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Trade War

Apple supplier seeks to escape trade war fallout with shift out of China

Migration begins as others step up contingency plans

An AirPod assembler has notified suppliers that it intends to move production from China to Vietnam.

TAIPEI -- China's GoerTek has become the first of Apple's leading equipment suppliers to confirm plans to shift production out of the country to avoid being caught up in the escalating trade war between Washington and Beijing.

The AirPods assembler has notified suppliers that it intends to move production of the wireless earphones to Vietnam, the Nikkei Asian Review has discovered. At the same time, two other smartphone suppliers -- Taiwan's Pegatron and Cheng Uei Precision Industry -- are looking at expanding capacity outside China for similar reasons, although this may not include Apple equipment.

GoerTek has asked all suppliers involved in AirPods production to confirm by the end of this week whether they can ship all necessary materials and parts directly to Vietnam, according to a source in the supply chain who showed the notice to the Nikkei Asian Review. The decision has not yet been finalized as it requires further discussion with Apple, which has been informed of the plans. The Chinese company, based in the eastern city of Weifang, also said it hopes all suppliers maintain original contract prices and deliver to previously agreed schedules.

GoerTek and Apple did not immediately respond to a request for comment. However, the company's decision to escape the crossfire generated by the trade spat between Beijing and Washington reflects the difficult position in which Apple and its suppliers find themselves. U.S. President Donald Trump has repeatedly urged the world's most valuable company to move production back to the U.S. However, China is not only Apple's most important manufacturing base, but the U.S. company also relies on the Chinese market for some 20% of its annual revenue. Any shift by Apple could trigger big consequences.

"Apple is the most obvious target if China wanted to retaliate on American companies," said James Wei, a Hong Kong-based analyst at Yuanta Investment Consulting. "Apple and its key suppliers are without doubt subject to highly uncertain political risks as the trade battle continues to heat up."

AirPods, along with the Apple Watch and smart speaker HomePod, were initially included in the $200 billion worth of Chinese goods that were hit with 10% tariffs beginning on September 24. However the products won a last-minute exemption. Industry sources said many suppliers are concerned that they could be hit again soon with the U.S. president threatening to impose additional tariffs on the remaining $267 billion of imports from China in the near future.

Meanwhile, Cheng Uei, which supplies chargers and connectors for iPhones and Android smartphones, said it is considering bringing some production back to Taiwan and Southeast Asia because of the U.S.-China trade tensions.

"We are thinking about increasing capacity at our plant in [New Taipei City's] Tucheng District. It won't take long. We can do it in one or two months," company chairman T.C. Gou told the Nikkei at an industry association event in Taipei.

Gou said his company plans to hire an additional 200 to 300 workers at its Taiwan site as part of a contingency plan. It was not a large-scale diversification from Cheng Uei's manufacturing hub in China, he said.

The group is also evaluating new facilities in Thailand, Vietnam and the Philippines, the chairman said. "The supply chains there are more developed compared with other emerging markets, while the labor costs are also cheap."

However, Gou said it is not easy to shift away from China, with mature supply chains established there for decades. Local Chinese governments are also offering more tax incentives and friendly investment policies to encourage manufacturers to stay, he said.

Cheng Uei will decide whether to invest in increasing capacity in Taiwan when it becomes clearer whether President Donald Trump will implement his threat to impose more tariffs on Chinese imports.

Finally, Pegatron, the second-largest iPhone assembler after Foxconn, is assessing locations in Taiwan for a new plant where it would make non-Apple products and be able to offset the rising costs due to the trade war, according to another senior supply chain source.

"The management of Pegatron have been traveling back and forth in southern and northern Taiwan this week," the source said.

The Taiwanese company also makes notebook computers, tablets, networking equipment, consumer electronics and Internet of Things devices for clients including Microsoft, Sony, and Google.

A second source said Pegatron's planned new facility in Taiwan would be for networking-related equipment and some IoT devices. "It is because those products [networking gear and routers] are already being hit by Washington's additional tariffs, and the business is growing that it needs more capacity to fulfill the demand," he said.

Pegatron declined to comment.

The shifts in Apple's supply chain will be closely watched by Chinese authorities. AirPods are assembled in China by suppliers Inventec, Luxshare-ICT, and GoerTek. Apple shipped roughly 20 million pairs of AirPods from the end of 2016, when the product became available, through 2017, and industry sources expect the number to rise to 28 million units this year. The U.S. company had been planning to launch updated AirPods by the end of this year, but the plan could now be rescheduled to next year, according to industry sources. It is not clear whether GoerTek plans to produce the existing or new models of AirPods in Vietnam.

GoerTek currently has a production facility in North Vietnam near Hanoi city making wired headsets for iPhones. 

Inventec, a key AirPods assembler, said it maintains close communication with clients about the U.S.-China trade war but currently does not have a confirmed plan.

Inventec makes a wide range of electronic products in Shanghai and Nanjing in China, Taoyuan in Taiwan, in the Czech Republic and in Mexico. The Taiwanese company's AirPods production site is in Shanghai.

The AirPods manufactured by Luxshare come from the Chinese supplier's facility in the Chinese city of Kunshan. Luxshare currently does not have Apple production capacity outside of China. Luxshare did not respond to a request for comment.

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