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Trade war

Apple's Chinese suppliers overtake US for first time

iPhone maker's mainland ties deepened despite trade war

TAIPEI -- Apple now has more mainland Chinese and Hong Kong-based suppliers than ever before, with the number surpassing American and Japanese companies for the first time despite the ongoing trade war.

The mainland and Hong Kong suppliers together constitute the iPhone maker's second-largest source of components, trailing only Taiwan-based companies, a Nikkei Asian Review analysis of Apple's latest annual list of top 200 suppliers shows.

The rapid rise of Chinese companies in Apple's supply chain highlights the country's remarkable technological advancement over the past few years, as Apple demands world-class quality from the makers of parts going into its products, from iPhones and MacBooks to Apple Watches and AirPods. Analysts are divided, however, over whether the trade war will eventually slow or even reverse this trend.

Chinese suppliers -- which include those based in Hong Kong, as all of their production facilities are located on the mainland -- accounted for 41 of the top 200 suppliers, or more than 20%. The number of mainland Chinese companies has tripled since 2012, while that of their U.S. counterparts has fallen by more than 32% to 37 suppliers over the same period, the analysis shows.

Taiwan and Japan had 46 and 38 suppliers, respectively, according to Nikkei's research.

The total number of production sites located in mainland China increased by 26 from the previous year to 380, accounting for almost 50% of all sites engaged in Apple's supply chain. A number of suppliers who are not headquartered in China operate factories there.

The 200 suppliers together represent 98% of Apple's fiscal year procurement of materials, manufacturing and assembly, and the annual list is seen as a barometer of the company's reliance on suppliers from different parts of the world. The list for fiscal 2018, released on March 7, shows not only a greater reliance on China, but also indicates an effort to expand its supply chain in India and Southeast Asia, where it has lagged behind rival Samsung Electronics.

For now at least, the escalating trade tensions between Washington and Beijing has not stopped Apple from deepening its manufacturing footprint in China, the company's most significant production base. In addition to adding more Chinese suppliers, the number of sites producing or assembling Apple products last year also rose to 380, up 7% from 2017 and 14% higher than in 2012. These include Chinese- and foreign-operated facilities.

"Chinese companies are rising quickly to become formidable competitors to Taiwanese or Japanese companies, as they have chances to learn from these foreign investors and even acquire facilities from them to quickly build patent portfolios and production capacities," said Chiu Shih-fang, a smartphone and supply chain analyst at Taiwan Institute of Economic Research.

"These foreign investors also help China train many professional technicians, engineers and even production line workers to help them advance technology quickly," Chiu said.

The rapid rise of Luxshare Precision Industry, or Luxshare-ICT, is the most prominent example. Luxshare, which entered Apple's supply chain as a connector supplier in 2012, became a key AirPods assembler in late 2017, ending the decades-long dominance of Taiwanese manufacturers as the final assembler for Apple products. 

Luxshare operated eight manufacturing sites for Apple in 2018, up from only one in 2012. The Chinese group is an emerging rival that cannot be ignored by iPhone assemblers Foxconn and Pegatron or Apple Watch makers Quanta Computer and Compal Electronics, two supply chain executives told the Nikkei Asian Review.

"We've monitored Luxshare for a while," one of the executives said. "This company's expansion pace is not going to slow down. It will pose strong competition to all major Taiwanese contract manufacturers."

China's O-film Technology is another rising star, having joined the list of Apple suppliers in 2017. Its camera and touch panel modules pose threats to Sharp, LG Innotek and TPK Holding. O-film bought a facility in China from Sony in 2016 to quickly gain production capacity and obtain intellectual property and manufacturing know-how.

Likewise, state-backed display maker BOE Technology Group's entry into the Apple supply chain the same year as O-film is putting massive pressure on LCD suppliers LG Display and Japan Display

Little-known Chinese company Lingyi iTech appeared on Apple's top supplier list for the first time in 2018. It is completing an acquisition of Salcomp, a Finnish company that has provided power chargers and adapters to Apple for a long time.

It is unclear what Lingyi iTech supplies to Apple, but the company describes itself as a maker of magnetic materials, precision parts and wire and cables, and it owns as many as 15 manufacturing facilities in China supplying to Apple, the list showed.

Apple's supply chain is also diversifying into India and Southeast Asia, though its presence remains limited and compared with that of South Korean rival Samsung, which started to build sizable manufacturing facilities in both regions since 2008.

Apple suppliers operated eight facilities in India last year, up from five in 2017. The new factories came from three different suppliers including Foxconn, which trades as Hon Hai Precision Industry. Foxconn joined smaller rival Wistron in manufacturing iPhones in the South Asian country, the supplier list showed.

India now hosts three iPhone assembly facilities and five other components factories, including facilities of China's Shenzhen Yuto Packaging Technology, which helps Apple produce the final packaging case for iPhones for the Indian market.

Vietnam has emerged as a potential diversification site for Apple suppliers looking to avoid damage from the U.S.-China trade war, given the country's proximity to China and developing supply chain cluster.

GoerTek, an AirPods and audio components supplier, asked its own suppliers late last year to evaluate the feasibility of shifting production to Vietnam, Nikkei first reported last year. No decision has been made, sources familiar with the matter said.

Luxshare has added a facility in northern Vietnam, the Nikkei analysis showed, and company founder Grace Wang visits the country frequently, industry sources said. However, the number of production sites in Vietnam operated by leading Apple suppliers did not increase in 2018.

The American tech giant has also increased U.S. production as President Donald Trump's calls for Apple CEO Tim Cook to bring manufacturing jobs back home. The number of domestic facilities operated by Apple's top suppliers increased 14% last year to 65.

Apple has touted its contribution to the U.S. economy, spending $60 billion with 9,000 component suppliers last year for an increase of over 10% from 2017. It supports more than 450,000 jobs in the country, the company said in January.

Yet the 65 American facilities in 2018 represent a 21% decline from the 2012 figure, the data showed. The company also experienced its worst-ever year-on-year decline in iPhone shipments in 2018, according to research company IDC. 

Apple still depends on U.S. suppliers such as Qorvo, Skyworks Solutions, Intel, 3M and Corning for crucial semiconductor technologies, optical parts and advanced materials, Nikkei research showed.

Those are among the segments that Beijing is pushing as part of its efforts to upgrade its own industries, and they have become battlegrounds in the trade war between the world's two biggest economies. Huawei Technologies, the world's No. 3 smartphone maker behind Apple, also relies on these cutting-edge parts providers from the U.S. to build its popular premium phones and notebooks.

There are differing views as to whether China's growing tech capabilities will help it become an even bigger part of the Apple supply chain. Kota Ezawa, an analyst at Citi Research, said the trade war may discourage the U.S. company from increasing its Chinese procurement, even if those suppliers continue to improve in terms of technology.

Chiu from the Taiwan Institute of Economic Research, however, does not foresee any sudden shift out of the country.

"It's very time-consuming work to move an electronic supply elsewhere, especially a smartphone supply chain as there are so many components involved," Chiu said. "It could take years for people to really see a difference."

"The iPhone has not yet been included in the tariff list, and it seems the trade conflicts could be solved with a deal at some point. ... Many suppliers do not feel the urgency to move out of China that quickly," the analyst added.

Apple did not respond to Nikkei's request for comments.

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