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Apple's Tech Supply Chain Demonstrates Difficulties In Reducing Reliance On China

Apple's Tech Supply Chain Demonstrates Difficulties In Reducing Reliance On China
In recent years, American businesses have had an increasing number of reasons to reduce their ties with China. Tariffs imposed by former President Donald Trump Beijing's Covid lockdowns are severe. The Sino-American standoff over Taiwan. Political pressure to "friend-shore" supply chains to countries that support Washington.
But, as the saying goes, breaking up is difficult.
A Bloomberg Intelligence analysis of Apple Inc., which is attempting to reduce its reliance on China, supports this conclusion. In an unusual move for new models, the Cupertino, California-based company has already begun producing some iPhone 14 models in India. And Foxconn Technology Group, Apple's largest supplier, recently agreed to a $300 million expansion of its production facilities in Vietnam.
However, Bloomberg Intelligence estimates that moving just 10per cent of Apple's production capacity out of China, where roughly 98per cent of the company's iPhones are manufactured, would take about eight years. Hundreds of local component suppliers, not to mention modern and efficient transportation, communication, and power supplies, make it especially difficult to leave the world's second-largest economy.
“With China accounting for 70per cent of global smartphone manufacturing and leading Chinese vendors accounting for nearly half of global shipments, the region has a well-developed supply chain, which will be tough to replicate -- and one Apple could lose access to if it moves,” BI’s report from analysts Steven Tseng and Woo Jin Ho said.
It's one thing to look for other manufacturers of toys and t-shirts outside of China. However, US technology firms spent more than two decades and tens of billions of dollars building complex supply chains to meet the demands of the e-commerce boom. Untangling those ties could take just as long, causing long-term damage to an already battered global economy.
Unexpected events, such as Europe and America's breakup with Russia, serve as a stark reminder of both the systemic risks of deep economic integration and the speed with which decoupling can occur.
Political forces in the United States have been steadily working against US-Chinese integration. Following commercial tensions under Trump that resulted in tariffs on a total of $360 billion in bilateral goods, as well as US sanctions on key Chinese technology manufacturers like Huawei Technologies Co Ltd, the $615 billion US-China trade relationship has simmered into a cold war under President Joe Biden.
The pandemic then ushered in President Xi Jinping's strict virus-containment policies, which essentially prohibited travel and locked down major areas for extended periods of time. Rising tensions between the United States and Taiwan, as well as China's unprecedented scale of military exercises in the Taiwan Strait, have become the latest flashpoint offering a case for decoupling.
“There was some momentum in this direction as a consequence of the trade war and the pandemic,” Scott Kennedy, a senior adviser at the Washington-based Center for Strategic and International Studies, said about decoupling. “The Shanghai lockdown was really a monster accelerant. And the cross-strait crisis in early August added more fuel to the fire.”
However, according to the data, the Biden administration's reshoring strategy – or "friend-shoring," as US Treasury Secretary Janet Yellen refers to it – remains a lofty but unfulfilled ambition.
According to data compiled by China's commerce ministry, US firms had $90 billion directly invested in China at the end of 2020, and added another $2.5 billion in 2021, despite all the talk of decoupling. Analysts believe that some businesses route some investments through Hong Kong or tax havens like the Cayman and Virgin Islands, so the actual total is likely to be higher.
US technology supply chains in China rely on firms from Taiwan and elsewhere, as well as domestic Chinese firms, increasing the level of reliance even more.
Furthermore, Yellen's "friend-shoring" concept hasn't swayed America's allies. Singapore and other key US allies warned the Biden administration that isolating China could destabilize the global economy and potentially "sleepwalk" the world's largest economies into a dangerous conflict.
“Such actions shut off avenues for regional growth and cooperation, deepen divisions between countries and may precipitate the very conflicts that we all hope to avoid,” Singapore’s Prime Minister Lee Hsien Loong said following Biden’s visit to the region in May.
That's not to say that untangling the tech supply chains that connect the US and China isn't already underway. According to a Goldman Sachs Group Inc. report released on September 23, the share of US tech imports coming directly from China has decreased by 10 percentage points since 2017, owing primarily to "moderating China mobile phone exports."
Apple's exposure to China is also significantly greater than that of many others. Inc., HP Inc., Microsoft Corp., Cisco Systems Inc., and Dell Technologies Inc. all rely on China for server, storage, and networking hardware, but their reliance is far less than Apple's.
According to Bloomberg Intelligence, overall tech-industry reliance could be reduced by 20per cent-40per cent "in most cases" by 2030. According to BI, hardware and electronic manufacturers could reduce their reliance on the Chinese market by 20per cent-30per cent over the next decade.
The Biden administration is taking a two-pronged approach to severing economic ties with China, incentivizing companies to shift production through subsidies while penalizing investment in China through tariffs and export controls.
This summer, Biden signed the Chips and Science Act and the Inflation Reduction Act, both of which include provisions to help boost domestic manufacturing of strategic goods such as semiconductors, electric vehicles, batteries, and pharmaceuticals.
For ten years, companies that receive the program's $52.7 billion in federal funding are prohibited from materially expanding production of chips more advanced than 28 nanometers in China – or a country of concern such as Russia.
Also this year, the US administration tightened restrictions on the export of US semiconductors to China by requiring new licenses to sell chip-making equipment to factories producing 14-nanometer or more advanced chips.
US industry officials are preparing contingency plans in case more barriers to US-China trade are erected, and the Biden administration is expected to impose a slew of new export restrictions this fall.
While a political reset between Biden and Xi on the sidelines of the upcoming Group of 20 leaders summit in Bali is possible, expectations for a grand détente remain low.
“I don’t see any breakthroughs coming out of the Xi-Biden meeting,” said Wendy Cutler, a former US trade negotiator and vice president at the Asia Society Policy Institute.
Meanwhile, sentiment in the private sector has deteriorated.
According to a recent US-China Business Council survey, US firms' optimism about China has already reached a new low, and evolving challenges, such as China's Covid Zero policy, power outages, and geopolitical tensions, have caused more than half of surveyed companies to postpone or cancel planned investments in China.
Almost a quarter of those polled said they had moved parts of their supply chains out of China in the last year.
However, it is not an exodus from China. A common strategy is "China Plus One," in which China remains the primary production base and any additional capacity is added in South and Southeast Asian countries such as India, Vietnam, Malaysia, Thailand, and Indonesia.
Last year, US companies committed to investing approximately $740 million in Vietnam, the most since 2017 and more than doubling the amount in 2020.
Taiwan is still an important but vulnerable component of US supply chains. The island currently manufactures more than 90per cent of the world's most advanced chips used for military and corporate computing services, led by Taiwan Semiconductor Manufacturing Co. Ltd. Apple, MediaTek, and Qualcomm, which control more than 85per cent of the global handset chip market, are all dependent on TSMC for supply.
According to Bloomberg Intelligence, Taiwan will continue to be a key manufacturing hub for cutting-edge chips over the next five years.
China's brisk market highlights the opportunity cost for US suppliers. According to Bloomberg data, 19 of the world's 20 fastest-growing chip industry firms over the last four quarters have been based in China.

Christopher J. Mitchell

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