A Blog by Jonathan Low


Dec 29, 2022

How Apple And Other Tech Firms Are Learning To Live Without China

China is learning the hard way that unyielding extremism will not be tolerated by western tech firms and their customers if reliability as a supply chain platform continues to suffer. Vietnam, India and others are only too happy - and capable - of filling the need.

As a result, western firms are diversifying their manufacturing bases and suppliers away from China - and it is China which is suffering, not the tech companies. JL

Chris Miller reports in The Atlantic:

Apple is restructuring its supply chain in case its relationship with Beijing sours. In recent years, Apple has opened small assembly facilities outside China, primarily in Vietnam and India. Driven by rising labor costs in China and partly by a fear of excessive dependence on a volatile leadership in Beijing, other electronics firms had already moved abroad. China will be affected by these supply-chain shifts. Chinese firms have embedded themselves into international supply chains and learned from the world’s best tech firms—a strategy that will no longer work if companies like Apple shift businesses elsewhere. This isn’t the end of globalization for U.S. tech but it sure feels like it for Chinese tech firms.

Long before it reached your home, even before its tiny components were pieced together in an assembly plant, your phone was already one of the most complex gadgets in the world. It is the product of a delicate supply chain whose every link is forged by competing business and political interests.

That chain is starting to rattle and even break, as the global tech industry works to become less dependent on China. Earlier this month, Taiwan Semiconductor Manufacturing Company (TSMC) held an event celebrating the expansion of its first major facility in the United States, a semiconductor plant in Phoenix, Arizona. When the facility starts operating in early 2024, it will use the world’s most precise manufacturing tools to etch billions of microscopic circuits onto the silicon chips that provide all of the world’s computing power.President Joe Biden attended the event and declared that TSMC’s investment proved that “American manufacturing is back, folks.” Morris Chang, TSMC’s founder, said in a speech that “globalization is almost dead and free trade is almost dead.”

The moment certainly was a turning point—both for technology manufacturing and for the fraught relationships among the United States, China, and Taiwan—but neither Biden nor Chang had things exactly right. The idea that the arrival of TSMC’s factory in Arizona represents a new era of self-sufficiency or the end of globalization is a fantasy. Chang, a Taiwanese American tech tycoon, sits atop a chip industry that can function only by sourcing ultra-precise tools and materials from half a dozen advanced economies. His company’s new Arizona facility is reportedly the largest foreign investment project in the state’s history. Deglobalization this is not.

In fact, the CEOs in attendance at the ribbon cutting, including Apple’s Tim Cook and AMD’s Lisa Su, each of whom buys chips from TSMC, have no plans to make their far-flung supply chains any less complex. Instead, they’re taking costly steps to reduce the share of their component production and assembly that takes place in China or Taiwan, to insure themselves against the growing risk that tensions between the U.S. and China finally snap. Any military escalation in the Taiwan Strait would not only be a grave geopolitical crisis—it would also tear apart the world’s semiconductor and electronics supply chains and pose a critical threat to America’s biggest tech firms.


TSMC sits at the epicenter of the world’s tech supply chains. It produces 90 percent of the world’s most advanced processor chips, all of them in a handful of facilities in Taiwan. More than a third of the new computing power the world adds each year comes from Taiwan. Companies like Apple—TSMC’s biggest customer—would struggle to make anything if TSMC’s production were knocked offline. iPhones, iPads, Macbooks, and AirPods all work thanks to TSMC-manufactured chips inside

Apple is in a particularly difficult position. For years, China has been Apple’s second-largest market, behind only the United States. China is also where most Apple products are assembled, by hundreds of thousands of workers, employed by Taiwanese manufacturers such as Foxconn and Wistron, which manage the process of gluing together the electronic guts inside each iPhone.

Apple is therefore doubly vulnerable to Chinese escalation against Taiwan. The most important and complex component in each iPhone can be manufactured only in Taiwan. But almost all iPhones are assembled just across the strait in China. A Chinese blockade or a war would drive Apple’s production volume very close to zero.

