Apple must play it slow as it moves iPhone production out of China

According to Bloomberg's Mark Gurman, the relationship between Apple and China might be at its most critical point since former President Donald Trump placed tariffs on products imported from China. As we pointed out several times when the tariffs were in effect, what was really being imposed was an import tax that taxed U.S. corporations importing goods from China into the U.S., and American consumers.

The tariffs did create an urgency at Apple as the company woke up to the realization that it didn't want to have to worry about something that it had no control over such as an import tax/tariff or war cutting off its means of production. Gurman notes that Apple is looking at moving more iPhone production to India where it produced 6.5 million iPhone units last year and Apple hopes to hit 10 million this year.

In 2023, for the first time, iPhone 15 non-Pro models will be built simultaneously in China and India. The iPhone 15 Pro and iPhone 15 Ultra will only be assembled in China. Other products are associated with non-Chinese production facilities. For example, Vietnam is considered the home of AirPods production and other manufacturing takes place in Malaysia and Ireland.

Managers at Apple are telling employees to look for places outside China to source components and place production lines for new products coming next year. Despite this, at least for the time being (and maybe years to come), Apple needs to continue the current relationship it has with China. For example 20% of Apple's revenue comes from Greater China which includes Taiwan and Hong Kong. Apple has 40 Apple stores in mainland China and the majority of iPhone units are still assembled in China.

A good example of how intertwined China and Apple are could be seen when China's COVID crackdown affected workers at Foxconn's largest iPhone production facility in Zhangzhou. Not wanting to be locked down, many Foxconn employees left the factory's campus forcing assembly lines to be shut. This resulted in as much as a six million unit shortage in the production of iPhone 14 Pro and iPhone 14 Pro Max models.

But Apple needs to be smart as it reduces its connection with China. Apple's top brass is worried that if it moves to quickly to pull production out of China, the move will backfire as Chinese consumers stop buying the iPhone and other Apple products. As a result, Apple is often criticized as kowtowing to the CCP by pulling certain apps. And last summer, Apple told TSMC to follow China's wishes and label shipments of parts and components to China as made in "Taiwan, China" or "Chinese Taipai."

Besides China, Apple would love to back away from Taiwan. As a fabless chip designer, Apple relies on the world's leading foundry, Taiwan Semiconductor Manufacturing Company (TSMC) to manufacture all of its chips. But just imagine what would happen if China were to take military action against Taiwan and take over TSMC's fabs. Recently Robert O'Brien, former National Security Advisor for the Trump administration, hinted that the U.S. would physically destroy TSMC's fabs to keep them out of the hands of China if there is an invasion.

Starting next year TSMC will begin producing 4nm chips at its fab in Phoenix, Arizona. And while those chips won't be advanced enough for the iPhone 16 Pro and iPhone 16 Pro Max/Ultra, a second fab being built in Phoenix will start turning out 3nm chips by 2026. However, by then cutting-edge chips could be built using the 2nm process. Nonetheless, Apple will purchase chips from TSMC's U.S. facilities for other devices which will reduce Apple's reliance on TSMC's Taiwan fabs.

This is an area fraught with danger as far as Apple is concerned. One person familiar with Apple's operations says that if TSMC's Taiwan factories go down, it would take over a year to ramp up production to the previous level.