When Geopolitics Pull Supply Chains Apart
- By Stefan Hammond
- December 05, 2022
In 2011, former U.S. Vice President Al Gore appeared onstage in Hong Kong, in a one-on-one interview with tech journalist Walt Mossberg. At the time, Gore was on Apple's board of directors, so Mossberg asked him about the line of CEO succession and who he'd like to see succeed Steve Jobs as head of Apple.
Gore replied that as Apple had several qualified candidates, it was a non-issue. In the event, Cupertino chose Tim Cook — widely considered to be a supply chain guru.
As Apple shrouds their new hardware releases in secrecy, the manufacturing and shipping process is an artful torture test of any supply chain. Working backwards: stacks of quality-tested units on retail shelves must be shipped in confidence — after a complex manufacturing process that involves multiple hardware sources and includes rare earth minerals.
Considering the complexity involved, Apple has done well to keep the torrent of shiny tech gear flowing smoothly under Cook, who (as Gore prophesied) was and is qualified for the top-level position.
But geopolitics are never stagnant, and recent disruptions have caused the topography of all supply chains to twist like a rollercoaster. Let's examine some of the challenges faced by smartphone manufacturers, whose products are typically supply-chain-dependent.
Locking down the chains
An ideal manufacturing location boasts a reasonably priced workforce capable of being trained in the requisite tasks, infrastructure up to the task, and a degree of political stability. If these are imperiled, clients may cast a wandering eye elsewhere.
But real-world manufacturing invokes realpolitik. In an ideal world, supply chains would enjoy a diversity of locations. But manufacturing logistics typically depend on the end product.
Let's look at a classic example of low-cost manufacturing driving a supply chain: the maquiladoras. This Spanish word describes “a company that allows factories to be largely duty free and tariff-free—these factories take raw materials and assemble, manufacture, or process them and export the finished product.”
Cupertino's cornucopia: well packaged devices to retail outlets throughout the world
According to Wikipedia, maquiladoras “are present throughout Latin America, including Mexico, Paraguay, Nicaragua, and El Salvador” and “date back to 1964, when the Mexican government introduced the Programa de Industrialización Fronteriza ('Border Industrialization Program').” An entry from Merriam-Webster describes a maquiladora in starker terms: “A foreign-owned factory in Mexico at which imported parts are assembled by lower-paid workers into products for export.”
Sounds like a good working arrangement, so what happened? In a word: globalization. Wikipedia: “In the 2000s, the [maquiladora] industry faced competition due to rise of other countries with availability of cheap labor, including Malaysia, India, and Pakistan.”
Unsurprisingly: “The biggest threat came from China's Special Economic Areas.”
Which leads us to iPhone City.
Apple and Foxconn
Supply chain watchers need no introduction to Foxconn, described by Wikipedia as the: “World's largest technology manufacturer and service provider…while headquartered in Taiwan, the company is the largest private employer in the People's Republic of China and one of the largest employers worldwide.”
According to a 2018 article in Business Insider India, Foxconn's facility in Zhengzhou “employs approximately 350,000 people and produces about half of the world's iPhones.” Thus the moniker: “iPhone City.”
Recent disruptions have caused the topography of all supply chains to twist like a rollercoaster
When it's operating at full capacity, iPhone City is an integral cog in Apple's supply chain. Cupertino's cornucopia feeds a deluge of well packaged devices to retail outlets throughout the world, making Apple one of the world's most-valued corporations.
But recent events have clouded the portal to iPhone City.
Locking it all down
“Zhengzhou, colloquially known as iPhone City thanks to being home to the world’s largest iPhone assembly plant, was placed into lockdown last week,” said a late-November article on 9to5mac.com.
“In an attempt to reduce the economic impact of lockdowns, large factories are allowed to remain open by switching to closed-loop production, where workers remain in the campus 24/7 for up to a month at a time, sleeping in shared dormitories,” said the article. Obviously, this does not make for a pleasant working environment, and “Foxconn more than tripled iPhone worker bonuses” as an emergency employee retention measure.
In late October, the Wall Street Journal reported that: “Foxconn Technology Group is scrambling to contain a weeks-long Covid-19 outbreak at an iPhone factory in central China, trying to appease frightened and frustrated workers during a crucial period for smartphone orders.”)
“In Foxconn’s main Zhengzhou facility, the world’s biggest assembly site for Apple Inc.’s iPhones, hundreds of thousands of workers have been placed under a closed-loop system for almost two weeks,” said the Journal.
No one could have predicted COVID-19 or the effects of China's ongoing policies on manufacture of value-added electronic devices, but the ongoing effects seem clear: those dependent on supply chains will diversify locations given enough motivation.
New horizons
Consequences? “Apple began assembling some of its devices in India and Vietnam a few years ago, slowly cutting its reliance on China,” said an article on TechCrunch. “In a report they sent to clients, JP Morgan analysts said Apple will move 5% of global iPhone 14 production to India by late 2022, and expand its manufacturing capacity in the country to produce 25% of all iPhones by 2025.”
It's not unilateral. “Apple-rival Samsung identifies India as a key global manufacturing hub and has set up one of its largest factories in the country,” said TechCrunch. “Chinese smartphone maker Xiaomi, which currently leads the market, as well as its rivals Oppo, Vivo and OnePlus also locally assemble a number of their handsets in the country.”
But there are caveats. “Indian authorities...seized USD725 million from Chinese smartphone company Xiaomi, accusing it of breaking the country’s foreign exchange laws by making illegal remittances abroad, officials said,” reported AP in April 2022. “The Enforcement Directorate, India’s financial investigation agency, tweeted that it had seized the amount from Xiaomi’s local unit.”
The search for new horizons never ends. “Major names including Samsung, Xiaomi, Oppo, and a handful of other brands are already producing smartphones [in Pakistan],” said an article on propakistani.pk.
“But now Apple, one of the biggest phone makers in the world, may be coming to Pakistan as well. Javed Afridi, the CEO of Haier and Chairman of Peshawar Zalmi has said that he is already in touch with Apple regarding local production in Pakistan.”
“That being said, there is no confirmation from Apple so far, so don’t place your bets just yet.”
Stefan Hammond is a contributing editor to CDOTrends. Best practices, the IoT, payment gateways, robotics, and the ongoing battle against cyberpirates pique his interest. You can reach him at [email protected].
Image credit: iStockphoto/summerphotos