In the coming weeks, Apple and Google will unveil their latest generation of smartphones, jockeying to distinguish the new devices from previous models. But one of the most significant changes will go largely unnoticed by consumers: Some of these phones will not be made in China.
A very small portion of Apple’s latest iPhones will be made in India, and part of Google’s newest Pixel phone production will be done in Vietnam, people familiar with their plans said.
The shift is a response to growing concerns about the geopolitical tensions and pandemic-induced supply chain disruptions that have involved China in the last few years. China has long been the world’s factory floor for high-tech electronics, unrivaled in its ability to secure legions of high-skilled workers and the production capacity to handle demand for the next hot device.
But U.S. companies are seeing more risk there — a perspective forged during the Trump-era trade war, with its tit-for-tat tariffs, and cemented by China’s saber-rattling after House Speaker Nancy Pelosi’s visit to Taiwan last month. They fear that basing a supply chain largely in China may thrust them into the middle of its escalating conflict with the United States over Taiwan.
China is still, by far, the most dominant consumer electronics manufacturer. But it’s not just smartphone production that is moving out the country. Apple is producing iPads in northern Vietnam. Microsoft has shipped Xbox game consoles this year from Ho Chi Minh City, Vietnam. Amazon has been making Fire TV devices in Chennai, India. Several years ago, all of these products were made in China.
On Wednesday, China announced that factory activity contracted for a second straight month in August, according to the country’s closely watched survey of purchasing managers.
“The empire of manufacturing in China is being shaken,” said Lior Susan, founder of Eclipse Venture Capital, which invests in hardware and manufacturing startups. “More and more capital is going to pull manufacturing out of China and find an alternative.”
The fracturing supply chain is rippling across Asia, causing a spike in industrial land prices in Vietnam, a revival of manufacturing in Malaysia and a surge in demand for low-wage workers in India. For China, it is siphoning away manufacturing activity when the country is reeling from its slowest economic growth in decades.
“Everyone is thinking about moving, even if they’re not acting yet,” said Anna-Katrina Shedletsky, founder of Instrumental, a San Francisco Bay Area company that remotely monitors assembly lines for electronics companies.
When the first outbreak of COVID-19 shut down factories in China in early 2020, the closures roiled sales plans for many companies, including Apple, which had to cut its quarterly sales forecast because it couldn’t make iPhones.
The company’s operations team started to look at alternative manufacturing locations to hedge against future shutdowns in China, said three former employees, who asked not to be identified because they are not permitted to speak about their work at the company.
Vietnam, which Apple had already earmarked for AirPods production in 2020, became a much-discussed option, one of the people said. Since then, Apple has started producing its watch in the country and moved some iPad manufacturing there. In Apple’s most recent list of its top 200 suppliers, 20 use factories in Vietnam. By comparison, 155 of the companies operate factories in China.
Apple plans to assemble and package a small fraction of this year’s iPhone 14, the company’s flagship device, in India for the first time. While most of the initial and most critical production for that device is happening in China, Apple will move some of its overall iPhone production to India later — mainly as a way to assess the ability for future manufacturing there, two people familiar with the plans said.
Even as Apple pushed ahead with plans, the company was careful not to antagonize China’s ruling Communist Party since the vast majority of its products are still made there. As China carried out military drills around Taiwan during Pelosi’s visit, Apple reminded its Taiwanese suppliers to label components destined for China as made in “Chinese Taipei” or “Taiwan, China,” according to a report in Japan’s Nikkei newspaper.
Apple, Microsoft and Amazon declined to comment.
So far, the biggest beneficiary of wariness over China has been Vietnam.
Foxconn, Apple’s largest contract manufacturer, recently signed a $300 million deal to expand in northern Vietnam with a new factory that will generate 30,000 jobs, according to state media. The latest spending was in addition to $1.5 billion that the Vietnamese government had said Foxconn had already invested in the country.
In Bac Giang and Bac Ninh provinces in northeastern Vietnam, Foxconn and other contract manufacturers operate massive factories in scenic countryside that was once rice fields and farmland, surrounded by temples, banyan trees and ponds. Now workers from around the country descend to these facilities in search of jobs.
A billboard outside a Foxconn factory in Bac Ninh advertised that the company is looking to hire 5,000 workers “urgently” with an offer of roughly $300 in monthly pay for an entry-level position. It is less than half the monthly pay — 4,500 yuan, or about $650 — that Foxconn is offering new hires at its assembly lines in Shenzhen in southeastern China.
The pay disparity underscores another reason that companies are looking for new manufacturing options. Over the past decade, manufacturing workers in China have tripled their annual income to more than $9,300, according to the country’s Bureau of Statistics.
Foxconn declined to comment for this article.
Tariffs also added to manufacturing costs in China. In 2019, then-President Donald Trump levied a 15% tariff on tech products such as smart speakers, smartwatches and wireless headphones.
As the tariff battle intensified, Google looked at alternatives to China. This year, Google plans to move manufacturing from Foxconn facilities in southern China to Vietnam, where it will begin assembling its latest model, the Pixel 7, two people with knowledge of the plans said.
The company expects Vietnam to provide as much as half of next year’s high-end Pixel phones, the people said.
But Google’s planning for next year’s phones demonstrates how hard it will be for companies to move from China completely. Google is exploring a foldable phone for 2023, but making a device like that, using newer screen and hinge technology, would probably require production to be close to key suppliers in China, these people said.
Google declined to comment.
Over two decades, the tech industry has established an expansive collection of suppliers that make the cords, buttons and machines critical to assembling smartphones and computers. The concentration of suppliers reduces shipment costs and makes it easier to fix faulty parts.
“We have a long way to go to have the whole supply chain diversified outside of China,” said Mehdi Hosseini, a financial analyst at Susquehanna International Group who focuses on the tech supply chain.
So for alternatives to China, proximity matters. Interest from Foxconn and others has caused industrial real estate prices in Vietnam to spike by nearly one-third since 2019 to $105 per square meter (about $9.75 per square foot), while the cost of warehouses has risen 20%, according to Cushman & Wakefield, a global commercial real estate firm.
Five years ago, said Trang Bui, Cushman’s general manager for Vietnam, she showed industrial land to clients once every other month. Now she travels daily with clients from the United States, Taiwan, South Korea, Japan, Europe and China to see real estate for factories.
“If you come to Vietnam, all you see is energy,” Bui said. “For an outsider who hasn’t visited the country, they might be a little shocked.”