In December last year, in Phoenix, Arizona, the world's leading semiconductor companies gathered together to congratulate TSMC's first batch of machine equipment in the US fab. In addition to old acquaintances such as Huang Jenxun, Su Zifeng and Cook, there are Micron, which makes memory chips, the CEO of lithography machine company ASML and MCU manufacturer Microchip.
In his remarks, Cook said that Apple will produce chips in the United States for the first time in nearly a decade, which is a key step in reducing its dependence on Asian manufacturing, "thanks to the efforts of so many people so that these chips can be proudly printed with American manufacturing." ”
When Jobs returned to Apple in 1998, they were still a super giant that designed, manufactured, and sold them. Then, Jobs invited supply chain master Cook, as the chief designer of Apple's supply chain, who handed over the production of products to OEM companies represented by Foxconn, focusing their main energy on R&D and sales.
In two decades, Apple has built a complex supply chain system that is closely related to China.
More than 95 percent of iPhones, AirPods, Macs and iPads are made in China, and the Chinese market accounts for more than 20 percent of Apple's revenue, with only the Mac Pro product line still produced in the United States.
As the line on the iPhone box: Designed by Apple in California, Assembled in China.
Apple is very good at diversifying risks with multiple suppliers, using two supplies to balance one supply. Since 2014, Apple has been thinking about carefully moving production lines to other countries to diversify risks. And after 2020, this process has accelerated considerably.
In 2020, someone has already bought a Vietnamese-assembled HomePod Mini; In September 2022, Foxconn's Indian factory began production of last year's latest iPhone 14, and in December, Foxconn invested an additional $500 million in its Indian subsidiary to expand production capacity.
At the same time, Foxconn's Vietnamese production area has passed the MacBook Pro production test, and may be officially mass-produced in May this year.
The Financial Times revealed in an article that the outbreak of the epidemic prompted Apple to accelerate the pace of supply chain shifts. Apple has a large team of engineers shuttling between its U.S. headquarters and suppliers in China, so much so that "Apple books 50 business classes from San Francisco to Shanghai every day."
But since 2020, Apple engineers have not been able to come to China.
Over the past decade, Apple and China have accomplished each other. Now, a migration operation directed by Apple, executed by suppliers and coordinated by India and Vietnam has begun. So, what is the role of Chinese suppliers?
What does Apple bring?
China provides Apple with much more than labor, but a rigorously complex system.
Apple isn't the first company to outsource production to China, but it's one of the most special: Almost all Apple foundries have a dedicated Apple Room, where Apple's on-site experts work.
Apple sends more than 100 on-site personnel to the foundry every year, covering all product-related departments such as materials, research and development, procurement, production management, and after-sales to ensure the timeliness of production. These resident experts all hold core positions in the factory and directly control the pace of production.
Specifically, GSM (Global Supply Chain Manager) usually leads the project according to the product demand plan, and the on-site team checks the production data on a daily basis, checks the authenticity and accuracy of the supplier's report, and fines the supplier if it is found to be fraudulent or intentional.
There is a rumor that in a foundry warehouse, there is often a problem of rats gnawing on double-sided tape. After Apple headquarters knew about it, it directly sent people from the United States to specially formulate a set of warehouse cat breeding programs, including the breed, age, quantity, procurement budget, procurement channels, work benefits, and even the performance appraisal of the cat and the cat's mentality to ensure that the cat can work in accordance with discipline.
This may be a joke, but it also accurately describes Apple's comprehensive monitoring of suppliers. At the same time, in order to meet the requirements of its own parts customization, Apple will require suppliers to purchase special equipment, build special production lines, and even directly provide equipment and technical guidance by Apple.
Apple doesn't have its own factories, but they spend about $10 billion a year on plants and equipment.
This special relationship has led to the rapid progress of Chinese suppliers.
On the iPhone 4, Apple used a technology called flexible circuit board (FPC), a printed circuit board made of soft materials that can be bent and folded, reducing the size and weight of electronic products. After the iPhone 4 was first applied, domestic Android mobile phones quickly popularized this technology.
