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Trade war

Apple weighs 15%-30% capacity shift out of China amid trade war

Tech giant asks suppliers to review costs in Southeast Asia and Mexico

China has been the production base on which Apple's global success has been built. (Nikkei Montage / Reuters)

TAIPEI -- Apple has asked its major suppliers to evaluate the cost implications of shifting 15% to 30% of their production capacity from China to Southeast Asia as it prepares for a fundamental restructuring of its supply chain, the Nikkei Asian Review has learned.

The California-based tech giant's request was triggered by the protracted trade tensions between Washington and Beijing, but multiple sources say that even if the spat is resolved there will be no turning back. Apple has decided the risks of relying so heavily on manufacturing in China, as it has done for decades, are too great and even rising, several people told Nikkei.

"A lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse factors are not going anywhere," said one executive with knowledge of the situation. "With or without the final round of the $300 billion tariff, Apple is following the big trend [to diversify production]," giving itself more flexibility, the person added.

China has been the production base on which Apple's global success has been built over the past two decades. The country has not only been able to rally hundreds of thousands of skilled workers at short notice to fill rapidly rising orders as the company grew, but an extensive and complex ecosystem of components, logistics and talent has built up in and around Apple manufacturing sites.

Some 5 million Chinese jobs rely on Apple's presence in the country, including those of more than 1.8 million software and iOS App developers, according to a study available on the company's website. Apple itself employs 10,000 staff in China, the company said.

Suppliers admit that replicating this network elsewhere will take time, and China is likely to remain Apple's most important manufacturing base for the foreseeable future. "It's really a long-term effort and might see some results two or three years from now," said one supplier. "It's painful and difficult, but that's something we have to deal with."

But the trade war has prompted Apple to seriously consider meaningful diversification for the first time, say several sources. At the end of last year, the company began to expand its so-called capital expense studies team, according to sources familiar with the matter. The team of more than 30 people is discussing production plans with suppliers and negotiating with governments over financial incentives they might be willing to offer to attract Apple manufacturing, as well as regulations and the local business environment.

Key iPhone assemblers Foxconn, Pegatron, Wistron, major MacBook maker Quanta Computer, iPad maker, Compal Electronics, and AirPods makers Inventec, Luxshare-ICT and Goertek all have been asked to evaluate options outside of China, multiple sources say. Many other Apple suppliers such as print circuit board and casing providers are closely monitoring where these major assemblers would shift their production.

"We need to know where those big assemblers are heading to so that we can initiate our plan too," an executive at an Apple component supplier told Nikkei.

Although Apple supplier Wistron has assembled cheaper iPhones in India since 2017, and Foxconn from this year, volumes have been very small. More than 90% of Apple's products are assembled in China. Last year, the number of mainland Chinese and Hong Kong-based suppliers surpassed those in the U.S. and Japan for the first time, accounting for 41 of the top 200 suppliers, according to Nikkei research.

The countries being considered for diversification include Mexico, India, Vietnam, Indonesia and Malaysia. India and Vietnam are among the favorites for smartphone diversification, the people said, who asked for anonymity as the discussions are private.

Apple has not set a deadline for the suppliers to finalize their business proposals. Both sides are working together to identify the most favorable incentives on offer and to review business environments outside of China.

Analysts said the company's move was logical and necessary. "We feel that Trump's warning of a 25% tariff hike... really serves as a trigger within the supply chain that they cannot keep pretending things will stay the same," said Jeff Pu, a veteran analyst at GF Securities. "Everyone needs to initiate a workable plan B... and to look at production facilities outside China, even if it will take time to shift." Some 37% of annual iPhone shipments go to North American markets, Pu estimated.

But it may be hard to beat what China offers. In the early 2000s, local governments in China invested in infrastructure such as water, utilities, roads, and even dormitories for workers. They also offered simplified import and export processes, and lighter labor rules. "All Apple had to do was to make a decision and production could be adjusted smoothly in China," said one of the sources.

Other countries, with less developed infrastructure, could struggle to match such incentives. Some suppliers had spent "three to five months assessing one location," only to discover later that there was a risk of power shortages, one source said.

It would take at least 18 months to begin production after choosing a location, sources said. "The production line for Apple's products is very complicated, and when production begins, it will only be small volumes to test the water," an executive said.

Foxconn, Apple's main smartphone assembler which formally trades as Hon Hai Precision Industry, said earlier in June that it would be ready to help Apple shift production beyond the world's second-largest economy if asked. Key iPhone metal casing supplier Catcher Technology has also acknowledged assessing the possibility of building new capacity outside of China, due to the uncertainties of the trade war.

Some suppliers say they will need to seek new customers from China, or clients serving the Chinese market, to maintain capacity utilization during the transition.

Eventually, the new capacity outside of China would serve not just the U.S. market but beyond, given the scale needed to support the new supply chains that would have to be created, one of the people said.

Apple declined to comment.

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