The Financial Times recently published a detailed overview of how Apple has built its supply chain in China. This is a deep dive into an important question, and its author Patrick McGee reveals some amazing details. Since we provided a few color quotes at the end, we have been asked a lot lately about how long it will take to unwind this supply chain — both for China and for the US technology industry. The short answer is a long time ago.
The problem with this analysis is that there is no easy way to quantify the problem. We could look at the global production volume, in which China’s share is 28.7%, and the US share is 16.8%, or just the share of consumer electronics, which is even more uneven. But this is only part of the picture.
The electronic complex of South China is built on human capital and intangible assets as well as on simple old-fashioned capital and money. This makes it difficult for anyone else to repeat.
Most of China’s current capabilities go beyond simple manufacturing. One of the most exciting aspects of South China’s electronic complex is the extent to which it has taken root in the overall economy. FT published incredible statistics. They were looking at ISO certificates. ISO is an international standardization body that certifies companies based on a detailed set of process qualifications and has established that:
China’s dominance can be partially measured. In 2021, the number of organizations in the country that were audited to confirm best practices in “quality management systems” — ISO 9001 certification — amounted to 426,716, or approximately 42% of the total number in the world. For India, the figure was 36,505; for the US, it was 25,561.
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In some parts of Southern China, ISO has become such a feature of large employers that local service companies are adopting many of these practices, and restaurants and nightclubs are also seeking ISO certification, apparently based on the assumption that their customers value quality.
And this really touches on the crux of the issue: China’s productive capabilities are measured by intangible assets and human capital to the same extent that they are measured by accurate statistics and simple, old-fashioned physical capital and money.
For companies like Apple, this means scale — the ability to produce several hundred million iPhones a year with a high degree of reliability. For small companies, this means flexibility and fast turnover. Recently we worked with a company that wanted to get a product from an American manufacturer. In the middle of planning, they discovered that they needed a special tool for production, but the contract manufacturer had no experience with the device, which delayed production for months while they were looking for a lease, and it was even harder to find. a team that knew how to use it.
On the contrary, there are a dozen companies in Shenzhen that specialize in this particular tool, which they can deliver to the factory tomorrow together with the team that will service it. Industrial clusters are a well—known phenomenon, but today there are no clusters of such scale and depth that could be compared with Shenzhen.
At the same time, the train left the station. American companies are doing everything possible to reduce and/or eliminate their dependence on China. We have heard rumors that Apple wants to withdraw most of its production from China within five years. We have no idea if this is true, but only Apple could even imagine such a timeline. There is no ready-made alternative and probably never will be.
The future electronics supply chain is likely to be divided into a dozen countries, such as Mexico, Vietnam and Malaysia. And this fragmentation will add friction to the system and probably make it more vulnerable to periodic failures.
China is also not standing still. The cost of labor in China has been rising for many years amid rising incomes and an unfavorable demographic situation. When Apple started manufacturing in China, most of Foxconn’s employees worked seasonally, leaving for their rural homes and back during periods of downtime. Their children, who work at the factory today, most likely grew up at least partially in cities and want iPhones and iPads for themselves. Despite the fact that the recent trade disputes between China and the United States served as a catalyst for the start of the process, in any case, it was almost certainly inevitable.