In the iPhone X era, Apple cooperated with Luxshare Precision to realize folded FPC flexible board technology. A quarter later, Huawei, Honor, OPPO, vivo and Xiaomi signed new orders for FPC soft board technology with Luxshare Precision. In 2017, the iPhone X was released, and Luxshare Precision's revenue increased by 66% year-on-year.
For foundries, Apple is both the most senior technical guide and the most rigorous teacher. How strict is Apple with foundries? It requires that when the outside of the mobile phone box is grasped by hand, the inner box should slide off at a uniform speed.
The harsh environment has created technological progress and wealth growth for a large number of suppliers, most typically Foxconn. When Foxconn manufactured the iMac in 2000, its revenue was half that of Wistron, and a decade later, Foxconn's revenue exceeded that of its other five competitors combined. Apple's apprentices are widely distributed in the A-share electronics sector, covering every link such as machine assembly, acoustic module, WiFi module, data cable, glass cover plate, etc.
In the list of suppliers announced by Apple in 2021, a total of 25 are listed on the A-share market, they are the tip of the iceberg on the surface, are the super node of the supply chain, and 116 Apple concept stocks are involved, all over the upstream materials, equipment and other supply systems, with a total market value of more than 2 trillion yuan.
Today, no American tech company is as closely tied to China as Apple. But while Apple brings technology and jobs, it also takes something with it.
Apple can't copy, but Foxconn can
In 2008, Apple introduced CNC machining technology on the MacBook Pro, purchasing more than 10,000 production equipment in one go. Before 2019, the international drilling and attack machine market was dominated by Japan and Germany.
In 2020, a domestic company called Genesis entered the Apple industry chain and began to supply Lingyi Intelligent Manufacturing, Dongshan Precision and Changying Precision. In terms of product performance, Genesis and foreign-funded equipment are not much different; In terms of price and life, Genesis is about 220,000 yuan / unit, the replacement period is 5 years, and Fanuc is about 400,000 yuan / unit, with a service life of 6-7 years. On average, the annual cost of using FANUC is at least 30% higher than that of Genesis.
As a result, the inexpensive Genesis began to encroach on the orders of Japan's veteran dragon hair Nako and Frank on a large scale. In 2021, its net profit jumped 172%.
This alternation of old lords and new kings is played out every moment in the Apple system, the most typical example is Luxshare Precision. Wang Laichun used to be a female worker on Foxconn's assembly line, and after leaving Foxconn, she opened her own foundry, starting from Foxconn's outsourcing business, and then won Apple's favor.
Although Luxshare Precision's factory is full of Gou Taiming quotes, the latter can only watch Apple support Luxshare Precision and Pegatron to compete little by little. It is reported that this year Luxshare Precision will work with Foxconn to produce the iPhone 15 pro max, originally Apple's high-end models were only exclusively manufactured by Foxconn.
The Information reported that in 2018, Foxconn had discussed the early prototype of AirPods Pro with Apple, and actively invested in the renovation of the facility, hoping to advance trial production, but Apple turned around and gave the order to Luxshare Precision, which made Foxconn management linger.
BOE, which has entered the Apple industry chain as an OLED panel supplier, is also inseparable from its technological breakthroughs. A panel company executive once admitted in an interview that Apple will directly ask Samsung to teach some of its old technologies to BOE.
But the risks borne by suppliers are also huge: each Apple OEM basically has three characteristics of high capital expenditure, high debt, and high risk, and entering the Apple industry chain means that large-scale capital is needed to start building production lines and purchasing equipment. Moreover, Apple's customized equipment cannot be used for the OEM of other similar products. Once kicked out of the industrial chain, it will face huge asset impairment.
On the other hand, the supply chain of Chinese mainland has not entered the core supply sequence of major components. In the case of the iPhone 12 Pro, the value contributed by the Chinese mainland is only 4.7% [6].
