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How Apple Tied its Fortunes to China and Moving its Supply Chain may be Close to Impossible

1 cover Apple  Tim Cook and China(Click on image to Enlarge)

A Major report this morning focuses on how Apple tied its fortunes to China. The company spent two decades and billions of dollars building a supply chain of unprecedented sophistication. Now, a reckoning may be on the way.

This morning, the Financial Times has published a major report on Apple's rise to fame using China as a manufacturing base for their iPhone. It begins by noting that back in 2007, Nokia had 900mn users. Its market dominance seemed so great that Forbes ran a cover story on the company asking “Can anyone catch the cell phone king?” The same year, Apple launched the iPhone.

Sixteen years and 1.2bn users later, the story of how the Finnish handset maker got blindsided by the iPhone is well known. Nokia, the story goes, didn’t have enough software savvy to keep up with visionary Apple co-founder Steve Jobs and design whizz Jony Ive.

But the cellphone’s multitouch, full-screen features were not Apple’s only advantages. The company was also outmanoeuvring Nokia on hardware and production before the iPhone even went on sale. And it did so by making a substantial bet on China and its manufacturing sector.

Supply chain researcher Kevin O’Marah vividly remembers his confusion when, in mid-2007, Apple vaulted from out of nowhere into the No. 2 spot of the Supply Chain Top 25, an annual ranking of the world’s best-run corporate supply chains.

“Everyone was shocked,” he says. “It was like, ‘What? This doesn’t make sense. They have a terrible reputation.’”

The supply chain ranking turned out to be an early indication of a profound shift in operations at Apple, which held the No.1 spot for the next seven years. In that time it became the world’s most valuable company, while placing itself at the centre of geopolitical tensions.

O’Marah began to learn that Apple was not really “outsourcing” production to China, as commonly understood. Instead, he realised that Apple was starting to build up a supply and manufacturing operation of such complexity, depth and cost that the company’s fortunes have become tied to China in a way that cannot easily be unwound.

Over the past decade and a half, Apple has been sending its top product designers and manufacturing design engineers to China, embedding them into suppliers’ facilities for months at a time.

These Apple employees have played integral roles co-designing new production processes, overseeing the minutiae of manufacturing until things were up and running, and keeping close tabs on suppliers to ensure compliance.

Apple has also spent billions of dollars on custom machinery to build its devices, developing niche expertise that its rivals did not even know about, let alone compete with.

It has transformed the company and the country. “All the tech competence China has now is not the product of Chinese tech leadership drawing in Apple,” O’Marah says. “It’s the product of Apple going in there and building the tech competence.”

These operations played such a salient role that the unassuming character behind them, chief operating officer Tim Cook, would succeed Steve Jobs as CEO in 2011. It was Cook who shifted Apple’s production from the US to China, where he established unparalleled efficiencies that underpinned Apple’s ascent.

But this extraordinary success story has also created Apple’s biggest vulnerability: its dependence on a single country, China, which under President Xi Jinping has grown increasingly authoritarian and estranged from the west.

The manufacturing concentration is glaring for a risk-averse company widely lauded for leading the world in supply chain brilliance. More than 95 per cent of iPhones, AirPods, Macs and iPads are made in China, where Apple also earns about a fifth of its revenue — $74bn last year. That contrasts sharply with rivals such as Samsung, which have sharply cut back manufacturing in China.

2 Financial Times graphic

Even in recent years, as competition between Washington and Beijing has escalated sharply, Apple has continued to invest in China and further cement its connections with the country.

The result is intense political scrutiny of Apple and its relationship with China, the country most in Washington consider to be America’s principal rival. Cook and his company are now under intense pressure from investors and US politicians to “decouple” from China and accelerate a diversification strategy that already has some products assembled in Vietnam and India.

For much more on this in-depth and enlightening story, read the Financial Times report by Patrick McGee.

10.0F - Apple News


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