Factory closures cost Apple $1bn per week in sales prompting supplier diversification  © Justin Sullivan/Getty Images
Factory closures cost Apple $1bn per week in sales prompting supplier diversification © Justin Sullivan/Getty Images

Apple diversifies away from dominant supplier in bid for resilience

Tech icon Apple decided to diversify away from its core supplier as China’s zero-Covid policy proved too high a risk. But enacting this strategy opened the company up to even more opportunities  

When Apple confirmed iPhone production would be put on pause last November it sparked frustration among brand-loyal customers who would miss out on the latest models in time for Christmas. Of course, it also presented a very real, and very high, threat to sales.

The firm’s main supplier, Foxconn, is Taiwanese but its factory delivering Apple products is based in the Zhengzhou region of China and therefore subject to the latter’s zero-Covid policy – and as when infection rates rose the site was ordered to close, temporarily halting the assembly of handsets.

However, when government forces locked down the 300,000 workers living at the Zhengzhou factory campus it resulted in protests, escape attempts and conflict, drawing out the shutdown.

Apple said at the time: “The facility is currently operating at significantly reduced capacity. As we have done throughout the Covid-19 pandemic, we are prioritising the health and safety of the workers in our supply chain.”

The lockdown was lifted in December but because Foxconn was responsible for 70% of iPhone shipments globally, and was the only location permitted to produce the iPhone Pro models, analysts estimated the incident cost Apple $1bn a week in lost sales.

It was a heavy toll, reminiscent of the early days of the Covid pandemic when shipments were stuck in China. Concerned at the prospect of history repeating itself, Apple initiated a plan to repair its supply chain and ensure resilience for the future.

Decentralise to de-risk outdated production models

Supply diversification has become a primary goal at Apple following the incident, and while the company is not exiting China, it decided to build up several layers of risk mitigation to reduce its concentration of suppliers in the area.

Step one started during the Zhengzhou lockdown when to meet orders, Apple moved a portion of iPhone production to Luxshare – a Foxconn rival also based in China. However, it wasn’t a simple process because the advanced devices require specialist assembly – a requirement few factories can manage.

While it normally took Foxconn around six months to adjust production lines to deliver new models, “with Apple’s dedicated investment, including increasing staffing in supply chain management, it only took Luxshare a few months to deliver the last-minute orders”, an Apple employee in China told the Financial Times.

The firm continued to work with Luxshare but moved additional production elsewhere, including Chennai, India, and parts of Vietnam to shore up business. It was a success and laid the foundation for a longer term commitment to a non-China-based supply chain for several products. Moving forward, Apple plans for India to produce 25% of all iPhones by 2025, while Vietnam will manufacture 20% of iPads and Apple watches, 5% of MacBooks, and 65% of AirPods in the same timeframe, according to a JP Morgan client report.

But transformation is not limited to handset manufacture and assembly. The disruptions prompted Apple to look into de-risking more of its supply chain, including the long-term security of critical components.

Embed change by connecting the upstream supply chain

While the lion’s share of manufacturing takes place in China, sources of crucial components such as microchips are also prevalent in the region, with Apple largely sourcing from TSMC in Taiwan. Recent friction between Taiwan and China, plus the fragility of semiconductor supply chains in general, reinforced the need to accelerate diversity and increase resilience.

In November, the company announced its plan to start sourcing semiconductor microchips from a different region. Apple chief executive Tim Cook told an internal meeting that 60% of the world’s processor supply comes out of Taiwan, adding that “regardless of what you may feel and think, 60% coming out of anywhere is probably not a strategic position”, according to Bloomberg.

“We’ve already made a decision to be buying out of a plant in Arizona, and this plant in Arizona starts up in 2024, so we’ve got about two years ahead of us on that one, maybe a little less. And in Europe, I’m sure that we will also source from Europe as those plans become more apparent.”

Cook added: “I think you will wind up seeing a significant investment in capability and capacity in both the US and Europe to try to reorient the market share of where silicon is produced.”

Multiple locations mean multiple sources in future

Moving forward, Apple is now building a decentralised supplier system into its reconfigured plan, requiring the same set up from its suppliers and partners. “They would like to have two or more sources on each component or value chain,” Isaiah Research senior analyst Eddie Han told Supply Management, adding that “each company has been asked to have two or more factories in different places”.

Foxconn, like Apple, is setting up in India, Vietnam and the US, and semiconductor producer TSMC has secured US government support for its chip factory in Arizona. Apple is moving closer to its goal of balancing the proportion of suppliers and regions because, as Han says, “cultivating competitive second suppliers is good for cost [and] decentralised production sites help reduce risk”.

Apple’s supply challenges were fairly common. As Han said, the company was hampered by “too much supplier concentration” – and while there’s a long journey ahead to ramp up these changes, the company has made significant inroads in risk reduction and resilience in a relatively short time.

CIPS Knowledge
Find out more with CIPS Knowledge:
  • best practice insights
  • guidance
  • tools and templates