Among the screen, SoC, lens components with the highest cost of the iPhone, only a few companies such as BOE, Haowei, and Sunny Optics can enter the supply chain, but they are not core suppliers.
Despite this, being part of Apple's supply chain is still a long-cherished dream of every OEM. According to Foxconn employees, because of Apple's secrecy regulations, Foxconn internally refers to iPhone models with luxury car brands, and the first-generation iPhone SE, iPhone 6S, iPhone 7 and iPhone X are referred to as Tesla, Aston Martin, Maserati and Ferrari, respectively.
Today, that 4.7% are also leaving China little by little.
At present, Foxconn has shipped the latest iPhone in India, Bourne Optics, Lens Technology and other parts suppliers have also gone to Vietnam to build factories, India-Vietnam tariffs are gradually expanding from electronic products to the upstream, catalyzing the transfer of more materials and equipment manufacturers.
JPMorgan expects Vietnam to produce the majority of AirPods, 20 percent of iPads and Apple Watches, and 5 percent of MacBooks by 2025.
"The low level of supply chains in Southeast Asia" is a common statement, but at present, the situation is not so optimistic.
NOT Assembled in China ？
In 2012, at Apple's behest, Goertek came to the Guivu Industrial Zone in Bac Ninh Province in northern Vietnam to build its first factory, and in 2019, Goertek opened a second factory in the same area.
Located just 33 kilometers from Hanoi and close to the international airport and port, the Guivu Industrial Park is known as "Little Dongguan" with its many factories. The first Samsung to land is like glue with the Vietnamese government, half of the world's Samsung mobile phones are shipped from Vietnam, Samsung is even about to produce semiconductor products in Vietnam. Canon also took root here, and the Guivu Industrial Zone naturally became the base of the apple industry chain in Vietnam.
In 2007, Foxconn entered Vietnam and has invested more than 10 billion yuan; In 2010, Yu Tong Technology went to Vietnam to set up Bac Ninh branch, and now has three factories in Vietnam; In 2016, Luxshare Precision established a subsidiary in Vietnam; In 2017, Lens Technology, Meiyingsen and Bourne Optics came to Vietnam to build factories; In 2020, the Vietnam factory co-organized by Lingyi Intelligent Manufacturing was also put into production.
Vietnam started from the AirPods product line, then produced Apple watch, gradually approached the core products, and now has become Foxconn's second largest production area in the world.
In the past few years, Vietnam has been a straw stack for exporters to avoid trade frictions. The driving distance from Shenzhen to Hanoi is only 1,200 kilometers, and before 2019, in order to avoid taxes, manufacturing companies shipped goods to Vietnam, changed packaging, labeled "Made in Vietnam", and imported them into the United States as Vietnamese products.
Subsequently, the United States imposed a 456% punitive tariff on a pile of steel products in Vietnam to block China's access. Vietnam urgently introduced new regulations, requiring products that are not fully locally manufactured to increase the local added value of 30% in Vietnam in order to be called "Made in Vietnam". Since then, Vietnam's exports have surpassed Shenzhen's.
The Indian factory has a similar growth logic.
In 2017, Foxconn began assembling old iPhones in India, and the production time was usually 6-9 months later than that of domestic production lines; In September 2022, India began to assemble the latest model iPhone 14, and the production line was only 2 months different from that in China; In December, Apple invested an additional $500 million in Foxconn in India to prepare for mass production of the iPhone 15, and the time gap will be reduced to several weeks again.
Also promoted is Pegatron's India factory, which expanded its workforce by 7,000 people in September last year and began production of the iPhone 14 in November.
One problem Apple encounters is that although the foundry has moved, the foundry's suppliers are still in China, and many second- and third-tier suppliers are only available in China.
But India has found a solution: in the past five years, India's tariffs on imported mobile phones have risen from 10% to 20%, and Xiaomi, Vivo, and OPPO have already set up factories in the Indian market to enter the Indian market. This high-tariff strategy has swept through almost all manufacturing sectors such as automobiles, home appliances, and furniture, and Musk has negotiated with the Modi government for two years in order to sell cars to Indians, but has not been able to negotiate lower tariffs.
