In a well-strategized move, Apple (AAPL) is relocating its production base to India. Apple’s investment in India will be around $1 billion to manufacture iPhones. In a seething tweet, President Trump “ordered” US companies to look for alternatives other than China. Ironically, Apple seems to have obeyed his orders. The Times of India reported that Foxconn, a Taiwanese contract manufacturer, will be Apple’s “investing partner.” There will be a “host of suppliers” that will be part of the business. The production will take place in Chennai. Apple wants to export the products made in India to other markets. The company’s investment in India seeks more clarity on export incentives offered by India’s government.
Benefits of Apple’s investment in India
Shifting the production base to India will be a win-win situation for Apple, whether the products are for global or local sales. The company can escape the 20% mandated import duties. Apple will also be eligible for export incentives. Local manufacturing will help the company strategically price its products. Apple will be able to meet the 30% local sourcing norm to open retail stores across the country.
The company can mitigate the trade war risks by shifting its production base from China. However, the new manufacturing destination isn’t the US, as Trump suggested, but Indian and Southeast Asia. In June, the Nikkei stated that Apple is doing a cost-benefit analysis to shift about 15%–30% of its production capacity from China to India. Later, the Nikkei reported that over 50 US tech companies including HP (HPE) and Dell (DELL) are rushing to move production out of China.
China loses its turf to other Asian countries
So far, the US-China trade war hasn’t benefited anyone. Notably, the US hasn’t gained anything. The trade war has hurt China’s economy. The South China Morning Post reported that the “Made in China 2025” plan is scuttled. Also, integrated circuit production fell sharply. The data released on Monday suggested weaker industrial output growth in China. Chinese Premier Li Keqiang was also vocal about the country’s economic uncertainty. He said that it’s challenging for the economy to maintain the 6% growth rate.
Meanwhile, India plans to capitalize on the US-China trade war. The country is aggressively “wooing” tech giants to shift their production base there. We don’t know if India will offer new incentives or if existing incentives will be updated. However, India is making concrete plans to expand the local production base for multinationals.
Many tech companies are also considering Vietnam as another manufacturing destination. Alphabet’s Google (GGOG) is relocating its Pixel smartphone production to Vietnam from China. Experts think that faster clearances and stable policies will attract many companies. Malaysia is another destination that’s trying to attract US multinational companies. The South China Morning Post stated that the Malaysian government has already approved $500 million in new proposals this month.
Challenges of setting up Apple’s supply chain
Considering the dire situation, Apple probably wouldn’t have left Chinese production. US tech companies have been getting their electronics manufactured in China for over 40 years. The combination of chip shops, component manufacturers, and assembling plants that China offers is unparalleled. However, in today’s competitive market, tech companies can’t afford a price hike for electronics. According to an article from The Verge, Avi Greengart, a tech analyst and Techsponential’s founder, said, “When you’re looking at 5 or 10 % tariffs, in many cases you’re simply absorbing the hit. Once you hit 25%, your product is no longer competitive, especially when there are alternatives on the market that are not being hit with these tariffs.” Apple admitted that the tariffs would “weigh on the company’s global competitiveness.”
The company has to look for alternate locations. However, manufacturing and assembling Apple’s hi-tech iPhones is a complicated affair. Millions of iPhones are produced and sold every year. We’ll have to see if India can handle production and quality control at this scale. Setting up a new supply chain from scratch is going to be challenging for Apple. Initially, I expect hiccups. However, I hope that Apple can overcome the challenges soon.
Apple’s revenues from China and India
In fiscal 2018, Apple returned to growth in the Greater China region. The revenues in the Greater China region fell 22% in the third quarter. In contrast, the revenues in Mainland China fell 4%. The company reported strong double digits growth in India in the June quarter.
On Tuesday, Apple stock closed in the positive territory at $220.70. Google (GOOG) fell by 2.15 points at $1,229.15 on Tuesday, while HP closed in the red at $14.99. Dell also settled in the negative territory at $53.85.