Apple Shifts iPhone Production Base to India as Part of Secretive Gamble to Move Beyond China

Mobile

In late March, when Tim Cook made his first public appearance in China since the onset of the Covid-19 pandemic, Apple Inc.’s chief executive officer approached it with all the delicacy of a high-stakes diplomatic visit. Cook took colleagues to an Apple retail store in Beijing and met privately with high-ranking government officials to discuss the company’s operations. “This has been a symbiotic kind of relationship that I think we both enjoyed,” he told the audience at a state-sponsored technology conference, in an appearance at which he also announced the expansion of a multimillion-dollar rural education program in the country.

One of the signature achievements of Cook’s career at Apple has been his work crafting its relationship to China, which is unusually positive compared with those of other US tech companies. Over more than two decades, Apple has built a vast manufacturing and assembly operation in the country involving thousands of business partners. There are more than 40 Apple stores in mainland China, and Apple draws almost 20 percent of its revenue from its “Greater China” region, which includes Taiwan and Hong Kong.

But Apple’s China formula is under its greatest strain in recent memory. Even as Cook was smoothing things over in Beijing, Apple executives were hard at work developing ties to other countries to lessen reliance on the country, according to multiple people familiar with Apple’s operations who spoke on the condition of anonymity, since they’re not authorized to speak publicly. The company declined to comment.

Apple’s diversification efforts took on urgency during heightened trade tensions between the US and China under the Trump administration and then intensified during the pandemic. In 2020, Cook said any changes to Apple’s supply chain over Covid would probably amount to little more than “adjusting some knobs.” Clearly, something far more sweeping is afoot.

Apple’s efforts center on India as a location for production of iPhones and accessories, Vietnam for AirPods and Mac assembly, Malaysia for some Mac production, and Ireland—where suppliers currently build the relatively easy-to-produce iMacs—for a range of simpler products. Managers in Apple’s operations department have instructed employees to focus on sourcing additional components and locating production lines outside China for more new products coming in 2024, though the company also plans to retain extensive operations in the country.

With Cook’s direct involvement, Apple has also assembled hundreds of employees into what some people within the company have called “tiger teams” to address weaknesses in its supply chain. It has expanded the efforts of these teams, which set up shop in suppliers’ factories in China and other countries, assess facility maintenance schedules, and assemble more extensive lists of backup suppliers for every component, right down to screws and plastic inserts. The company is working to improve its forecasts, component by component, to better anticipate potential shortages.

Apple is also exploring ways to reduce its reliance on Taiwan, where chipmaking giant TSMC Ltd. makes many of the semiconductors crucial to all its products. That effort, prompted by concerns over geopolitical tensions centering on Taiwan, has started slowly; Apple is gearing up to produce a minuscule number of chips at a TSMC plant in Arizona starting next year. Shifting chip production could be even more challenging than relocating device assembly, however, given the lack of clear alternatives to Taiwan’s capacity. It’s also arguably even more critical. One person with knowledge of Apple’s operations predicts that if chip production there went down, it would take almost a year to ramp component production back up.

Still, the company is moving carefully. Apple’s leadership is concerned that China might retaliate if it moves too much capacity to other countries, or transitions too rapidly. Customers in China could turn against US-designed products amid heightened nationalism. The company also has concerns about its ability to ensure high standards of quality in Vietnam and particularly Malaysia, given the current state of the manufacturing industries in those countries.

There’s also a delicate balance to maintain within Apple itself, where different teams have contrasting priorities and objectives. Its procurement team, which sources parts, can scour the world for the necessary components, but much of the work of establishing production in a new geographic location falls to its manufacturing operations team, which needs to allocate significant human and financial resources to setting up new final-assembly production lines. The company’s product development teams may also push back on the potential quality or feature omissions necessitated by assembly outside of China. “There are trade-offs between diversification and engineering,” says a person close to these discussions.

