August 28, 2019 / 6:08 PM / 4 months ago

Apple's data shows a deepening dependence on China as Trump's tariffs loom

    By Stephen Nellis
    Aug 28 (Reuters) - Tapping factories in Brazil and India has
not lessened Apple Inc's dependence on China, the
company's supply chain data shows, raising the stakes for the
iPhone maker as U.S. President Donald Trump wages a trade war
and promises more tariffs. 
    Apple faces levies of 15% imposed by Trump's administration
on major products made in China such as smartwatches and
wireless headphones on Sept. 1, with a tariff on its biggest
seller, the iPhone, to take effect on Dec. 15.
    Few American firms are as tightly bound to Asia's largest
economy as Apple. Contract factories owned by Hon Hai Precision
Industry Co Ltd's Foxconn, Pegatron Corp,
Wistron Corp and others employ hundreds of thousands
of workers to assemble Apple devices.
    In recent years, Apple's contract manufacturers have
expanded into other countries. India, for example, had no Apple
contract manufacturer locations in 2015 but expanded to three
assembly facilities by 2019, including a factory owned by
Foxconn, which plans to make models from the iPhone X family of
devices, Reuters reported last year

    Apple taps the India operations to avoid steep import duties
on iPhones in one of the last fast-growing mobile phone markets
on the planet, similar to Apple and Foxconn's move to open a
production facility in Brazil in 2011.
    But the factories outside China are smaller and, in the case
of India and Brazil, Apple only uses them to meet domestic
demand. Apple's contract factories inside China, meanwhile, have
added far more locations than outside, with Foxconn alone
expanding from 19 locations in 2015 to 29 in 2019 and Pegatron
going from eight to 12, according to Apple's data. The new
locations come as Apple has added watches, smart speakers and
wireless headphones to its product lineup. (Graphic:
    And beyond the contract factories, the rest of Apple's
suppliers - the companies that sell it chips, glass, aluminum
casings, cables, circuit boards and much more - became more
concentrated in China. Among all supplier locations, 44.9% were
in China in 2015, a proportion that rose to 47.6% by 2019, the
data showed.
    Reuters analyzed five years' worth of supply chain data
published by Apple. The data includes more than 750 locations
each year between 2015 and 2019 for the California company's top
200 suppliers based on Apple's spending. Apple does not disclose
how much it spends with each, and the companies on the list can
change as different suppliers make the top-200 cutoff among
Apple's thousands of suppliers.
    Reuters sorted the data and calculated the overall portion
of Apple's supply chain in China. In a few cases each year,
Apple did not provide a specific address and Reuters excluded
that location.
    Apple declined to comment on Reuters' analysis. In July,
Chief Executive Tim Cook told investors on the company's
quarterly earnings call that he "wouldn't put a lot of stock
into" speculation about how the company would shift production
because of U.S. tariffs.
    "The vast majority of our products are kind of made
everywhere," Cook said on the call. "There is a significant
level of content in the United States, and a lot from Japan to
Korea to China, and the European Union also contributes a fair
amount. ... I think that will carry the day in the future as
    Apple faces hurdles in diversifying beyond China, where the
clustering of multiple suppliers allows it to make hundreds of
millions of devices per year while holding only a few days'
worth of inventory, which is critical to the free cash flow
Apple investors prize.
    Other phone makers ship far fewer units and have more
flexibility. Alphabet Inc’s Google is shifting its
Pixel smartphone production to Vietnam from China starting this
year as it builds a cheap supply chain in Southeast Asia, the
Nikkei business daily reported on Wednesday.
    But Apple's scale works against it because few other nations
have workforces as large as China. Factories require highly
skilled engineers to design and troubleshoot custom tools and
processes. Vietnam, where Apple has manufactured accessories for
years, has a population less than one-tenth the size of China.
    Even if Apple can make devices in India or Vietnam, the
volumes would be small compared with Apple's overall needs.
    Outside of China, "there few places in the world that have
the infrastructure to produce 600,000 phones a day," said Dave
Evans, chief executive of San Francisco supply chain firm
    Apple has so far been spared tariffs on major products,
winning a reprieve last year on many wireless devices. And Cook
has cultivated a close relationship with Trump over dinners and
private meetings at the White House.
    Apple has told trade officials that it generally believes
tariffs will result in higher prices for U.S. consumers but has
not said whether it plans to pass tariffs onto customers by
raising prices.
    For electronics products, where the circuit board is made
can sometimes determine the product's country of origin, said
George R. Tuttle III, a customs attorney who has worked with
electronics firms.
    That leaves open the possibility that device makers could
make circuit boards or other key components outside China while
still assembling devices there to avoid tariffs.
    Apple has disclosed no such plans. But the India unit of
Foxconn, which also performs work for HMD Global's Nokia-branded
phones and Xiaomi Corp in addition to Apple, has
developed the ability to make circuit boards in India, two
industry sources told Reuters last year
 Year  Percentage of Apple supplier locations in China
 2015  44.9%
 2016  45.1%
 2017  46.0%
 2018  47.6%
 2019  47.6%

 (Reporting by Stephen Nellis in San Francisco and Ally J.
Levine and Sirui Zhu in New York; Editing by Greg Mitchell and
Lisa Shumaker)
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