Apple considering a Chinese exit amid international tensions

It seems Apple does not consider itself immune from collateral damage, as whispers about a China exit are becoming louder and more plentiful.

For China, and those Chinese citizens who are dependent on Apple for their livelihood, the news will come as a shock, but this is a development which some have been expected for a while. According to the Nikkei Asian Review, Apple is considering moving 15-30% of its production capacity out of China.

This is a trend which we are starting to see pretty much everywhere. Supply chain management is a very difficult aspect of an international business, and while it might have looked attractive to take advantage of cheap labour in developing markets during yesteryear, it seems a concentration of operations is getting Apple executives twitchy today.

The quoted sources are suggesting diversification of the supply chain is a sensible way to manage some tensions floating back and forth across the Pacific Ocean.

In terms of the clues this development was on the horizon, it is worth looking back a couple of weeks. Foxconn executives have already said 25% of production is already located outside of China, and there is enough capacity to meet the demands of Apple as a customer should tensions have a negative impact on the Apple business. This appeared to be a largely unprompted statement, but perhaps the conversations were already happening behind closed doors.

What is also worth noting is that Foxconn certainly has some incentive to bend to the will of Apple executives; if it doesn’t have the capacity, a smart idea might be to spend some cash buying a company outside of China sharpish. Although not confirmed, Apple supposedly accounts for roughly half of Foxconn total revenues. If Apple wants to move production capacity out of China, Foxconn should quickly learn the moves to the new dance.

For the Chinese employees in the supply chain, this will be a very worrying time. Five million workers rely on Apple’s presence in the country, with Apple only employing 10,000 directly. Interestingly enough, there are now more named suppliers in China than in the US (41 Chinese firms vs. 37 US suppliers). What is worth noting is that China will remain the centre of Apple’s supply chain for the foreseeable future; shifting such a complex and monstrous operation would take a considerable amount of time, investment and planning.

Other countries would of course want to woo Apple, but China is a very attractive base for the iLeader. Not only does it have the necessary infrastructure, it has the skilled workers in place. 90% of Apple’s products are currently manufactured in China and replicating this successful operation will not easily be done elsewhere.

Although this would be a precautionary move from Apple, the threat is genuine. Huawei and ZTE have already shown there are heavy consequences if supply chains are too concentrated in a single market, and due to the aggressive actions of the White House it would surprise few to see retaliation from the Chinese Government.

On the supply chain side of things, Apple has been making other efforts to shift around operations. The firm has been working to move the production of some premium handsets to India in an effort to avoid the 20% import duties in the country. Apple has continued to struggle in India, partly due to the price conscious nature of consumers. Anything which can be done to reduce the price of handsets will be explored to improve market share.

Whatever your thoughts of President Donald Trump, you cannot argue the Oval Office is having a much more profound impact on the technology industry than previous administrations. Perhaps his actions will lead the Chinese semiconductor market grow, while the manufacturing and assembly operations will be spread into other Asian markets. Another couple of years and the segment could almost look unrecognisable.

US Democratic candidates told Huawei and ZTE are a no-no

Democratic National Committee (DNC) has warned candidates against using devices manufactured by either ZTE or Huawei due to the threat the pair pose to US national security.

With tensions on the rise between the US and China, both Huawei and ZTE are remaining under the spotlight. Some might suggest there is a genuine threat to national security, while others might believe escalating the Chinese menace is a useful way to distract from domestic debacles, though the reason is irrelevant. With each passing week there is another example of Huawei and ZTE disappearing in the US.

The report comes via Reuters, with a source stating Bob Lord, the Chief Security Officer for the DNC, sending an email to all candidates warning of the threat.

“Please make sure that you are not using or purchasing ZTE or Huawei devices anywhere within your staff – for personal or work-related use,” the email stated.

Although the anti-Chinese rhetoric has been common throughout the last few months, it has largely been restricted to government proclamations. With the opposition now jumping the boo-China bandwagon, the sentiment could become much more common through US society. It is also one of the first example where an official has ventured into the personal lives of employees, instead of just limiting the warning to work-related activities. It might not be too long before the prejudice rubs off on the man-on-the-street.

The apparent threat is due to the proximity of the two organizations to the Chinese government, thus escalating the prospect of espionage through devices and network equipment. Government influence in ZTE is quite apparent, Shenzhen Zhongxingxin Telecommunications Equipment, a Chinese state-owned corporation, is the controlling shareholder of ZTE, though Huawei is a bit more nuanced. Huawei founder Ren Zhengfei previously worked as a military technologist for the People’s Liberation Army, though Huawei is an employee owned organization with little-proved government intervention.

This is of course just another example of the US turning against the Chinese. ZTE is still on thin ice following the ban from using any US components or IP in its supply chain, both Huawei and ZTE have been banned from being sold on military sites, while distribution deals with US telcos also disintegrated due to political pressure. Both have also been banned from selling any networking equipment to any government agencies or departments.

The cards are beginning to stack up, and it is starting to look very feasible both could be banned from US shores completely before too long on the grounds of national security. It does seem Huawei has the same hunch as it was reported in April the vendor was working on its own alternative operating system to Android. Complications with its relationship with Google could mean the millions of Huawei devices around the world are regulated to door-stops.