Experiments in relocating some manufacturing and assembly operations have been going on within Apple for more than a decade. In 2012 it partnered with Foxconn, its biggest contract manufacturer, to make some iPhone models in Brazil to circumvent tariffs on imported goods. The following year, in response to domestic political pressures, Apple began making Mac Pro computers at a Flex Ltd. factory in Texas. Neither project went smoothly. Apple has cut back on Mac Pro production in the US and now does only token assembly of the devices in the country.

A more durable shift began in 2017, when Apple began making some low-end iPhones in India. On balance, it wasn’t doing much to weaken its ties to China at that time; a Bloomberg Intelligence analysis found that the number of Chinese suppliers rose from 2017 to 2020, while the number of suppliers dropped in some other countries. These operations, which have been slowly developing since then, are now the foundation for much of the company’s effort to make its signature products outside of China.

Apple managed to get through the beginning of the pandemic relatively unscathed, but the challenges piled up as Covid dragged on. In 2022 the company encountered significant delays and shortages for its most important launches. The revamped MacBook Air was delayed by several weeks after Covid spikes shut Quanta Computer Inc. factories. The Foxconn factories where the company’s new iPhone 14 Pro devices are made were shut for the same reason, leading to supply complications extending into 2023. Apple’s revenue in 2022’s holiday quarter dropped for only the second time in the iPhone era.

The trouble at Foxconn highlighted the risk of sweeping disruptions that would test Apple’s ability to keep churning out products, and validated existing plans to spread operations out geographically. Its most ambitious plans are for India, where it will work with a swath of partners to make iPhones, AirPods and Apple Pencils, as well as components for the Apple Watch, iPad and Mac. Apple has already tapped three of its main assembly partners from Taiwan to build devices in India: Foxconn, Pegatron and Wistron. It’s also recently brought on an additional key supplier in India, Tata, to build iPhone exteriors and ultimately assemble the whole product.

Apple produced more than 6.5 million of the 200 million iPhones it made in 2022 in India; it aims to produce 10 million units there in 2023. People involved in the process believe that the number could exceed 15 million units next year; some think Apple could move as much as 25 percent of iPhone production to India by 2025 if it sticks to the most aggressive timeline. It’s also had early discussions about moving iPad and Apple Watch production there, but such moves are unlikely in the near term, say people with knowledge of the plans.

The differences between Apple’s standard and high-end phones are based in part on what materials are used to make them. Apple’s highest-end phones, the iPhone 14 Proand iPhone 14 Pro Max, have stainless steel enclosures; less premium models and older ones still in production use aluminum. The company has discussed moving the majority of aluminum iPhone production out of China. It has relocated a top iPhone enclosure-quality executive to India operations after 15 years in China. Reversing a pandemic-era travel slowdown, Apple brass including Rob York, a senior manufacturing executive responsible for churning out exteriors for the iPhone, Apple Watch, and other devices, and Priya Balasubramaniam, who’s responsible for the overall manufacturing of the iPhone and other devices, has been visiting India with increased regularity.

For the past few years, Apple has made the first batches of its most recent iPhone models in China, then gradually added production in India. It expects to ship the iPhone 15 from both countries simultaneously, which would be a first. (The iPhone 15 Plus and titanium iPhone 15 Pro models will still be made only in China.) The process of building iPhone 15 casings in India has begun, and components for the device are already being made locally by such suppliers as Jabil, which also plans to make Apple Pencil styluses and is already assembling AirPods enclosures. The company has had some problems with quality control at its Indian suppliers. Last year it approved Indian operations to make only certain models—deciding, for instance, that at least some suppliers could make black and starlight-colored iPhone SE models, but not red ones.

Apple is looking to build a wider range of components and products in India. Existing operations with such suppliers as Salcomp Manufacturing India Pvt Ltd. to make iPhone chargers, cables and boxes are expected to expand, and Apple is discussing establishing Indian production of metal and plastic parts, cover glass and screws.

Facilitating the creation of this kind of sprawling network of suppliers in China was a key to Cook’s project of building Apple’s capacity there. Now all he has to do is do it again.

© 2023 Bloomberg LP


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