China's "zero COVID" policy has hit Apple's supply chain, causing delays on iPhone production.
Apple plans to expand production into India and Vietnam and eventually use a factory in Arizona.
But relocating an entire supply chain is expensive, and it could cut into Apple's enormous margins.
When Apple's manufacturing hub in Zhengzhou, China, temporarily shut down in November, it was clear Apple needed to rethink its supply chain.
The shutdown, which Bloomberg reported could result in a shortage of 6 million iPhone 14 Pro and Pro Max units, means wait times are now stretching past the holiday season. On Saturday, The Wall Street Journal reported Apple was accelerating the expansion of its manufacturing base outside China.
But any shift out of China won't be quick, with over 35% of the factories supplying Apple located in China. Some estimates say it will take until the end of the decade to move 10% of Apple's iPhone manufacturing out of the country. Moreover, it's unclear what would happen to Apple's enormous hardware margins if it attempted to leave China.
Breaking up is hard to do
While Apple sources its microchips from several factories in India, Vietnam, and China, the largest supplier is the Chinese Foxconn factory that shut down after protests over China's "zero COVID" policy.
Apple began making plans to move more of its production outside China in May after experiencing a bout of supply-chain delays after shutdowns over the zero-COVID policy and protests surrounding it.
Dan Ives, a Wedbush analyst, said in an analyst note that the zero-COVID policy was the last straw for the company.
"The reality is that Apple is extremely limited in their options for the holiday season and are at the mercy of China's zero-COVID policy," Ives said. "Now it's the painful waiting game to see what ramped production looks like over the next week for Apple to ease some iPhone shortages that are building globally."
But any move will take time. Ives and Wedbush estimated it would take until 2025 or 2026 for 50% of Apple's iPhone production to move to India and Vietnam if Apple moved "aggressively."
In a September report, Bloomberg Intelligence was even more pessimistic, saying it would take eight years, or until 2030, to move 10% of Apple's production capacity out of China, or 20% if Apple moved more aggressively. Bloomberg Intelligence estimated 98% of iPhones were assembled in China, thanks to the supply chain Apple has built over the past 20 years.
Based on Insider's analysis of Apple's supplier list from the 2021 fiscal year, which cataloged the 191 suppliers in 744 locations, Apple has 262 suppliers in mainland China, which comprise 35.2% of all listed suppliers. (In addition, it has 71 in Taiwan, and US-China tensions could also hamper Taiwanese production.)
Apple's list includes only supplier locations and does not specify manufacturing capacity.
There are 28 Apple suppliers in Vietnam, or 3.8% of the total listed by Apple. India has just 11, or 1.5%. According to The Wall Street Journal, Apple wants to bring its iPhone production to 40 to 45% in India and increase manufacturing of AirPods, laptops, and Apple Watches from Vietnam.
But both countries need more reliable infrastructure, The Wall Street Journal reported. Vietnam's population is far, far smaller than China's, and Apple faces challenges navigating India's bureaucracy.
Onshoring iPhone production?
There is another alternative: the US, which has 84 locations supplying Apple already.
On Tuesday, Taiwan Semiconductor Manufacturing Co. announced it's investing $40 billion to open two chip-fabrication plants in Arizona that could eventually produce 600,000 advanced chips a year. Apple CEO Tim Cook tweeted that the factory "marks a new era of advanced manufacturing in the U.S. — and we are proud to become the site's largest customer."
Bloomberg reported TSMC would start making 4-nanometer chips in its planned Arizona plant at the urging of companies like Apple. TSMC added that it wanted to make more-advanced 3-nanometer chips in a second planned factory.
But TSMC's 4-nanometer-chip plant won't begin production until 2024, and its 3-nanometer-chip plant won't open until 2026. Even once opened, ramping up production in a new plant takes several years as the factory works out its kinks and slowly builds up its workforce. And TSMC estimated chips made in the US would cost 50% more than those made in Taiwan.
If Apple wants to rely less on China, it can do it. The world's most valuable company is a sharp and savvy supply-chain operator. Before Cook took over at Apple in 2011, he spent a decade managing its logistics — including shutting down Apple-owned factories and replacing them with contractors that make up Apple's modern supply chain.
Shifting away from China would require Apple to sacrifice time and money on a long-term project involving hundreds of moving parts. Last quarter, Apple maintained 43% gross margins, one of the reasons its stock has stayed relatively more resilient than its Big Tech peers. Swapping out the largest part of its supply chain would inevitably introduce inefficiencies that would shrink those margins.
Apple is also big enough to take the hit — it just needs to wait things out. The question is, would investors?
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