How China increased its influence on the iPhone



This fall, Apple will manufacture some of its flagship iPhones outside of China for the first time, a small but significant change for a company that has built one of the most sophisticated supply chains in the world with the help of Chinese authorities. But the development of the iPhone 14, which was unveiled on Wednesday, shows how complicated it will be for Apple to truly disentangle itself from China.

More than ever, Apple’s Chinese employees and suppliers provided intricate work and sophisticated components for the 15th year of its flagship device, including aspects of manufacturing design, speakers and batteries, according to four people familiar with new operations and analysts. As a result, the iPhone has gone from a product designed in California and made in China to a creation of both countries.

The critical work provided by China reflects the country’s progress over the past decade and a new level of involvement of Chinese engineers in the development of iPhones. After the country lured corporations into its factories with legions of cheap workers and unrivaled production capacity, its engineers and suppliers moved up the supply chain to claim a bigger share of the money than corporations. Americans spend to create high-tech gadgets.

The increased responsibilities China has taken on for the iPhone could challenge Apple’s efforts to reduce its reliance on the country, a goal that has taken on added urgency amid growing geopolitical tensions over Taiwan. and simmering concerns in Washington about China’s rise as a tech competitor.

Chinese companies operating in India will always play a key role in Apple’s plan to manufacture iPhones in the country. In Chennai, India, Taiwanese supplier Foxconn, which already manufactures iPhones in factories across China, will lead the assembly of the device by Indian workers with support from neighboring Chinese suppliers, including Lingyi iTech, which owns subsidiaries to supply chargers and other components for iPhones, according to two people familiar with the plans. China’s BYD is also setting up glass-cutting operations for displays, these people said.

“They want to diversify, but it’s a tough road,” said Gene Munster, managing partner of Loup Ventures, a technology research firm. “They are so dependent on China.”

Apple declined to comment. Foxconn, BYD and Lingyi iTech did not respond to requests for comment.

The Covid-related disruptions have exacerbated Apple’s predicament. When China closed its borders in 2020, Apple was forced to overhaul its operations and abandon its practice of sending hordes of California-based engineers to China to design the assembly process for flagship iPhones.

Apple declined to comment. Foxconn, BYD and Lingyi iTech did not respond to requests for comment.

The Covid-related disruptions have exacerbated Apple’s predicament. When China closed its borders in 2020, Apple was forced to overhaul its operations and abandon its practice of sending hordes of California-based engineers to China to design the assembly process for flagship iPhones.

Instead of subjecting staff to lengthy quarantines, Apple has begun empowering and hiring more Chinese engineers in Shenzhen and Shanghai to lead the critical design elements of its best-selling product, according to the four people familiar with the operations.

The company’s manufacturing and product design teams began hosting late-night video calls with their counterparts in Asia. After travel resumed, Apple tried to encourage its staff to return to China by offering a stipend of $1,000 a day during the two weeks of quarantine and four weeks of work, the people said. Although the payout could be as high as $50,000, many engineers were hesitant to go due to uncertainty about how long they would be quarantined.

In the absence of travel, the company encouraged staff in Asia to lead meetings that colleagues in California once led, these people said. The staff also took responsibility for selecting some Asian suppliers of future iPhone parts.

The company is now increasingly turning to China to provide well-paid workers to do this work, these people said. This year, Apple posted 50% more jobs in China than in all of 2020, according to GlobalData, which tracks tech hiring trends. Many of these new recruits are Western-educated Chinese citizens, the people said.

The change in the way Apple operates has coincided with an increase in the number of Chinese suppliers it uses. A little over a decade ago, China brought little value to the production of an iPhone. It mainly supplied the low-wage workers assembling the device with components shipped from the United States, Japan and South Korea. According to a study by Yuqing Xing, an economics professor at the National Institute of Policy Studies in Tokyo, labor accounted for about $6, or 3.6 percent, of the iPhone’s value.

Gradually, China developed local suppliers which began to supplant Apple’s suppliers around the world. Chinese companies have started making speakers, cutting glass, supplying batteries and manufacturing camera modules. Its suppliers now account for more than 25% of an iPhone’s value, according to Xing.

The gains illustrate how China has extended its mastery of the smartphone supply chain, said Dan Wang, an analyst at Gavekal Dragonomics, an independent economic research firm. “This trend is not slowing down,” he said.

For most of the pandemic, China has rewarded Apple’s reliance on the country for manufacturing. Its steady production – even as other countries shut down for periods in 2020 and 2021 – has helped Apple increase its smartphone market share and sell its largest number of iPhones, analysts say, a remarkable achievement for a decades-old electronic device that has evolved from offering breakthrough innovations to incremental improvements.

This year, analysts expect Apple to release four iPhones with smaller notches for its Face ID feature than previous models. It’s unveiling the phones a week earlier than usual, which could boost current quarter revenue by adding a week of sales. It is also expected to increase the price of its iPhone 14 Pro models from $100 to over $1,600 to offset higher costs for some components.

Apple expects the iPhone 14 to build on the success of years past. As other smartphone makers cut production as the global economy slumps, Apple has called on suppliers to make more phones than they did a year ago, according to Susquehanna International Group, a financial firm.

The rise in manufacturing orders speaks to the resilience of affluent Apple customers, whose deep pockets allow them to buy high-priced smartphones despite rising inflation and the economic downturn.

“There is a huge wealth gap in consumer spending in the smartphone industry,” said Wayne Lam, technology analyst at CCS Insight. “Apple is safe compared to the competition.”

When media and employees gather at company headquarters in Cupertino, Calif., on Wednesday for the product debut, Apple will emphasize the phone’s capabilities — not how it’s made. The only signs of this process changing will be seen in flights to and from nearby San Francisco International Airport.

Apple once spent $150 million a year flying with United Airlines, according to a United promotional banner. Former employees recall that before the pandemic, they boarded flights to Shanghai and Hong Kong in which business class seats were occupied by people who worked at Apple.

Now, United no longer offers nonstop flights from San Francisco to Hong Kong. It flies direct to Shanghai four days a week.


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