WEBVTT - Can Apple Hit Reset on Its China Production?: Asia Centric

0:00:03.840 --> 0:00:08.520
<v Speaker 1>You're listening to Asia Centric from Bloomberg Intelligence, the podcast

0:00:08.560 --> 0:00:11.840
<v Speaker 1>that pulls back the curtain on global business so you

0:00:11.920 --> 0:00:16.360
<v Speaker 1>can invest better across the Pacific rim. I'm Tom Corbett

0:00:16.400 --> 0:00:19.600
<v Speaker 1>in Hong Kong, and I'm John Lee with Bloomberg Intelligence.

0:00:19.800 --> 0:00:23.079
<v Speaker 1>In today's episode, we will discuss the decoupling of technology

0:00:23.120 --> 0:00:27.040
<v Speaker 1>supply chains and whether Apple can stop making iPhones in China.

0:00:27.640 --> 0:00:31.040
<v Speaker 1>Apple designs its iPhones in California, who relies on Asian

0:00:31.080 --> 0:00:36.199
<v Speaker 1>supplies to assemble their phones? Last gek iPhones were producing

0:00:36.280 --> 0:00:40.159
<v Speaker 1>China alone. Escalating tensions between China and the US have

0:00:40.360 --> 0:00:44.080
<v Speaker 1>raised the stakes across the board and the US restricting

0:00:44.280 --> 0:00:47.599
<v Speaker 1>China's access to chips has implications for some of the

0:00:47.760 --> 0:00:51.960
<v Speaker 1>biggest tech names, including Apple. What does this mean for

0:00:52.000 --> 0:00:55.680
<v Speaker 1>the future of Apple, the iPhone and the iPad. Let's

0:00:55.680 --> 0:01:00.760
<v Speaker 1>bring in. Stephen Zong is senior technology analyst with Bloomberg Intelligent. Stephen,

0:01:00.880 --> 0:01:06.040
<v Speaker 1>Welcome to the podcast. Hi Tom, Hi John. Glad to

0:01:06.080 --> 0:01:08.760
<v Speaker 1>be here. Stephen. Why does Apple rely so much on

0:01:08.840 --> 0:01:12.520
<v Speaker 1>China to make its iPhones. There's a few key strands

0:01:12.520 --> 0:01:17.480
<v Speaker 1>in China. Apparently they have a very abendent supply of

0:01:17.680 --> 0:01:21.280
<v Speaker 1>skill labors. They have a very good supply chain which

0:01:21.360 --> 0:01:24.959
<v Speaker 1>you can basically source all the key components there, and

0:01:25.040 --> 0:01:29.560
<v Speaker 1>they have very good logistic efficiency. China also happens to

0:01:29.680 --> 0:01:32.520
<v Speaker 1>be the one of the biggest market for iPhone so

0:01:32.560 --> 0:01:36.720
<v Speaker 1>they have an account for rough of the iPhone shuman

0:01:36.760 --> 0:01:39.560
<v Speaker 1>per year. So it's more than just cheap labor that

0:01:39.640 --> 0:01:42.440
<v Speaker 1>draws Apple to China. If you want to look for

0:01:42.640 --> 0:01:46.360
<v Speaker 1>chip labors, China is no longer the place to go.

0:01:47.240 --> 0:01:52.080
<v Speaker 1>But then if you constitute the skilled labored or engineers,

0:01:52.720 --> 0:01:57.040
<v Speaker 1>then China certainly has one of the largest population of

0:01:57.240 --> 0:02:01.120
<v Speaker 1>skill labors, so that's obviously one of the strands. So

0:02:01.280 --> 0:02:04.400
<v Speaker 1>if you look at the like India, obviously you can

0:02:04.440 --> 0:02:07.919
<v Speaker 1>make product there, but you may need to spend extra

0:02:08.040 --> 0:02:12.000
<v Speaker 1>Kina money to trend those vapors, so the efficiency may

0:02:12.040 --> 0:02:15.320
<v Speaker 1>be jepodized on time to time. China just locked down

0:02:15.720 --> 0:02:19.960
<v Speaker 1>the world's largest iPhone plant, the fox Con plant, to

