Apple’s Branching Out
Supply chains move fast - let’s get ahead! This week you’ll get two reports. Today we relocate Apple and deal with medical devices. Tomorrow we'll source yoga pants and sign a special gas deal.
Apple’s Woes and the Rise of Vietnam
Apple is reported to be accelerating its plans to reduce iPhone production in China - where could it go? India is already a production center. Vietnam could be another. All three have their challenges.
Apple is reportedly accelerating its plans to move some of its iPhone production out of China, as well as move some iPad production to India. That follows interruptions to production linked to COVID-19 policy-related protests and “closed-loop” manufacturing processes.
China has been dominant in mobile phone supply chains since the mid-2000s. The chart above shows its exporters' share has reached 69% of global exports in 2021, up from 42% in 2009. In the meantime, it has displaced production from Europe (remember the original Nokia and Ericsson phones?).
More recently there’s been a surge in exports from Vietnam, reaching 14% of exports in 2021. Vietnam has displaced exports from South Korea as Samsung and LG have moved production.
Exports from China have been in decline in the past two years. The chart above shows Chinese shipments on a seasonal basis. Exports in the normal peak month of November 2022 are 25% down from 2021, and 42% below 2017-2019 average levels.
A mixture of reduced demand for phones, which fell by 9% year over year in Q3’22 according to Canalys, reshoring strategies, and pandemic-related disruptions all likely played a part. Comments from Murata Manufacturing suggest a further decline in demand is underway.
Notably, iPhone assembler Foxconn reported an 11% drop in monthly revenues in November as a result of manufacturing being “impacted by the epidemic in Zhengzhou.” It remains to be seen whether the new relaxation of COVID testing and isolation rules will prevent future industrial disruptions.
India and Vietnam are potential alternative locations for iPhone production.
India has already become a major center of production as part of an in-market, for-market strategy supported by production-linked incentives from the government. Yet, thus far, exports have been small at just 2% of global exports in 2021. A customs-related hold-up in exports by Vivo from India shows starting up production for export is far from a simple matter.
Exports from India will likely increase, given Apple started production of its iPhone 14 in India earlier in the model’s life cycle than before. Shipping data indicates that exports from India linked to “iPhone” increased by 133% year over year in the three months to Oct. 31, 2022.
Apple already had 26 suppliers in Vietnam in fiscal 2022, compared to 50 in mainland China, 20 in Malaysia, and 11 in India. Products manufactured in Vietnam include the iPad, AirPod, and HomePod ranges. Additionally, Apple is also reportedly in the process of setting up Watch and MacBook manufacturing with Luxshare and Foxconn.
Vietnam has been a popular location for phone producers including Samsung and LG since the early 2010s. More recently, Chinese manufacturer Xiaomi has started building up its capacity in Vietnam.
Reshoring is not a panacea, with relocations only changing the nature and timing of risks rather than completely removing them. The chart above shows exports of mobile phones to the U.S. and EU from Vietnam on a monthly basis. In 2021 (blue line), peak shipments occurred two months later than normal due to COVID-19-related factory closures.
Those closures may be one of the reasons why Samsung is planning to cut back the share of its global phone production in Vietnam to 40% from 60%. Indeed, the firm has already started reshoring back to South Korea.
Technology - Dealing with Devices, Not Cars
The U.S.-EU Trade and Technology Council (TTC) did not reach firm agreements on EU concerns about the U.S. Inflation Reduction Act’s support for renewables and electric vehicles. There was, however, a commitment from the U.S. side to “address constructively” the EU concerns.
The next formal meeting is not until mid-2023. Ultimately, if an agreement regarding the IRA measures can’t be reached, then the EU has stated it may restructure state aid to help disincentivize companies from relocating to the U.S.
There were plenty of other areas of collaboration and progress. The two sides have committed to data sharing in semiconductors, including shared demand forecasting to avoid a future oversupply of chips (see below).
The EU and U.S. have also agreed to address “non-market policies” in China in the medical devices sector, specifically the deployment of government-controlled investment funds. The EU and U.S. will look to “foster supply chain diversification, build resilience to economic coercion, and reduce dependencies.”
As shown in the chart above the U.S. and EU dominated global exports of medical devices, including diagnostic and treatment machinery as well as implants and prosthetics. Total exports were worth $236B annually in 2021. The U.S. and EU combined had a 63% share vs. China’s 6%. Yet, Chinese exports have grown by 13% annually in the past five years versus 7% for EU exports and 3% for the U.S.
China’s semiconductor exports fell by 21% year over year in November in unit terms. The chart above shows that they were the lowest since February 2021. Imports meanwhile were down by 25% to the lowest since the start of the pandemic. The latter is consistent with the 30% decline, in dollar terms, in South Korean semiconductor exports.
Data from Taiwan shows exports of semiconductors fell by 3.4% year over year in November in dollar terms. That was the first decline on that basis since April 2019. Imports also fell by 17% to their lowest value since April 2021.
The downturn in demand has reportedly led GlobalFoundries to cut 6% of its staff, as part of plans to reduce costs by $200M in non-manufacturing roles.
TSMC has announced a $28B investment in new a 3nm semiconductor foundry in the U.S. The plant is not due online until 2026, illustrating the lengthy lead times needed to expand semiconductor capacity. The firm is also facing challenges, including staffing and construction bottlenecks, in starting up a previously announced $12B plant in the U.S.
The Dutch government will reportedly accede to U.S. requests to restrict the export of semiconductor manufacturing machinery to China. That may reverse comments from just a week ago, but follows the TTC meeting discussed above. A deal is set to be announced in January.
That’s it for now - join us tomorrow for more insights into consumer and industrial supply chains.
Disclaimer: This report is for information purposes only, not for legal, business, or financial decisions. It’s based on the latest available information on the publication date - that information may have changed by the time you read this report. Use it at your own risk.