At the end of last month, videos began to circulate on the Internet that showed thousands of people dragging suitcases along the streets and highways of Zhengzhou, China.
They were workers from Foxconn Technology Group – the world’s largest electronics manufacturer – who were fleeing the company’s premises. Some scale barbed wire fences to escape; others walked 25 miles to get home.
Days after the mass exodus, China closed the industrial park that houses Foxconn’s Zhengzhou facility, known as “iPhone City.” This further isolated the facility’s 200,000 workers, who were previously required to work in a “closed-loop” system due to the COVID outbreak, in which they sleep, live and work in a designated area isolated from the outside world. Due to the closed-loop system, Foxconn workers were exposed to the virus and lacked basic necessities, which drove them to flee.
This is not the first Foxconn factory lockout. Foxconn plants across China have suffered production outages several times this year due to government-enforced lockdowns and closed-loop systems. As a result of recent outages in Zhengzhou, including the lockdown itself and earlier worker walkouts, production at Apple’s popular iPhone factory has dropped to “significantly reduced capacity,” the Cupertino-based company acknowledged in a note last week.
For nearly three years, companies like Apple have operated with the uncertainty of not knowing when and where the next lockdown will occur — and for how long — because of Beijing’s strict zero-covid manual, underscoring the risks of over-reliance on Chinese factories.
These blocking uncertainties, combined with rising Sino-US trade tensions, have led Apple to accelerate its search for new manufacturing centers. And India has emerged as one clear winner, with some analysts betting the world’s third-largest economy is on the fast track to becoming one of Apple’s favorite suppliers.
Unpredictability
Beijing’s dogged pursuit of zero COVID has locked people in shopping malls and office buildings, factories and even Disneyland. China’s virus containment measures, some of the toughest in the world, have fueled anxiety, depression and psychological trauma.
For global firms operating in China, the government’s virus containment strategy has resulted in major disruptions to production and sales.
A debilitating 60-day spring lockdown in Shanghai caused Starbucks’ sales in China to drop 40% this quarter; Tesla delivered 18% fewer cars in the same period compared to the previous quarter. During the spring and summer, Apple lost $4 billion on projected sales of iPads and Macs alone. As a result of China’s virus containment measures – which have no end in sight – business sentiment has fallen. Only 55% of companies surveyed in October by the American Chamber of Commerce in Shanghai said they were optimistic about their five-year business prospects in China. It was the lowest reading in the survey’s 23-year history.
China’s compliance with zero COVID, along with rising Sino-US trade tensions, makes it difficult for businesses to “rely solely on Chinese suppliers for products,” said Patrick Penfield, a professor of supply chain practices at Syracuse University. Luck.
“Many multinationals in China are struggling to maintain production, receive supplies and meet demand,” he said.
The mass exodus of Foxconn workers and subsequent lockdowns in Zhengzhou will only reinforce the “seriousness” of China’s virus containment strategy, said Edith Terry, managing director of East Asian trade and public affairs consultancy Cotton Tree Advisors. Luck.
The fallout from China’s zero-Covid policy is “an absolute gut punch for Apple in its most important holiday quarter,” said Dan Ives, managing director of investment firm Wedbush Securities. he tweeted last week. “We estimate that this will negatively impact around 3% of iPhone sales this quarter based on… Chinese manufacturing [and] supply problems. Albatross continues in China,” he said.
Zhengzhou is a key manufacturing location for Apple’s iPhones, especially its latest models. iPhone production could slow by as much as 30% due to recent events – unwelcome news for the electronics giant ahead of the holiday season. Apple said on Sunday that it will make fewer iPhones and that deliveries will be delayed. The unpredictability in China’s supply chains has created glaring uncertainty for companies like Apple, which “rely on a stable supply of goods from China,” said Chris Tang, UCLA Distinguished Professor of Business Administration. Luck.
“Because of this, Apple now has no choice [but] diversify its supplier base.”
And that base, he added, is shifting to emerging markets such as India and Southeast Asian countries.
