainability -- not just low costs.
Trade tensions between Beijing and Washington, moreover, have flared up again as Trump administration officials plan ways to strip the supply chain out of China as punishment for the country's handling of the epidemic. Tokyo also said it will fund Japanese companies' production relocation plans to slash the country's reliance on China.
"It's still an irreversible trend that big U.S. tech companies will need to gradually seek production bases outside China," another supply chain executive told Nikkei. "Most of the U.S. companies including Apple are looking for non-China production. ... Some prefer Vietnam and some like Thailand, some in India, and some in the Americas, and others Southeast Asian nations."
Meanwhile, the coronavirus outbreak has also hit AirPods demand, as Apple was forced to close many of its brick-and-mortar stores. Apple has told its suppliers to lower production for the first half of 2020 by more than 10% from its original orders of around 45 million units, which it placed in January, people familiar with the production plan said. The plan to introduce an update of the AirPods later this year is also currently affected and delayed by pandemic disruptions, they said.
AirPods, the most rapidly growing item in Apple's hardware product portfolio, are the world's best-selling wireless Bluetooth earphones. They commanded about 50% of the global market last year, selling around 65 million units, according to Counterpoint Research, which predicts sales to grow to up to 100 million units for 2020.
Apple declined to comment. AirPods assemblers GoerTek and Luxshare did not respond to the Nikkei Asian Review's request for comments.
Apple had asked suppliers to evaluate plans to move around 15% to 30% of its hardware production out of China at the height of Washington-Beijing tensions last year, Nikkei Asian Review first reported. China-based GoerTek, a main AirPods assembler, began preparing to shift production to Vietnam as early as October 2018 and began some test production last summer, as Nikkei first reported.
Luxshare Precision Industry, also known as Luxshare-ICT, had initiated new investment last year in the Southeast Asian country and also passed Apple's qualification to mass produce the wireless headphone there, two people said. Inventec, another AirPods assembler, is currently building a plant in Vietnam, at Apple's requests, a person with knowledge of the matter told Nikkei.
Apple has gradually formed a more complete acoustics supply chain in north Vietnam, where the Cupertino, Calif., tech giant has long sourced its traditional EarPods -- the wired headphones that come with iPhones -- from multiple suppliers' factories there.
Meanwhile, its acoustic component supplier, Merry Electronics, is collaborating with Luxshare to prepare a facility in Vietnam slated to begin operations as early as this summer, according to the company. Many Apple suppliers, such as the two major iPhone builders Foxconn and Pegatron, and iPad maker Compal Electronics, are all expanding production in north Vietnam even though they are not necessarily helping make Apple products there at the moment. Many are currently helping other tech companies, such as Google and Amazon diversify production.
Willy Shih, professor of management practice at the Harvard Business School, told Nikkei that the global pandemic will force a lot of tech companies to take another look at supply chain continuity issues.
"So far, in terms of the tech supply chain, China really has the best infrastructure, transportation, skilled workers and logistics. But we will see more diversification in the coming years, certainly for the electronics industry, as now they realize they can't put all the eggs in one basket."
"I would say the more likely scenario is these big companies will look for China plus one, China plus two other countries, or even China plus three other countries in the longer term," Shih said.