0:02:20.160 --> 0:02:23.960
<v Speaker 1>come back a COVID outbreak. Can Apple still stay invested

0:02:24.000 --> 0:02:28.560
<v Speaker 1>in China and yet deal with all this unpredictability over

0:02:28.560 --> 0:02:30.840
<v Speaker 1>whether it can even get its product out in a

0:02:30.880 --> 0:02:33.760
<v Speaker 1>near turn. The only thing they can do, or the

0:02:33.800 --> 0:02:37.080
<v Speaker 1>fast Con can do, is that they can reokay part

0:02:37.080 --> 0:02:40.120
<v Speaker 1>of production to other side. In this case, we heard

0:02:40.160 --> 0:02:43.320
<v Speaker 1>that they moved part of that to Shinjin. The longer term,

0:02:43.320 --> 0:02:45.560
<v Speaker 1>obviously hope that that when they seem back to normal,

0:02:45.840 --> 0:02:49.200
<v Speaker 1>they can still catch up interns of production. Well, obviously

0:02:49.240 --> 0:02:51.960
<v Speaker 1>this cannot go on forever. I think India obviously become

0:02:52.040 --> 0:02:55.960
<v Speaker 1>sort of backup capacity, but it takes times to something instant.

0:02:55.960 --> 0:03:00.320
<v Speaker 1>Apple hide behind its peers in terms of this past

0:03:00.360 --> 0:03:03.400
<v Speaker 1>the relocation, Like if you look at the same for example,

0:03:03.880 --> 0:03:06.840
<v Speaker 1>they already have like almost sixty of its filmmade in

0:03:06.919 --> 0:03:10.240
<v Speaker 1>Vietnam Stephen with the latest lockdown, will this impact the

0:03:10.320 --> 0:03:14.920
<v Speaker 1>production targets of for Apple? It seems to be. I

0:03:14.960 --> 0:03:18.720
<v Speaker 1>think some report talking about like up to which I

0:03:18.760 --> 0:03:21.440
<v Speaker 1>think is possible, but just that depends on how long

0:03:21.480 --> 0:03:24.320
<v Speaker 1>they lasts. If just a couple of weeks, I think

0:03:24.360 --> 0:03:29.400
<v Speaker 1>it's manageable, and particularly when you know that small phone demand,

0:03:29.919 --> 0:03:33.160
<v Speaker 1>it's not particularly gray at this point for they actually

0:03:33.160 --> 0:03:37.720
<v Speaker 1>progress the really for the supply chain, So it's it's

0:03:37.760 --> 0:03:40.360
<v Speaker 1>largely depends on how long this latter will last. If

0:03:40.360 --> 0:03:42.240
<v Speaker 1>it's just a couple of weeks, I think it's a manager.

0:03:42.920 --> 0:03:45.760
<v Speaker 1>Has Apple mentioned that they want to diversify production away

0:03:45.800 --> 0:03:49.360
<v Speaker 1>from China. Obviously it didn't say our law. I guess

0:03:49.400 --> 0:03:53.480
<v Speaker 1>it's probably a little bit too sensitive to say out loud,

0:03:53.720 --> 0:03:57.800
<v Speaker 1>but they did the For example, if this year the

0:03:57.800 --> 0:04:01.760
<v Speaker 1>iPhone fourteen the made in India, they DIEP made the

0:04:01.840 --> 0:04:07.320
<v Speaker 1>announcement basically confirm they actually started making I from fourteen India.

0:04:07.640 --> 0:04:11.080
<v Speaker 1>That really happened before, so I guess they at least

0:04:11.080 --> 0:04:16.480
<v Speaker 1>they shoot a commitment to reduce the reliance and China, Stephen.

