iPhone's Southeast Asian industrial chain is hit, will Apple stop the transfer?

Following the riot at the Wistron factory in India, Foxconn, Wistron, Pegatron in India and Foxconn, Luxshare, Goertek, Lens Technology and others in Vietnam have successively stopped production due to the epidemic, and Apple's Southeast Asian supply chain has suffered an unprecedented impact.

Currently, the epidemic is still spreading in Vietnam and India, and the number of confirmed cases continues to rise. Apple seems to have allocated most of its orders to foundries in mainland China. The number of Apple's supply chain manufacturers in mainland China has increased, and its core position has become more prominent.

Apple's supply chain transfer process to Southeast Asia is being hindered by cultural conflicts, epidemics and other factors. Is it possible for Apple to suspend the transfer of its supply chain to Southeast Asia?

Shift to Southeast Asia

As Apple's iPhone integrates more and more components, costs continue to rise and profits continue to be squeezed. It is understood that the gross profit margin of iPhone hardware has dropped from the peak of 74% in 2009 to around 60%.

Apple is becoming increasingly sensitive to iPhone components and OEM costs. However, rent, labor costs, component costs, etc. in mainland China are constantly increasing, bringing greater cost pressure to Apple.

In order to reduce production costs, Apple has joined hands with Foxconn, Wistron and other contract manufacturers to move to India and Vietnam where production costs are lower. In 2017, Foxconn produced the iPhone SE for Apple in India at a lower cost, making it easier for Apple to open up a huge blue ocean market in India.

Since then, Apple has successively handed over orders for iPhone 6s, iPhone 7, iPhone X, and iPhone 11 to Foxconn India, and the hardware gross profit has recovered to more than 65%. Apple has also gradually opened up a new situation in the Indian smartphone market. Counterpoint said that in 2020, Apple's iPhone shipments in the Indian market exceeded 3.2 million units, a year-on-year increase of 60%.

Seizing the opportunity, Apple's supply chain further tilted towards India. In 2021, Apple even outsourced its latest flagship iPhone 12 to Wistron in India. This made the iPhone 12 hardware gross profit break through 70% again, reaching 72%.

Apple, enjoying the dividends, continues to persuade its partners to move to India and Vietnam. It is understood that Luxshare, Goertek, Lens Technology, Foxconn and others have set up factories in Vietnam. Luxshare Vietnam and Goertek Vietnam manufacture AirPods Pro and AirPods Studio for Apple. Foxconn Vietnam invested US$270 million to establish a new company in Vietnam at the end of last year, planning to produce iPads and MacBooks for Apple.

Industry chain observer Chen Cheng (pseudonym) believes that Apple has many considerations for transferring its iPad, MacBook, AirPods Pro, and AirPods Studio factories to Vietnam: first, Vietnam has cheap young labor and lower manufacturing costs; second, Vietnam borders China and has developed maritime transportation, which facilitates exports to markets such as Asia, Europe, and Africa; third, Vietnam has signed a large number of free trade agreements and has global free trade advantages.

In addition, there is one pull and three major pushes for Apple's supply chain manufacturers to move to Southeast Asia.

Preferential policies in Southeast Asia attract Apple's industrial chain to relocate. Like China, the Indian and Vietnamese governments have introduced a series of preferential policies that are attractive to Apple's supply chain companies, such as subsidies for landing, rent-free factories, and tax refunds.

India's high tariff barriers have prompted Apple's industrial chain to move to India. India is a major smartphone market and has become a battleground for smartphone manufacturers. In the past seven or eight years, India has continued to raise tariff barriers on smartphones and their industrial chain, encouraging smartphone industry chain companies to move to India. If Apple wants to open an Apple Store in India and gain a larger market share, the iPhone must not only be assembled locally, but also the local procurement rate of parts must reach 30%. Therefore, more and more supply chain manufacturers are cooperating with Apple to move to India to improve local production efficiency.

Apple is pushing its industry chain to Southeast Asia under pressure from component costs. The shortage and price increase of smartphone chips and components have increased the cost of Apple's iPhone. If the iPhone continues to be produced in mainland China, Apple's hardware profit margin will be further compressed. This will reduce investors' expectations of Apple's earnings and will not be conducive to Apple maintaining high profits and high stock prices. The transfer of Apple's industry chain to India can partially alleviate the huge pressure caused by the increase in component costs.