A once in a lifetime opportunity
In recent years, India has been courting multinationals with the aim of becoming a world leader in electronics and smartphone manufacturing. In June 2020, it announced a $6.6 billion incentive program to attract global firms to manufacture their electronics in India.
The Modi government has recognized the current moment as a “single opportunity” to influence global companies as China’s zero-covid strategy shakes up their supply chains, Akshobh Giridharadas, an adviser to the US-India Strategic Partnership Forum, a trade advocacy group, said Luck. “India has limited time—and [Narendra Modi] he realizes it. The government is accelerating policies that will give India an advantage as companies increasingly diversify their supply chains,” he said.
India’s strong government support for smartphone manufacturing, along with a large workforce of skilled and young professionals, is motivating global cellphone makers to increase production in the country, said Tarun Pathak, research director at smartphone consultancy Counterpoint Research. Luck. And one key selling point that sets India apart from other emerging markets is its sheer market size.
“Foxconn moving production from China to India is also about getting closer to a high-growth market, rather than, say, following US policy signals to contain China,” Terry said. Apple also wants to capture India’s fast-growing high-end smartphone market, which is expected to reach 10% next year from 7%, Pathak said.
Now, according to experts, India is fast becoming a popular hub for Apple factories at the expense of China.
In September of this year, Apple began manufacturing the iPhone 14s at a factory outside the city of Chennai – the first time the Cupertino company has based production of its latest smartphones in India, marking a major shift in its manufacturing strategy.
After the latest Zhengzhou lockout, Apple has asked a second supplier — Taiwan’s Pegatron — to start manufacturing its latest iPhone model in Tamil Nadu, according to a Bloomberg report. Foxconn now plans to quadruple its workforce in India to 70,000 over the next two years, according to a Reuters report.
Analysts now expect a bigger and faster shift of iPhone production to India than expected. In September, JPMorgan analysts predicted that India could produce 5% of Apple’s iPhone 14 inventory and 25% within three years. Ming-Chi Kuo, a Hong Kong-based Apple-focused technology analyst at TF International Securities, he said last week that the Zhengzhou lockdown prompted Foxconn and Apple to speed up iPhone production in India. Kuo expects iPhones made in India – still by Foxconn – will grow by at least 150% next year.
“Foxconn’s mid- to long-term goal is to source 40% to 45% of iPhones from India, up from the current 2% to 4%, which means Foxconn’s iPhone manufacturing capacity in India will increase rapidly over the next few years,” suggests Kuo. .
Pathak believes Apple “can scale in India”, with iPhone production in the country likely to double next year. But he says India’s share of half of global iPhone assembly is an “ambitious” target due to China’s still-large role in the iPhone supply chain and stiff competition from other emerging markets.
Apple is not alone in diversifying its production to India. Rivals like Samsung, Xiaomi and Google (which makes the Pixel smartphone) are also shifting production to India. From 2021 to 2022, India’s smartphone production grew by 126%, making the country the world’s second largest smartphone producer behind China.
Companies like “Apple, Abbott, Boeing-Tata, Flex, Pratt & Whitney … are just the beginning of this wave” of multinationals moving into India, said Gunjan Bagla, India CEO of business consultancy Amritt and a business professor at Arizona State University. Luck.
Still, India needs to build the infrastructure and talent these companies need. China still offers efficient, high-value manufacturing networks that Apple — and other multinationals — will find difficult to replace in India, said Paul Hong, distinguished professor of global supply chain management at the University of Toledo. Luck. India imports most of the iPhone components from China. “For Apple, complete separation from China [is] is not realistic in the short term,” Hong said. Companies are now more likely to pursue a “China plus one” strategy that allows them to maintain operations in China but diversify supply chains to India and competing economies such as Vietnam and Mexico, Bagla said.
Chinese authorities have now lifted the lockdown in Zhengzhou, but the Foxconn site remains under a strict closed-loop system, with company and government officials giving no indication of when it will end.
And India will continue its mission to take advantage of the zero pain of COVID in China, according to Giridharadas.
“India is just getting started.
