Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Pacific rim. I'm Tom Corbett
Speaker 1: in Hong Kong, and I'm John Lee with Bloomberg Intelligence.
Speaker 1: In today's episode, we will discuss the decoupling of technology
Speaker 1: supply chains and whether Apple can stop making iPhones in China.
Speaker 1: Apple designs its iPhones in California, who relies on Asian
Speaker 1: supplies to assemble their phones? Last gek iPhones were producing
Speaker 1: China alone. Escalating tensions between China and the US have
Speaker 1: raised the stakes across the board and the US restricting
Speaker 1: China's access to chips has implications for some of the
Speaker 1: biggest tech names, including Apple. What does this mean for
Speaker 1: the future of Apple, the iPhone and the iPad. Let's
Speaker 1: bring in. Stephen Zong is senior technology analyst with Bloomberg Intelligent. Stephen,
Speaker 1: Welcome to the podcast. Hi Tom, Hi John. Glad to
Speaker 1: be here. Stephen. Why does Apple rely so much on
Speaker 1: China to make its iPhones. There's a few key strands
Speaker 1: in China. Apparently they have a very abendent supply of
Speaker 1: skill labors. They have a very good supply chain which
Speaker 1: you can basically source all the key components there, and
Speaker 1: they have very good logistic efficiency. China also happens to
Speaker 1: be the one of the biggest market for iPhone so
Speaker 1: they have an account for rough of the iPhone shuman
Speaker 1: per year. So it's more than just cheap labor that
Speaker 1: draws Apple to China. If you want to look for
Speaker 1: chip labors, China is no longer the place to go.
Speaker 1: But then if you constitute the skilled labored or engineers,
Speaker 1: then China certainly has one of the largest population of
Speaker 1: skill labors, so that's obviously one of the strands. So
Speaker 1: if you look at the like India, obviously you can
Speaker 1: make product there, but you may need to spend extra
Speaker 1: Kina money to trend those vapors, so the efficiency may
Speaker 1: be jepodized on time to time. China just locked down
Speaker 1: the world's largest iPhone plant, the fox Con plant, to
Speaker 1: come back a COVID outbreak. Can Apple still stay invested
Speaker 1: in China and yet deal with all this unpredictability over
Speaker 1: whether it can even get its product out in a
Speaker 1: near turn. The only thing they can do, or the
Speaker 1: fast Con can do, is that they can reokay part
Speaker 1: of production to other side. In this case, we heard
Speaker 1: that they moved part of that to Shinjin. The longer term,
Speaker 1: obviously hope that that when they seem back to normal,
Speaker 1: they can still catch up interns of production. Well, obviously
Speaker 1: this cannot go on forever. I think India obviously become
Speaker 1: sort of backup capacity, but it takes times to something instant.
Speaker 1: Apple hide behind its peers in terms of this past
Speaker 1: the relocation, Like if you look at the same for example,
Speaker 1: they already have like almost sixty of its filmmade in
Speaker 1: Vietnam Stephen with the latest lockdown, will this impact the
Speaker 1: production targets of for Apple? It seems to be. I
Speaker 1: think some report talking about like up to which I
Speaker 1: think is possible, but just that depends on how long
Speaker 1: they lasts. If just a couple of weeks, I think
Speaker 1: it's manageable, and particularly when you know that small phone demand,
Speaker 1: it's not particularly gray at this point for they actually
Speaker 1: progress the really for the supply chain, So it's it's
Speaker 1: largely depends on how long this latter will last. If
Speaker 1: it's just a couple of weeks, I think it's a manager.
Speaker 1: Has Apple mentioned that they want to diversify production away
Speaker 1: from China. Obviously it didn't say our law. I guess
Speaker 1: it's probably a little bit too sensitive to say out loud,
Speaker 1: but they did the For example, if this year the
Speaker 1: iPhone fourteen the made in India, they DIEP made the
Speaker 1: announcement basically confirm they actually started making I from fourteen India.
Speaker 1: That really happened before, so I guess they at least
Speaker 1: they shoot a commitment to reduce the reliance and China, Stephen.
Speaker 1: One of the biggest risks to Apple in executing this
Speaker 1: decoupling and then recoupling from China to India. The immediate
Speaker 1: issue is really the cost. Right assembly is not really
Speaker 1: a difficult process, but then the efficiency can have major
Speaker 1: impacts on the final production cost. And also we're talking
Speaker 1: about at the moment, you don't have a lot of
Speaker 1: components in India, so you have to import everything from
Speaker 1: China to India. The shuman from China to India by
Speaker 1: sea is roughly three weeks, so it depends on the
Speaker 1: cost of component. If it's expensive part, you should buy
Speaker 1: air which is usually three to four times more expe
Speaker 1: and ship Stephen. Some analysts believe of iPhones can be
Speaker 1: produced outside of China by two. Is this realistic? What's
Speaker 1: your expectation? It's definitely possible, right, but just that a
Speaker 1: lot of things has to happen. Yeah, we're talking about that.
