How the mass shutdown of the world's largest iPhone factory presents a huge opportunity for India to overtake China as Apple's preferred supplier

How the mass shutdown of the world’s largest iPhone factory presents a huge opportunity for India to overtake China as Apple’s preferred supplier

Late last month, videos started going viral on the internet show up Thousands of people drag their bags along city streets and highways in Zhengzhou, China.

They were workers from Foxconn Technology Group – the world’s largest electronics manufacturer – who had escaped from the company’s compound. scaling some barbed wire fences for escape; others walked 25 miles to get home.

A few days after the exodus, China closed the industrial zone where Foxconn’s facilities in Zhengzhou are located, known as iPhone City. This led to the isolation of 200,000 facility workers, who were previously required to work within a “closed-loop” system due to the COVID outbreak, as they sleep, live and work in a designated area cut off from the outside world. Closed-loop system left Foxconn workers exposed for the virus And the lacking The basic necessities that drove them to flee.

This isn’t the first shutdown at a Foxconn plant. Foxconn facilities across China have suffered production hits several times this year due to government imposition closures And the closed loop systems. As a result of the recent turmoil in Zhengzhou, including both the shutdown itself and earlier worker flight, production at Apple’s favorite iPhone factory has fallen to a “significant reduction in capacity,” the Cupertino-based company. He confessed On a note last week.

For nearly three years, companies like Apple have worked in uncertainty about not knowing when and where the next shutdown – and for how long – due to Beijing’s tough policy. Zero COVID Operation ManualThis underscores the dangers of over-reliance on Chinese factories.

Uncertainties about the shutdown, combined with heightened trade tensions between China and the United States, have prompted Apple to accelerate its search for new manufacturing hubs. India has emerged as one clear winner, with some analysts betting that the world’s third-largest economy is on a fast track to becoming one of Apple’s preferred suppliers.

Unpredictability

Beijing’s relentless pursuit of the novel coronavirus has locked people up in shopping malls and office buildings, in Factory floorseven in Disneyland. China’s virus containment measures, which are among the toughest in the world, are done fuel Anxiety, depression and trauma.

For global companies operating in China, the government’s virus containment strategy has translated into major disruptions to production and sales.

Shanghai’s harsh 60-day spring shutdown pushed Starbucks sales in China plunge 40% in that quarter Tesla Delivered 18% less cars in the same period compared to the previous quarter. During the spring and summer, Apple lost 4 billion dollars In forecast sales of iPad and Mac alone. As a result of the virus containment measures in China – which do not show the end On the horizon – business sentiment has plummeted. Just 55% of companies A poll conducted by the Shanghai American Chamber of Commerce in October said they are optimistic about their five-year business outlook in China. It was the lowest reading in the survey’s 23-year history.

China’s commitment to zero COVID-19, along with heightened trade tensions between China and the United States, has made it difficult for companies to “rely solely on Chinese suppliers of product,” said Patrick Benfield, professor of supply chain practice at Syracuse University. luck.

“Many multinational companies in China are struggling to maintain production, receive supplies, and meet demand,” he said.

Edith Terry, managing director of Cotton Tree Advisors, a consultancy that focuses on business and public affairs in East Asia, said the mass flight of Foxconn workers and the subsequent shutdown in Zhengzhou only reinforce the “severity” of China’s virus containment strategy. luck.

The consequences of China’s no-COVID policy are “a huge blow to Apple in its most important holiday quarter,” said Dan Ives, managing director at investment firm Wedbush Securities, chirp last week. “We estimate that this will negatively affect approximately 3% of iPhone sales this quarter based on … China production [and] Supply issues. Albatross continues in China.

Zhengzhou is an important location for the production of Apple’s iPhone, especially its latest models. iPhone production may slow down as much as 30% Due to recent events – unwelcome news for the electronics giant ahead of the festive season. Apple said Sunday that it will produce fewer iPhones and shipments will be delayed. Unpredictability in Chinese supply chains has created stark suspicions for companies like Apple that “rely on a steady supply of goods from China,” said Chris Tang, a UCLA distinguished professor of business. luck.

For this reason, Apple has no choice now [but] to diversify its supply base.

