As China falters, here’s how India can be Apple’s next manufacturing hub

  • Vivek Wadhwa
  • Updated: May 18, 2016 01:13 IST
Every iPhone contains compoments sourced from hundreds of suppliers located in several countries. Apple’s complex value chain now faces a challenge in China. (REUTERS)

Apple’s CEO is expected to meet Prime Minister Narendra Modi this week as part of his Asian tour. This happens amid reports that Foxconn , Apple’s leading contract manufacturer, is considering locating some of its iPhone manufacturing to India—which is overtaking China as the world’s fastest growing market. Foxconn has also been speculating about setting up robotic manufacturing plants in the US.

This seems very unlikely because of Apple’s massive presence in China and the complexity of the manufacturing value chain of its products’ electronics components. But this may not be as far-fetched as it seems and could provide Apple a badly needed way of diversifying its manufacturing base—and entering the Indian market in force.

Read | What’s cooking with Tim Cook’s maiden visit to India?

When American companies moved manufacturing to China, it was all about cost. China’s wages were amongst the lowest in the world and its government provided subsidies and turned a blind eye to labour abuse and environmental destruction. Things have changed. China’s labour, real estate, and energy costs have increased to the point that they are comparable to some parts of the United States. Subsidies are also harder to get and Chinese labour is not tolerating the abuse that it once did. China is now a more expensive place to manufacture than Indonesia, Thailand, Mexico, and India, according to Boston Consulting Group.

Add to this the efforts by the Chinese government to spur indigenous innovation by forcing foreign companies to reveal their intellectual property and use local suppliers, and you have strong motivation to relocate manufacturing.

But Apple is by no means looking to exit from China, its second largest market. It just announced an investment of one billion dollars in ride sharing startup Uber’s rival Didi Chuxing. It clearly saw a large market opportunity and a way to appease the Chinese government.

Technology is, however, further changing the labour-cost equation. And China is becoming unpredictable because of its faltering economy. It makes sense for Apple to locate some of its manufacturing closer to other markets.

Read | Apple’s Cook in China to work charm offensive after logo battle

What is changing the labour situation is robotics. Robots can now do what human workers can—for a fraction of the cost. A new generation, from companies such as Rethink Robotics of Boston, ABB of Switzerland, and Universal Robots of Denmark, are dexterous enough to thread a needle and nimble enough to work beside human workers. They can do repetitive and boring circuit board assembly and pack boxes. These robots cost less than $40,000 to purchase and as little as a US dollar per hour to operate. And unlike human workers, they will work 24-hour shifts without complaining.

The hurdle in relocating manufacturing for any company such as Apple is the tie to the chain of suppliers of its products’ electronics components. The question therefore to ask is: how dependent is Apple on its China supply chain?

In 2015, the supply chain for Apple’s products consisted of 198 global companies with 759 subsidiaries—so this is quite complex. Seamus Grimes of National University of Ireland and Yutao Sun of Dalian University of China studied each of these subsidiaries and interviewed executives of those located in China. The objective of their research was to advise China on how it could move further up the value chain and cause foreign companies to give it more of their intellectual property. The paper they published, however, provides another interesting insight: into how few of Apple’s technology suppliers are actually Chinese.

The authors researched each of the 779 subsidiaries and categorized the electronics components into core, non-core, and assembly-related, with the high-cost, intellectual-property dependent technologies being designated as core. They learned that 336, or 44.2%, of these subsidiaries were manufacturing in China; 115 were in Taiwan; and 84 in Europe or the United States. Of these, 47% were core component suppliers, 37.8% supplied non-core components, and 14.6% performed assembly work.

Read | Apple invests $1 bln in Chinese ride-hailing service Didi Chuxing

When the researchers looked into the ownership of subsidiaries that were manufacturing in China, they found that only 3.95% were Chinese. And only 2.2% of the core component suppliers were Chinese. The largest proportion, 32.7%, were Japanese; 28.5% were American; 19.0% were Taiwanese; and 6.5% were European.

To put it simply, more than half of the components of Apple’s products are imported into China and practically none of the important, core, technologies is made by Chinese companies. Foreign companies do not trust China and nearly all of the intellectual property in Apple’s products originates from outside it.

The authors noted that direct benefit to China of having companies such as Apple there has been remarkably low—and that is why the government has made the attainment of foreign intellectual property a national priority. And this is what is making foreign companies nervous and creating a Catch-22 situation for China.

Setting up large scale manufacturing plants is not easy and value-chain dependencies can make relocations very hard. Nothing will happen very fast. But because the electronics supply chain is globally dispersed, it is certainly possible for Apple and its suppliers to start moving some of their manufacturing to places such as India, Mexico, and the United States. This will be a win-win for India, Apple, and the world.

Vivek Wadhwa is a fellow at the Arth ur & Toni Rembe Rock Center for Corporate Governance, Stanford University. He is a prominent researcher on entrepreneurship and emerging technologies

The views expressed are personal

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