Tim Cook is moving to diversify Apple’s supply chain, are you doing the same? Apple is reducing its dependence on Chinese manufacturing by shifting some of its production out of the country despite China's rapid scaling down of pandemic-related measures (with the expected amount of disruption throughout the country).
According to ComputerWorld, Apple plans to move 25% to 30% of its production of iPhones for the US market out of China over the next three to five years with MacBooks likely moving to Thailand.
Apple is reportedly planning to move their product manufacturing to Taiwan, Vietnam, India, and Thailand. According to analysts, the company is likely to move away from its many Taiwanese suppliers due to the fear of a potential invasion of Taiwan.
The Apple Falls From The Tree: The Move Explained
Not only is Apple a leader in consumer electronics, they also excel in outsourcing and manufacturing, so it is worth understanding the thinking behind the move by asking the questions they are asking:
- What are the business risks?
- What are the geopolitical risks?
- How to diversify?
Notice here that Apple is taking a pragmatic approach to real and possible risks rather than hoping to go back to the way things were before the pandemic disrupted global supply chains. The world is changing and Apple is changing with it.
1. What Are The Business Risks?
Business risk is a very real concern as the past three years have seen billions of dollars lost due to supply chain disruptions. Apple, in particular, suffered greatly when their major manufacturing location in Zhengzhou, China was shut down due to a COVID lockdown, resulting in $1 billion dollars in losses per week and widespread protests.
Apple is also pushing its suppliers to diversify their suppliers (Apple’s tier two suppliers) to prevent issues further down the supply chain. It would be good to see more companies do this as there are a lot of problems that can be solved by fixing issues with 2nd and 3rd tier suppliers.
Diversifying production locations and suppliers will not prevent losses, however it can lessen the severity of them. We have seen a number of clients suffer because many of them have one major supplier in China that if they go down, it could prevent shipping for weeks. Even before COVID, serious quality issues from one supplier could cause serious problems as the issue would not be apparent for weeks or months, and the solutions can not be easily implemented if the problem is too far gone.
2. What Are The Geographical Risks?
Geopolitical risks are more complicated. Many events seem obvious in retrospect, but experts at the time often are wrong in their predictions. Few saw the rapid and relatively bloodless collapse of the Soviet Union, the 9/11 attacks, or the disastrous war in Iraq (though as a young soldier there in 2003, I can say that I was not left with much confidence). Just last year, many experts were predicting a quick Russian victory in Ukraine.
These risks are not limited to wars and rumours of wars. Government collapse, environmental disasters and pandemics are all factors that must be considered. A number of companies had a rude awakening when the military took control of Myanmar again.
I would say the odds of a Chinese invasion of Taiwan are very low (especially after Russia’s failure in Ukraine), however, the threat of war and posturing is still a major risk to Apple’s supply chain. Hedging against a small risk with a catastrophic result is a wise decision.
3. How To Diversify?
Stephen Ezell from the Information Technology and Innovation Foundation told Voice of America that “Apple represents the tip of the spear for a much greater share of global high-tech production moving outside of China”. That is true, however, does that mean that you should move out of China?
The answer for most countries is yes but not completely. Chinese manufacturers are too integrated to completely remove themselves from China as a 1st, 2nd, or 3rd tier supplier. Some part(s) will likely still be produced in China. What it means is that you should diversify as much as is feasible. Some countries are moving to India, Vietnam, and Thailand, however none of these will ever be the “new China”.
What we are seeing here is not de-globalization, as some commentators say it is a redistribution. China is no longer the end all be all of global manufacturing. Companies are realising that they need to diversify and be more responsive to changing market conditions. The easy days of cheap manufacturing in China are ending but it represents a great opportunity to improve.
How should your company diversify? That is up to your specific circumstances. You are likely not Apple with billions in cash to work with so it is best to start with an honest look at your specific needs and your costs. Also, see how you can do it better than what was done before. We have worked with companies and doubled their efficiencies to more than offset the cost differences.
Bottom Line
Overall, the decision by Apple to move production from China has highlighted the need for businesses to diversify their manufacturing operations. Now is the perfect time to explore alternative manufacturing sites to take the next step in diversifying your supply chain.