Speaker 1: You have to get some supplier component supplier also move
Speaker 1: into India, and then also they have to come up
Speaker 1: with arrangement like how to allocate the extra costs. Would
Speaker 1: it be possible to raise iPhones retail price too? So
Speaker 1: that's probably difficult. But we all know that the Apple
Speaker 1: is so has a very pie control on the supply chain,
Speaker 1: which means that will have a very detailed certification all
Speaker 1: the supplier and all their process takes time. Well, I
Speaker 1: would say it's quite difficult in our view in b
Speaker 1: I I mean we're actually spent. Probably only single digit
Speaker 1: change may happen in the nest few years. Centuly, Yes,
Speaker 1: twenty thirty may seem more reasonable to me at least,
Speaker 1: I mean to sort of that a quarter of iPhone
Speaker 1: can be made in India. Stephen, is there any way
Speaker 1: you can describe just how deeply embedded Apple supply chain
Speaker 1: is in China? Everybody is thinking about diversification to manage
Speaker 1: the uncertainty. So now it looks like an Apple, it's
Speaker 1: folding behind on that progress. So so from that perspectively,
Speaker 1: actually expoied themselves into a pretty big risk. Let's talk
Speaker 1: a little bit about that diversification that you just mentioned.
Speaker 1: Is it a foregone conclusion that Apple became so entrenched
Speaker 1: in China, so dependent on China or could it have
Speaker 1: been avoided? And what did they miss? They know what
Speaker 1: kind of a risk they are taking, maybe the thing
Speaker 1: that's risk worth taken, or maybe because they are reading
Speaker 1: not there's not a the better choice at the moment,
Speaker 1: but it's clear that their supply chain are death. They
Speaker 1: look in outside China the new capacity. The company actually
Speaker 1: released their top two hundreds of Priier lists every once
Speaker 1: in a while. Based on the latest list, China's number
Speaker 1: I think it's like two hundred sixty something. It's actually
Speaker 1: not changed a lot. It's still the biggest country obviously
Speaker 1: in terms of a number of factories located. But then
Speaker 1: a lot of other Southeast Asian countries. We're talking about Malaysia,
Speaker 1: about Thailand, Vietnam, even Singapore. Actually they all growing, will
Speaker 1: increase in terms of number of factories. They definitely moved
Speaker 1: towards ossium even though the reliance on China is still
Speaker 1: very high, but I think increasingly. But you can see
Speaker 1: they're trying to match that geopolitical risk. If we compare
Speaker 1: Apple with its biggest competitor, Samsung Electronics, Samsung makes its
Speaker 1: phones in seven countries around the world. If Samsung can
Speaker 1: do it, why can't Apple. I think one of key
Speaker 1: difference is that a sens on actually can produce a
Speaker 1: lot of key components in house. Right they have their
Speaker 1: own processor or memory chips, they can produce panel, and
Speaker 1: that they also have subsidiaries that making other components, so
Speaker 1: they can be very efficient if they want to relocate
Speaker 1: their capacity to a certain country. Right, But Apple is different.
Speaker 1: Apple really households to to Asia all three so obviously
Speaker 1: they have a very good arguing power in the supprice chain.
Speaker 1: China is an important consumer market for Apple. If Apple
Speaker 1: diversifies production away from China, what would be the ramifications
Speaker 1: for Apple that? That's actually good question, because it can
Speaker 1: be a concern. I guess it depends on how Apple
Speaker 1: manages that process. If it just build capacity like gradually
Speaker 1: and they didn't really cut down the capacity in China,
Speaker 1: then I guess it's okay. Because he can argue that, okay,
Speaker 1: that's capacity to support the growth in China. Maybe it's
Speaker 1: not expanding. I think it should be. You can be okay,
Speaker 1: but then yeah, Apple actually downsized the capacity in China.
Speaker 1: Then there could be an issue, right because as you
Speaker 1: know that the China can maybe they can pick up
Speaker 1: pick it up as its cues to do something drastic
Speaker 1: against Apple. So I guess given the concern, I think
Speaker 1: Apple is very likely to work with the supplier to
Speaker 1: maybe more like engage in the more gradual expansion. So
Speaker 1: still keep China as the major production half, but obviously
Speaker 1: he's spent elsewhere. Two diversify the risk that what they
Speaker 1: will do. This year, the US implemented the Chips Act.
Speaker 1: The US also banned the sale of advanced semiconductors used
Speaker 1: in ai and supercomputers to China. Does this impact Apple
Speaker 1: at all? So far, it doesn't seem so because obviously
Speaker 1: Apple doesn't make those chip in China and it is small.
Speaker 1: I mean they're working with t SMC mostly and TSMC
Speaker 1: is mainly in Taiwan. So no, But with that, the
Speaker 1: impact going forward, that really depends on what the US
Speaker 1: government want to do going forward. But now no, if
Speaker 1: Apple iPhones are made outside of China. Does this mean
Speaker 1: higher prices for US consumers? It is very likely obviously,
Speaker 1: unless he has those sold by the supply chain right
Speaker 1: or by Apple yourself. So that's a very obvious question,
Speaker 1: and I will assume Apple are not willing to do that.
Speaker 1: It's so one or a few of the suppliers have
Speaker 1: to take that hit, and that depends on how substantial
Speaker 1: that he will be. This is why I think a
Speaker 1: lot of supplier of Apple usually when they have a
Speaker 1: very efficial and operation in place, they want change white
Speaker 1: bother to fix something already running. So well, that can
Speaker 1: be an issue, and I'm sure Apple is aware of that.
Speaker 1: So I guess what they would do is that I
Speaker 1: really want to diversify, but they won't do with it
Speaker 1: like drastically. They do it on a gradual manner, so
Speaker 1: the incremental costs will become easier to manage. Our guest
Speaker 1: has been Stevensung, senior analyst at Bloomberg Intelligence covering the
Speaker 1: technology space. Steven, thanks for joining us. Thank you, Tom,
Speaker 1: Thank you John, and I'm John Lee. Thank you for
Speaker 1: listening to the AHA Centric podcast.