BEIJING, Sept. 7 – This fall, for the first time, Apple will produce some of its iPhone flagships outside of China. It’s a small but significant change for a company that has built one of the most complex supply chains in the world in China. But the development process for the upcoming iPhone 14 shows just how complicated it will be for Apple to actually leave China.
China and the United States create products together
The iPhone is 15 years old. Today, Apple’s Chinese employees and suppliers contribute more complex work and precision parts to the flagship than ever before, covering everything from manufacturing design to speakers and batteries, people familiar with the matter said. As a result, the iPhone has gone from a “designed in California, made in China” product to a product created by both countries.
The critical work China has provided on iPhone development reflects the country’s progress over the past decade and the new level of involvement of Chinese engineers in iPhone development. After China lured companies to its factories with relatively cheap labor and unparalleled capacity, the country’s engineers and suppliers have moved up the supply chain to get a larger share of the money spent by U.S. companies developing high-tech products.
▲ Apple CEO Tim Cook
China’s increasing responsibility in iPhone development could challenge Apple’s efforts to reduce its dependence on China. Influenced by the external environment, Apple is trying to reduce its dependence on China.
Diversified Production Still Needs China
Apple plans to manufacture some of its iPhones in India, but Chinese companies with operations in the country will still play a key role. In Chennai, India, Chinese supplier Foxconn of Taiwan will lead the assembly of iPhones by Indian workers with the support of nearby mainland Chinese suppliers, including Leader Manufacturing, whose subsidiary supplies chargers and other parts for the iPhone, people familiar with the matter said. China’s BYD is also setting up display glass cutting operations in India, the people familiar with the matter said.
“They (Apple) want to diversify production, but it’s a tough road,” said Gene Munster, managing partner at venture capital firm Loup Ventures, “They’re too dependent on China.”
Apple would not comment. Foxconn, BYD and Leaders have not responded to requests for comment.
Chinese engineers on the rise
Apple’s woes were exacerbated by travel disruptions caused by the New Crown pneumonia outbreak, which forced it to dramatically restructure its operations in 2020, abandoning its practice of sending large numbers of California engineers to China to design the flagship iPhone assembly process.
Rather than subjecting employees to long periods of isolation, Apple began decentralizing and hiring more Chinese engineers in Shenzhen and Shanghai, letting them lead key design elements for its best-selling products, people familiar with the matter said.
▲ Chinese engineers begin to take charge of key design elements
Apple’s manufacturing and product design teams began making late-night video calls with their Asian counterparts. After travel resumed, Apple had tried to encourage employees to return to China by offering them a $1,000-a-day stipend during the two-week quarantine and four-week work period, sources close to the situation said. Despite being offered a stipend of up to $50,000, many U.S. engineers were reluctant to go because they were unsure how long the quarantine would take.
In the event that U.S. employees were unable to travel, Apple encouraged Asian employees to host meetings that were once hosted by their California colleagues, sources close to the situation said. Those employees are also responsible for selecting some of the Asian suppliers for future iPhone parts.
Apple is now increasingly relying on China to provide high-paying employees to do those jobs. This year, Apple posted 50 percent more jobs in China than it did in all of 2020, according to data from GlobalData, which tracks hiring trends in the tech industry. Many of these new hires are Western-educated Chinese nationals.
The value of Chinese suppliers has increased dramatically
Along with the restructuring of how Apple works, it is using an increasing number of Chinese suppliers. More than a decade ago, China’s contribution to the value of iPhone production was tiny, providing mostly relatively cheap labor to assemble devices using components shipped from the United States, Japan and South Korea. According to a study by Yuqing Xing, a professor of economics at the National Institute for Policy Studies in Tokyo, this work accounted for about $6, or 3.6 percent, of the value of the iPhone.
Gradually, however, China cultivated local suppliers that began to replace Apple’s suppliers around the world. Chinese companies began producing speakers, cutting glass, supplying batteries and making camera modules. Now, Chinese suppliers account for more than 25 percent of the value of the iPhone, according to Xing Yuqing.
According to Dan Wang, a technology industry analyst at independent economic research firm Long Zhou Jingxun, these increases indicate that China has expanded its control of the smartphone supply chain. “This trend is not slowing down.” He said.
Chinese Production Helps iPhone Sell Like Hotcakes
For much of the epidemic, Apple’s reliance on manufacturing in China has also paid off. Analysts say steady production in China has helped Apple increase its smartphone market share, selling the most iPhones ever, despite periods of discontinued production in other countries in 2020 and 2021. that’s a remarkable achievement for an iPhone that’s more than a decade old. It has now shifted from offering revolutionary innovations to incremental improvements.
Analysts expect Apple to release four iPhone 14 models this year with smaller “bangs” for face recognition than previous models. Apple is releasing iPhone 14 a week earlier this year than it has in the past, which could boost revenue in the current quarter by adding a week of sales. Apple is also expected to raise the price of the iPhone 14 Pro model by $100 to more than $1,600 to offset some of the impact of higher component costs.
▲ iPhone 14 Launches Tonight
Apple wants the iPhone 14 to build on the success of the past few years. While other smartphone makers have cut production in response to the global economic downturn, Apple is asking its suppliers to produce more phones than it did a year ago, according to financial firm Heineken International Group. The increase in manufacturing orders is a testament to the resilience of Apple’s wealthy customers, whose deep pockets have enabled them to buy high-priced smartphones in the face of rising inflation and recession.
“There’s a huge wealth gap in consumer spending in the smartphone industry,” said Wayne Lam, a technology analyst at research firm CCS Insight, noting that “Apple is safe relative to its competitors.”
When the news media and Apple employees gather at Apple’s California headquarters early Thursday morning Beijing time for the iPhone 14 launch, Apple will emphasize what the phone does, not how it’s made. The only sign of change in the process will be the flights in and out of nearby San Francisco International Airport.
A promotional banner for U.S. airline United Airlines shows that Apple used to spend $150 million a year on United flights. Former Apple employees recall filling business class seats with Apple employees on their flights to Shanghai and Hong Kong before the outbreak.
And now, United no longer offers nonstop flights from San Francisco to Hong Kong. It flies nonstop to Shanghai four days a week.