Later, India's import protection spread upstream, and a 10% tariff began on products such as PCBs, camera modules and connectors. Taxing upstream actually forces the supply chain to shift together.
At the same time, Bloomberg revealed that the Indian government contacted 1,000 American companies within a month in order to attract foreign investment. India has also earmarked 460,000 hectares of land to host foreign companies withdrawn from China[5].
At the beginning of this year, the Vietnamese government can't wait to announce another good news: Foxconn plans to invest another $700 million in Vietnam this year, and the news that the MacBook Pro series will be produced in Vietnam is also spreading.
Some overseas market researchers have visited Vietnam and found that Chinese and foreign capital setting up factories in Vietnam is not using backward production capacity, but the latest technology, and environmental protection standards are even higher than domestic to prevent backward production capacity from being quickly eliminated. So, what if the locals don't use it?
Another news may answer this question, Apple is now asking major Chinese foundries to ship Chinese NPI engineers to Vietnam, train local college graduates, and solve NPI technical problems.
Set goals, give equipment, teach processes, promote production. Apple uses this method in China to create behemoths such as Luxshare, Lens and Goertek, which compete with foundries in Taiwan. Although the main body of transfer in India and Vietnam is still Chinese companies, it is difficult to say whether there will be local OEM giants in the future and start to compete with Chinese companies.
Given that Sabih Khan, Apple's current vice president of operations for global supply chains, is Indian, the trend is by no means impossible in the delicate 2019.
For the domestic supply chain, there is a sugar hanging in front of the policy, a knife against tariffs behind its back, and an Apple whistle directing action.
End
In 2010, in order to bring in Foxconn, Guo Gengmao, then governor of Henan Province, braved 35 degrees Celsius heat to wait for Gou for an hour at Xinzheng Airport. This station has exchanged an "iPhone City" and 300,000 jobs for Henan, and the GDP has increased by 124% in ten years, and the import and export volume has maintained the first place in central China for a long time.
Zhengzhou Foxconn is China's No. 1 export enterprise. Among the top 100 export companies, Foxconn occupies seven seats in different factories in the mainland, with Shenzhen factory ranking fourth, Chengdu factory ranking fifth, Taiyuan factory 18th, Yantai plant 43rd, Tianjin factory 57th and Wuhan factory 79th.
There is a lot of meaning behind Assembled in China, and in addition to the industry itself, it also brings a lot of taxes and jobs. While the cost of various factors is gradually rising, the breakthrough of high value-added links in the electronics industry is not smooth, and it has also encountered the encirclement and blockage of the United States.
The Financial Times interviewed 25 supply chain experts, including former Apple engineers, who said it would be difficult for Apple to divest its dependence on China's supply chain in the short term. But the problem is that the beginning of the process is a signal in itself.
Dell's latest plan is to ensure that all chips in its products are produced outside Chinese mainland by 2024 and move 50% of its computer production capacity out of Chinese mainland by the end of 2025.
The first dominoes are slowly falling on their backs.
Resources
[1] Foxconn is the "Whampoa Military Academy" in the IP industry, and even Google has sought it out to buy patents
[2] Gou and Foxconn, Xu Mingming
[3] Gou, can money solve all problems?
[4] How does Apple manage suppliers by doing "factory presence"?
[5] Modi Government's "Self-Sufficiency in India" Economic Initiative Review, Ning Shengnan
[6] Dismantling the iPhone 12: The proportion of Korean parts increased
[7] Foxconn factory sister gorgeous transformation! Luxshare Precision Wang Laichun topped the interface news 2022 female CEO list
[8] Inside Apple’s Eroding Partnership With Foxconn，The Information
Editor: Li Motian
Visual Design: Shurui
Responsible editor: Li Motian
Research support: Rui Liu