He added that this rule is moving to emerging markets such as India and Southeast Asian countries.

Once in a lifetime opportunity

In recent years, India has dealt with multinational companies with Goal To become the world’s largest electronics and smartphone manufacturing center. In June 2020, it announced a $6.6 billion incentive plan to attract global companies to produce its electronics in India.

The Modi government has recognized that the current moment is a “once in a lifetime opportunity” to influence global companies as the COVID-free China strategy shakes up their supply chains, Akshobh Giridhardas, advisor at the US-India Strategic Partnership Forum, business advocacy group, Tell luck. “India has a limited time – and [Narendra Modi] realizes that. The government is pursuing rapid policies that will give India an advantage as companies increasingly diversify their supply chains,” he said.

Tarun Pathak, Director of Research at Smartphone-focused advisory firm Counterpoint Research, said India’s strong support for smartphone manufacturing, along with a large workforce of skilled and young professionals, is motivating the world’s mobile makers to ramp up production in the country. luck. One of the main selling points that distinguishes India from other emerging markets is the sheer size of the market.

“Foxconn moving production from China to India is also about approaching a high-growth market, rather than, say, following the US policy of containing China,” Terry said. Pathak said Apple also wants to dominate India’s fast-growing high-end smartphone market, which is expected to reach 10% next year from 7%.

Now, experts say, India is fast becoming a preferred hub for the Apple factory at the expense of China.

In September this year, Apple began manufacturing iPhone 14s at a factory outside Chennai – the first time ever that the Cupertino-based company had been producing its latest smartphone in India, marking a major shift in its manufacturing strategy.

After Zhengzhou’s recent shutdown, Apple asked a second supplier – Taiwan’s Pegatron – to start rolling out its latest iPhone model in Tamil Nadu, according to Bloomberg Report. Foxconn now plans to quadruple its workforce in India in the next two years to 70,000, says A Reuters report.

Analysts are now expecting a bigger and faster-than-expected shift in iPhone production to India. In September, JPMorgan analysts predicted that India could produce 5% of Apple’s iPhone 14 stock and 25% within three years. Ming-Chi Kuo, a specialist Apple technology analyst at TF International Securities in Hong Kong, He said last week Zhengzhou’s shutdown has prompted Foxconn and Apple to speed up iPhone production in India. ko expect iPhones made in India – still Foxconn – will grow at least 150% next year.

Kuo suggests that “Foxconn’s medium to long-term goal is to ship 40% to 45% of iPhones from India, versus 2% to 4% currently, which means Foxconn’s iPhone production capacity in India will increase rapidly in the next few years.” .

Pathak believes that Apple “could expand into India” as iPhone production in the country is likely to double next year. But he argues that India’s contribution to half of total iPhone assembly worldwide is an “ambitious” target given China’s still huge role in the iPhone supply chain and stiff competition from other emerging markets.

Apple is not alone in diversifying its production to India. competitors like Samsung, xiaomiAnd the The Google (who makes the Pixel smartphone), as well the shift production to India. From 2021 to 2022, India’s smartphone production increased by 126%, making the country the second largest smartphone manufacturer in the world after China.

Gunjan Bagla, managing director of Amrit Business Consulting and a business professor at Arizona State University, said companies such as “Apple, Abbott, Boeing-Tata, Flex, Pratt & Whitney…are just the beginning of this wave” of multinationals moving into the country. India luck.

However, India needs to build the infrastructure and talent that these companies need. Paul Hong, distinguished professor of global supply chain management at the University of Toledo, said China continues to offer efficient, high-value manufacturing networks that Apple and other multinationals will find difficult to replace in India. luck. India imports the bulk of iPhone components from China. “For Apple, complete separation from China [is] Hong said. Instead, companies are now pursuing a “China plus one” strategy that sees them maintain operations in China but diversify supply chains to India and rival economies such as Vietnam and Mexico, Bagla said.

Chinese authorities have now lifted the lockdown in Zhengzhou, but the Foxconn complex remains Under a strict closed-loop system, where company and government officials give no indication of when it will expire.

Giridhardas argues that India will continue with its mission to benefit from the pain of a coronavirus-free China.

“India is just getting started.”

This story originally appeared on Fortune.com

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