0:04:16.560 --> 0:04:21.080
<v Speaker 1>One of the biggest risks to Apple in executing this

0:04:21.279 --> 0:04:25.600
<v Speaker 1>decoupling and then recoupling from China to India. The immediate

0:04:25.680 --> 0:04:29.799
<v Speaker 1>issue is really the cost. Right assembly is not really

0:04:29.839 --> 0:04:36.039
<v Speaker 1>a difficult process, but then the efficiency can have major

0:04:36.120 --> 0:04:40.359
<v Speaker 1>impacts on the final production cost. And also we're talking

0:04:40.400 --> 0:04:42.719
<v Speaker 1>about at the moment, you don't have a lot of

0:04:42.760 --> 0:04:45.600
<v Speaker 1>components in India, so you have to import everything from

0:04:45.680 --> 0:04:49.720
<v Speaker 1>China to India. The shuman from China to India by

0:04:49.880 --> 0:04:53.400
<v Speaker 1>sea is roughly three weeks, so it depends on the

0:04:53.760 --> 0:04:57.000
<v Speaker 1>cost of component. If it's expensive part, you should buy

0:04:57.040 --> 0:04:59.960
<v Speaker 1>air which is usually three to four times more expe

0:05:00.000 --> 0:05:04.200
<v Speaker 1>and ship Stephen. Some analysts believe of iPhones can be

0:05:04.200 --> 0:05:08.560
<v Speaker 1>produced outside of China by two. Is this realistic? What's

0:05:08.600 --> 0:05:13.880
<v Speaker 1>your expectation? It's definitely possible, right, but just that a

0:05:13.960 --> 0:05:16.720
<v Speaker 1>lot of things has to happen. Yeah, we're talking about that.

0:05:16.760 --> 0:05:20.480
<v Speaker 1>You have to get some supplier component supplier also move

0:05:20.600 --> 0:05:25.040
<v Speaker 1>into India, and then also they have to come up

0:05:25.080 --> 0:05:29.800
<v Speaker 1>with arrangement like how to allocate the extra costs. Would

0:05:29.800 --> 0:05:33.240
<v Speaker 1>it be possible to raise iPhones retail price too? So

0:05:33.400 --> 0:05:36.400
<v Speaker 1>that's probably difficult. But we all know that the Apple

0:05:36.600 --> 0:05:40.000
<v Speaker 1>is so has a very pie control on the supply chain,

0:05:40.040 --> 0:05:44.920
<v Speaker 1>which means that will have a very detailed certification all

0:05:44.920 --> 0:05:49.960
<v Speaker 1>the supplier and all their process takes time. Well, I

0:05:50.000 --> 0:05:53.440
<v Speaker 1>would say it's quite difficult in our view in b

0:05:53.640 --> 0:05:56.599
<v Speaker 1>I I mean we're actually spent. Probably only single digit

0:05:56.680 --> 0:05:59.839
<v Speaker 1>change may happen in the nest few years. Centuly, Yes,

0:06:00.000 --> 0:06:03.479
<v Speaker 1>twenty thirty may seem more reasonable to me at least,

0:06:03.520 --> 0:06:06.520
<v Speaker 1>I mean to sort of that a quarter of iPhone

0:06:06.520 --> 0:06:09.080
<v Speaker 1>can be made in India. Stephen, is there any way

0:06:09.120 --> 0:06:14.479
<v Speaker 1>you can describe just how deeply embedded Apple supply chain

0:06:14.800 --> 0:06:20.880
<v Speaker 1>is in China? Everybody is thinking about diversification to manage

0:06:20.920 --> 0:06:24.600
<v Speaker 1>the uncertainty. So now it looks like an Apple, it's

0:06:24.640 --> 0:06:27.960
<v Speaker 1>folding behind on that progress. So so from that perspectively,

0:06:27.960 --> 0:06:31.560
<v Speaker 1>actually expoied themselves into a pretty big risk. Let's talk

0:06:31.560 --> 0:06:34.880
<v Speaker 1>a little bit about that diversification that you just mentioned.

