- Apple’s reported interest in moving some of its product production out of China in the wake of the trade war could take years to realize, supply chain experts told Business Insider.
- The company’s complex production system is set up to deliver supplies to and ship products out of China; redirecting that system elsewhere will take enormous time and effort, they said.
- Right now, other countries don’t have the infrastructure in place or enough trained labor for Apple to shift a significant amount of its production to them, the experts said.
- But the company could be aided by the fact that many electronics makers are looking to shift production out of China, both because of the trade dispute and because of rising labor and regulatory compliance costs.
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Apple is looking for a new country to be its iPhone factory.
After years of relying on China to build its electronics products, Apple is reportedly casting its gaze across the globe in search of new pastures. The move is due to the growing trade tensions with China, as President Trump threatens hundreds of billions of dollars in tariffs that would make the country a much less ideal manufacturing homebase.
But moving out of China will create a variety of problems for Apple that could slow down production of its computers and smartphones, test its reputation for high quality, and, ultimately, not even guarantee that Apple would be completely out of the tariffs’ reach. For that reason, Apple is unlikely to move more than a small, token portion of its manufacturing outside of China anytime soon, according to supply chain experts that Business Insider spoke to.
While it makes sense for Apple to explore alternatives to China as a long-term strategy, the iPhone maker, like nearly all of the consumer electronics industry today, is just too firmly entrenched in the Asian nation and will have a difficult time extricating itself from there, they said.
"This is not stuff you can just pick up and relocate," said Ryan Reith, vice president of mobile devices at market research firm IDC. The process of moving production from China to another country is "a years thing," he continued, "not a months thing."
It’s important to note that Apple doesn’t actually produce any of its devices on its own. Instead, it outsources production to Foxconn and Pegatron, Taiwan-based contract manufacturers that have extensive networks of factories in China and other countries. Apple coordinates the supply of components to those factories and the distribution of finished products from them.
On its face, Apple’s reliance on contract manufacturers would seem to make shifting production to other countries easier. After all, those companies already have manufacturing plants outside of China. In fact, Foxconn Chairman Terry Gou, who is in the running to become President of Taiwan, recently urged Apple to move its production from China to Taiwan. And earlier this month, the head of Foxconn’s semiconductor group said the company was prepared to help Apple move production out of China if it needed to.
But moving production to other countries involves a lot more than setting up a line of equipment in a new building, the supply chain experts said. And Apple can’t just move iPhone production by placing an order at another of its contractor’s facilities.
A plan by Foxconn to build an LCD factory in Wisconsin has been mired in problems and delays since it was announced a few years ago. Apple’s plan to shift as much as 30% of its manufacturing capacity out of China to countries such as Vietnam, India, or Mexico, as the Nikkei Asian Review reported last week, is especially ambitious.
Shifting production will be a big challenge
As labor costs have risen in China, companies in industries like apparel, footwear, and automobile parts, have already started to move production out of China to Vietnam, Mexico, and other countries.
There are existing electronics factories in areas outside of China, in countries like Mexico, Vietnam, Indonesia, and India. Some assemble products that use older, less-cutting edge technology, like the older iPhone 6 and 7 models that contractor Wistron Corp makes in Bangalore, India, according to Bloomberg. Apple is preparing trial productions of newer iPhones X models at a Foxconn facility in India, Bloomberg recently reported, but it’s not clear what level of output is expected if it successfully moves into mass production.
Right now, nearly all of Apple’s supply chain is organized around delivering components to production facilities in China and shipping goods from those factories to retailers and customers around the world, they said. Moving production to other areas of the world would require Apple to reorient its supply chain to those facilities, a daunting task.
Part of the challenge is that many of Apple’s suppliers and component makers are themselves located near the plants that make its finished goods, said IDC’s Reith. Apple would either have to ask those suppliers to set up shop near its new plants outside of China or figure out how to ship their components to those new factories.
Getting the suppliers up and running in the new countries could make the task of moving take even longer. And sourcing any necessary components for the new factories from China could pose its own problems. Those components themselves could be subject to tariffs. And by not being close to Apple’s plants, it could take longer for those component makers to make changes.
"The reason why China is such a manufacturing hub is not really about it having the cheapest labor," Reith said. "It’s all those other aspects of manufacturing that take place there."
Skilled workers can be hard to find
Even if Apple is able to find or set up new factories in other countries and find suppliers for them, it still has to find people to work in the plants or for its component makers, the experts said. The company’s products are known for the high quality of their manufacturing, said John Jordan, a clinical professor of supply chain and information systems at Penn State University’s Smeal College of Business. Building a case for an iPhone or other components often requires precision techniques that few people are trained in, he said.
Few of the workers that have those skills are likely to move to new plants outside of China, he said. But finding workers inside the countries where Apple might move could prove to be a big problem. While Vietnam and other countries have seen a pick up in manufacturing of apparel or other goods, the skills needed for such factories don’t necessarily translate into making iPhones, Jordan said.
"You can’t really convert what they’re doing into what Apple needs anytime soon," he said.
Apple’s Chinese plants have an extensive network of roads they can rely on to connect them to suppliers and distributors. They also have major shipping facilities close by and warehouses needed to store products. That type of infrastructure took decades to develop in China and isn’t necessarily in place yet in other areas of the world.
"There’s a whole host of infrastructure issues that have to be dealt with," said Abe Eshkenazi, CEO of the Association for Supply Chain Management, an industry group.
Apple likely could shift a small amount of its production outside of China in a reasonably short time frame, said Bruce Arntzen, the executive director of the supply chain management program in MIT’s engineering school. But it likely couldn’t move a sizeable portion of it anytime soon, because of those labor and infrastructure issues. Other countries just don’t have the capability right now to replace even a significant fraction of what Apple produces in China, he said.
"They would pretty quickly tie up most of capacity," Arntzen said.
Moving will be a years-long process
Thanks to such challenges, moving production out of China would likely be a long process.
In a research note last week, Dan Ives, a financial analyst who covers Apple for Wedbush, estimated that the company could shift 5% to 7% of its iPhone production to India in 12 to 18 months. To move 15% of its smartphone production out of China to other countries would take about two to three years "given the complexity and logistics involved in such a gargantuan endeavor," he said.
Those estimates roughly line up with those of the supply chain experts who spoke with Business Insider. Gregor Berkowitz, a longtime tech industry consultant who travels frequently in Asia, for example, thinks Apple could get some manufacturing moved to Taiwan in a matter of six months, but thinks it could take two to three years for it to get facilities up in running countries such as Thailand or Vietnam. Reith, for his part, thinks a move could be a three-year process, although he believes Apple has likely already started working on it.
"I don’t see this as something that could happen overnight," he said.
That said, a couple of factors may help ease such a transition for Apple. Because the company is such a major manufacturer and represents such an important client for many of its component makers, many of those suppliers are likely to be at its beck and call, said Berkowitz. If Apple says it plans to set up a factory in Vietnam or Indonesia, those suppliers will likely take their lead from it and move their operations with it, he said.
"For other companies" the question of whether suppliers would move with them to a new location "would be more concerning," he said. "But for Apple, because of their leverage, they’re not going to see the same kinds of risks."
And Apple’s not likely alone in looking to move outside China. Because of the rising costs of producing there and the trade war, many electronics makers are exploring a shift in production. That’s likely to spur even component makers that would be reluctant to set up shop elsewhere to do so anyway, Arntzen said.
"Everyone is in the position Apple is in," he said. "Because everyone’s got the same problem," he continued, "it probably will happen sooner that the supply base moves to other countries."
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