The Sino-US technology war has accelerated the transfer of Apple's supply chain to Southeast Asia. The Sino-US technology war has forced Apple's global smartphone supply chain to be divided into two systems: the Chinese mainland and non-Chinese mainland. In addition to consolidating the Chinese mainland industrial chain system, Apple also needs to improve the non-Chinese mainland industrial chain system in Southeast Asia, so that the two systems can be independent and complementary to each other, reducing the various uncertainties and risks brought about by geopolitics.

Transfers frequently blocked

However, the transfer of Apple's industrial chain to Southeast Asia has been frequently hindered. Cultural conflicts, the spread of the epidemic, factory riots, etc. are bringing unprecedented shocks to Apple's supply chain companies.

Apple's supply chain companies have encountered some cultural conflicts in some Southeast Asian countries, which may affect normal operations. Chen Cheng, an industry chain observer, pointed out that Vietnam borders China and belongs to the same East Asian civilization, with cultural proximity, but Vietnam is inclined to the United States and treats Chinese people differently. India is an English-speaking country with a strong religious color. People's lives revolve around religion and basically do not accept overtime. Many companies have difficulty adapting to India. If the company is not well managed, racial conflicts or riots are likely to occur. At the end of last year, Wistron's Indian factory had a "riot" due to a salary dispute. More than 20,000 iPhones were destroyed, nearly 8 billion yuan of machinery and equipment were damaged, and the factory stopped working.

The governance environment in Southeast Asian countries is poor, and the epidemic continues to spread, forcing Apple supply chain companies to suspend operations. Recently, the epidemic in India continues to spread, and Foxconn's Indian factory has seen large-scale infections, and the iPhone factory has directly cut production by half. Similarly, the epidemic is also impacting Apple's supply chain companies in Vietnam. As the epidemic in Vietnam continues to worsen, factories such as Foxconn and Luxshare Precision in Vietnam have also been forced to suspend operations.

Apple's supply chain will face land issues in the process of moving to Southeast Asia. Sima Qiu, a senior analyst at Magirror Research, pointed out that Vietnam's land area is relatively small, and companies from South Korea, Japan and other countries have already taken root in Vietnam, leaving less and less land for Apple's supply chain companies. For example, Foxconn had to postpone its plan to set up a factory in Vietnam in order to cooperate with Apple due to the lack of suitable land. Although India has a vast territory and is not short of land, the land in India is privately owned, and land acquisition is difficult. Farmers often resist due to land acquisition issues, and many projects have to be stopped due to land acquisition issues.

Although labor in Southeast Asia is cheap, its production efficiency is not as good as that in China. Dong Min, deputy secretary-general of the China Electronic Video Industry Association, said that the overall cost of Apple's supply chain companies in Southeast Asia is lower than that in China, but there is a certain gap between the diligence of Indian workers and Chinese workers, resulting in a lower product yield than in China.

India is a loose federal country with low administrative efficiency, and Apple supply chain companies in India may not be able to obtain the policy dividends they deserve. Industry chain observer Chen Cheng pointed out that the official language of India is English, but there are many dialects across the country, communication efficiency and execution are low, and each state may not be able to effectively implement the policies formulated by the central government. Therefore, some of the early Apple supply chain companies in India were not mainly for enjoying government subsidies, but to cooperate with Apple's industrial layout.

Some of India's policies are not in line with the laws of the market economy and are likely to put Apple's supply chain companies in an awkward position. It is understood that the Indian government has some nonsensical regulations. For example, if a company has more than 100 employees, it is not allowed to lay off or dismiss employees without authorization and must report to the government for approval. However, Apple's Indian foundry has more than 100 employees, and layoffs and dismissals are subject to government control, which will put Apple's Indian foundry companies in a dilemma.

The investment environment in Southeast Asia is not as good as that in China, and some manufacturers have begun to retreat. Industry chain sources revealed that Panasonic originally planned to build three ceramic capacitor (MLCC) production lines in India, but due to various reasons, it finally decided to transfer two of the production lines to China, leaving only one production line in India. Some companies even gave up investing directly after investigating in India.