0:06:35.200 --> 0:06:39.600
<v Speaker 1>Is it a foregone conclusion that Apple became so entrenched

0:06:39.960 --> 0:06:42.680
<v Speaker 1>in China, so dependent on China or could it have

0:06:42.680 --> 0:06:46.560
<v Speaker 1>been avoided? And what did they miss? They know what

0:06:46.880 --> 0:06:49.440
<v Speaker 1>kind of a risk they are taking, maybe the thing

0:06:49.560 --> 0:06:53.280
<v Speaker 1>that's risk worth taken, or maybe because they are reading

0:06:53.400 --> 0:06:56.640
<v Speaker 1>not there's not a the better choice at the moment,

0:06:57.040 --> 0:07:00.160
<v Speaker 1>but it's clear that their supply chain are death. They

0:07:00.240 --> 0:07:04.920
<v Speaker 1>look in outside China the new capacity. The company actually

0:07:05.120 --> 0:07:08.920
<v Speaker 1>released their top two hundreds of Priier lists every once

0:07:08.960 --> 0:07:13.560
<v Speaker 1>in a while. Based on the latest list, China's number

0:07:13.640 --> 0:07:16.520
<v Speaker 1>I think it's like two hundred sixty something. It's actually

0:07:16.560 --> 0:07:20.400
<v Speaker 1>not changed a lot. It's still the biggest country obviously

0:07:20.880 --> 0:07:23.400
<v Speaker 1>in terms of a number of factories located. But then

0:07:24.000 --> 0:07:29.280
<v Speaker 1>a lot of other Southeast Asian countries. We're talking about Malaysia,

0:07:29.960 --> 0:07:35.200
<v Speaker 1>about Thailand, Vietnam, even Singapore. Actually they all growing, will

0:07:35.280 --> 0:07:39.200
<v Speaker 1>increase in terms of number of factories. They definitely moved

0:07:39.400 --> 0:07:43.080
<v Speaker 1>towards ossium even though the reliance on China is still

0:07:43.160 --> 0:07:46.360
<v Speaker 1>very high, but I think increasingly. But you can see

0:07:46.640 --> 0:07:51.239
<v Speaker 1>they're trying to match that geopolitical risk. If we compare

0:07:51.280 --> 0:07:54.960
<v Speaker 1>Apple with its biggest competitor, Samsung Electronics, Samsung makes its

0:07:55.000 --> 0:07:57.840
<v Speaker 1>phones in seven countries around the world. If Samsung can

0:07:57.880 --> 0:08:00.600
<v Speaker 1>do it, why can't Apple. I think one of key

0:08:00.680 --> 0:08:04.800
<v Speaker 1>difference is that a sens on actually can produce a

0:08:04.840 --> 0:08:08.240
<v Speaker 1>lot of key components in house. Right they have their

0:08:08.240 --> 0:08:12.600
<v Speaker 1>own processor or memory chips, they can produce panel, and

0:08:12.680 --> 0:08:17.760
<v Speaker 1>that they also have subsidiaries that making other components, so

0:08:18.600 --> 0:08:22.360
<v Speaker 1>they can be very efficient if they want to relocate

0:08:22.440 --> 0:08:27.000
<v Speaker 1>their capacity to a certain country. Right, But Apple is different.

0:08:27.600 --> 0:08:33.880
<v Speaker 1>Apple really households to to Asia all three so obviously

0:08:33.880 --> 0:08:37.000
<v Speaker 1>they have a very good arguing power in the supprice chain.

0:08:37.800 --> 0:08:40.880
<v Speaker 1>China is an important consumer market for Apple. If Apple

0:08:40.960 --> 0:08:44.280
<v Speaker 1>diversifies production away from China, what would be the ramifications

0:08:44.280 --> 0:08:48.520
<v Speaker 1>for Apple that? That's actually good question, because it can

0:08:48.600 --> 0:08:52.400
<v Speaker 1>be a concern. I guess it depends on how Apple

0:08:53.280 --> 0:08:59.200
<v Speaker 1>manages that process. If it just build capacity like gradually

0:08:59.840 --> 0:09:03.199
<v Speaker 1>and they didn't really cut down the capacity in China,

0:09:03.320 --> 0:09:06.880
<v Speaker 1>then I guess it's okay. Because he can argue that, okay,

0:09:06.880 --> 0:09:10.600
<v Speaker 1>that's capacity to support the growth in China. Maybe it's

0:09:10.640 --> 0:09:13.240
<v Speaker 1>not expanding. I think it should be. You can be okay,

0:09:13.240 --> 0:09:18.600
<v Speaker 1>but then yeah, Apple actually downsized the capacity in China.