Thus, for years, Apple’s leaders have tried to stay close to China’s rulers without crossing any of Washington’s red lines. Cook went so far as to join the advisory board of the business school at Tsinghua, the Chinese university that educated Xi Jinping and is spearheading many of the Chinese government’s tech-development efforts. And his company has played an important role in advancing China’s tech sector by assembling devices there and by buying more than ever from Chinese suppliers. Yuqing Xing, an economist at Japan’s Graduate Institute for Policy Studies, analyzed Apple’s supply chain in 2019 and found that, for the iPhone X, important components such as antennae, wireless charging systems, and circuit boards, totaling about 25 percent of the device’s manufacturing costs, were all sourced from Chinese firms. That’s a sharp contrast to earlier models such as the iPhone 3G, for which all the key components came from Japan, the U.S., Korea, and Germany. Xing’s analysis found that for this phone, China accounted for just a little over 3 percent of the manufacturing cost—not by adding components but through wages paid to the workers gluing components together.

Earlier this year, Apple was even poised to buy memory chips from Yangtze Memory Technologies Co. (YMTC), a chipmaker that has attracted criticism from U.S. politicians for reportedly violating U.S. export-control law while receiving billions of dollars of Chinese government subsidies. Apple changed tack only after the Biden administration rolled out new export controls in October that limit U.S. firms from dealing with YMTC. (A spokesperson for Apple did not respond to a request for comment about the company’s relationship with YMTC.) Because YMTC is the largest producer of this type of chip in China, Washington’s blacklisting of YMTC all but guarantees that in the future, Apple will source its memory chips only from American, Korean, or Japanese suppliers.

Now Apple is restructuring its supply chain in case its relationship with Beijing sours. In recent years, Apple has opened small assembly facilities outside China, primarily in Vietnam and India. Driven partly by rising labor costs in China and partly by a fear of excessive dependence on a volatile leadership in Beijing, other electronics firms had already moved abroad. The recent COVID-induced chaos at a Foxconn facility producing iPhones in Zhengzhou only adds to the pressure for diversification.

Samsung, for example, assembles many of its phones in Vietnam, where it has a substantial production base. This is part of the reason Vietnam recently overtook the U.K. as America’s seventh-biggest trade partner. Now Apple is opening Vietnamese assembly lines for Apple Watches and MacBooks alongside the AirPods and iPads already produced in the country. It’s also partnering with India’s Tata Group, an influential business conglomerate, to assemble iPhones. Analysts at JP Morgan have predicted that 25 percent of Apple products may be assembled outside China by 2025, a drastic increase over today’s 5 percent.


This would represent a major shift in international supply chains, but crucial smartphone components would still come from a global supply chain. And the phones would still be assembled far from major markets in advanced economies.

TSMC, for example, will still manufacture the most advanced chips in Taiwan, in order to maintain a competitive edge. Every year, the company rolls out an updated manufacturing process exclusively in its Taiwanese plants, which Apple almost always uses for the chips in each year’s new iPhone. The $40 billion facility TSMC is opening in Arizona is likely to provide only the company’s second-most-advanced manufacturing process. The most complex chips, including the processors in iPhones, will still be made in Taiwan.

This is part of the reason the chips manufactured in Arizona, or in other new plants planned across the United States, don’t provide any real measure of self-sufficiency. Smartphones and PCs won’t be assembled in the U.S. anytime soon. Nor will they be made of primarily U.S.-built components, given unique Korean and Japanese specialties such as producing screens and image sensors. Indeed, some of the chips that TSMC eventually fabricates in Arizona and sells to Apple may even end up in China, where Apple is likely to retain a substantial product-assembly base for the foreseeable future.

Nevertheless, China will be affected by these supply-chain shifts. The task of finding new jobs for assembly workers as Foxconn and Apple shift their focus to Vietnam and India is the easiest problem Beijing must deal with. Chinese firms have advanced by embedding themselves into international supply chains and learning from the world’s best tech firms—a strategy that will no longer work if companies like Apple shift their businesses elsewhere.

U.S. tech firms and consumers won’t notice too much change, except maybe for slightly higher prices as the supply chain shifts away from China. Companies will still rely on Japanese and Korean components and offshored assembly, especially in Vietnam and India. This isn’t the end of globalization for U.S. tech or for American allies. But it sure feels like it for Chinese tech firms.


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