Apple is shifting a fifth of its China-based manufacturing to India, in a move that could hasten China’s decline as an economic superpower.
Apple (NASDAQ:AAPL) is moving 20% of its production from China to India, as the technology giant seeks geographic alternatives in the wake of the coronavirus pandemic.
In diversifying, Apple may ultimately protect itself from future shocks. Its move may also signal a more general and long term reduction in Chinese economic importance.
Reportedly, senior Apple executives have been meeting with the Indian government over the last few months as the company looks to expand its manufacturing base in the country.
Apple plans to scale up its Indian manufacturing by around $40 billion over the next five years. Speaking to The Economic Times, an Indian official said:
We expect Apple to produce up to $40 billion worth of smartphones, mostly for exports through its contract manufacturers Wistron and Foxconn.
According to the same official, Apple is looking to reduce its reliance on China in the wake of the coronavirus pandemic. In 2018-19, the company produced $220 billion worth of products in China.
It is actually looking at India as a base to manufacture and export, essentially diversifying its production out of China.
Apple’s desire to diversify beyond China comes just as India is trying to increase its global manufacturing presence. The tech giant is exploiting India’s recently launched PLI scheme, which will pay tech companies an incentive of 4% to 6% on incremental sales.
In other words, India’s push to become a global manufacturing superpower appears to have arrived at just the right moment in history.
While Apple’s move into India may be only a short-term trial, it probably represents a long-term shift in global manufacturing.
On the one hand, diversification will make Apple resilient to future shocks affecting China. Its dependence on China meant its stock was hit particularly hard in February when the coronavirus started ravaging Wall Street. As such, reducing its reliance on any one manufacturing base will protect its stock in the future.
Also, there are worrying signs that trade relations between the U.S. and China may deteriorate significantly post-Covid. Reports suggest that the Trump administration is seeking ways to “punish” China economically for the coronavirus.
These include sanctions, new tariffs, trade restrictions, and the cancellation of debt. They also include a potential attempt to lift China’s sovereign immunity, which protects state-owned companies from litigation.
On Tuesday, it was revealed that Trump’s White House instructed federal pension funds to avoid investing billions in Chinese stocks.
Basically, U.S.-China trade relations are set to turn very sour over the coming months and years. Obviously, Apple doesn’t want to be in the thick of this. So moving manufacturing out of China isn’t only insurance against another China-born pandemic. It’s also a protection against a full-blown trade war.
Indeed, other signals suggest that China could pay a heavy economic price for the coronavirus. Other American companies besides Apple are now planning to reduce reliance on China. U.K. businesses have been doing much the same since February. And Japan is planning to fund Japanese firms to move production out of its Asian neighbor.
A gradual shift away from China had already begun at least as early as last year. Due to the U.S.-China trade war, as many as 80% of U.S. companies and 67% of E.U.-based companies had begun looking for new bases in 2019.
The coronavirus looks to have accelerated this process, and Apple knows it. Realizing that China won’t enjoy the same manufacturing advantages in the future, Apple is, therefore, looking to hedge its bets.
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