0:09:19.200 --> 0:09:21.800
<v Speaker 1>Then there could be an issue, right because as you

0:09:21.920 --> 0:09:24.400
<v Speaker 1>know that the China can maybe they can pick up

0:09:24.640 --> 0:09:28.160
<v Speaker 1>pick it up as its cues to do something drastic

0:09:28.240 --> 0:09:31.920
<v Speaker 1>against Apple. So I guess given the concern, I think

0:09:32.080 --> 0:09:34.720
<v Speaker 1>Apple is very likely to work with the supplier to

0:09:35.000 --> 0:09:39.200
<v Speaker 1>maybe more like engage in the more gradual expansion. So

0:09:39.360 --> 0:09:44.199
<v Speaker 1>still keep China as the major production half, but obviously

0:09:44.360 --> 0:09:49.760
<v Speaker 1>he's spent elsewhere. Two diversify the risk that what they

0:09:49.840 --> 0:09:52.800
<v Speaker 1>will do. This year, the US implemented the Chips Act.

0:09:53.120 --> 0:09:56.120
<v Speaker 1>The US also banned the sale of advanced semiconductors used

0:09:56.120 --> 0:09:59.480
<v Speaker 1>in ai and supercomputers to China. Does this impact Apple

0:09:59.480 --> 0:10:04.199
<v Speaker 1>at all? So far, it doesn't seem so because obviously

0:10:04.240 --> 0:10:07.400
<v Speaker 1>Apple doesn't make those chip in China and it is small.

0:10:07.720 --> 0:10:11.520
<v Speaker 1>I mean they're working with t SMC mostly and TSMC

0:10:11.920 --> 0:10:17.200
<v Speaker 1>is mainly in Taiwan. So no, But with that, the

0:10:17.280 --> 0:10:21.280
<v Speaker 1>impact going forward, that really depends on what the US

0:10:21.360 --> 0:10:25.400
<v Speaker 1>government want to do going forward. But now no, if

0:10:25.440 --> 0:10:28.520
<v Speaker 1>Apple iPhones are made outside of China. Does this mean

0:10:28.640 --> 0:10:33.119
<v Speaker 1>higher prices for US consumers? It is very likely obviously,

0:10:33.520 --> 0:10:36.680
<v Speaker 1>unless he has those sold by the supply chain right

0:10:36.760 --> 0:10:40.360
<v Speaker 1>or by Apple yourself. So that's a very obvious question,

0:10:40.480 --> 0:10:43.360
<v Speaker 1>and I will assume Apple are not willing to do that.

0:10:43.920 --> 0:10:47.360
<v Speaker 1>It's so one or a few of the suppliers have

0:10:47.480 --> 0:10:51.040
<v Speaker 1>to take that hit, and that depends on how substantial

0:10:51.120 --> 0:10:54.520
<v Speaker 1>that he will be. This is why I think a

0:10:54.559 --> 0:10:58.520
<v Speaker 1>lot of supplier of Apple usually when they have a

0:10:58.720 --> 0:11:02.680
<v Speaker 1>very efficial and operation in place, they want change white

0:11:02.679 --> 0:11:06.600
<v Speaker 1>bother to fix something already running. So well, that can

0:11:06.640 --> 0:11:10.000
<v Speaker 1>be an issue, and I'm sure Apple is aware of that.

0:11:10.160 --> 0:11:11.960
<v Speaker 1>So I guess what they would do is that I

0:11:12.080 --> 0:11:15.800
<v Speaker 1>really want to diversify, but they won't do with it

0:11:15.960 --> 0:11:19.880
<v Speaker 1>like drastically. They do it on a gradual manner, so

0:11:20.120 --> 0:11:24.360
<v Speaker 1>the incremental costs will become easier to manage. Our guest

0:11:24.440 --> 0:11:29.560
<v Speaker 1>has been Stevensung, senior analyst at Bloomberg Intelligence covering the

0:11:29.600 --> 0:11:33.880
<v Speaker 1>technology space. Steven, thanks for joining us. Thank you, Tom,

0:11:34.000 --> 0:11:36.360
<v Speaker 1>Thank you John, and I'm John Lee. Thank you for

0:11:36.440 --> 0:11:38.280
<v Speaker 1>listening to the AHA Centric podcast.