Apple (AAPL) Reducing iPad, iPhone Manufacturing in China

Apple Inc. (AAPL) reportedly is planning to move significant amounts of iPad and iPhone production outside China, partly because the new Biden administration in the United States is, so far, leaving tariffs on Chinese goods imposed by the Trump administration in place, and partly because rising labor costs are spurring other companies as well to seek lower-cost manufacturing locales. If the reports prove to be accurate, iPad production will commence in Vietnam starting in the middle of 2021, while iPhone production will increase in India. The iPhone 11 already is produced in India, and manufacturing of the iPhone 12 may start there soon.

Apple's Shift From China Is Already Underway

In June 2019, a report emerged that Apple had plans to move between 15% and 30% of its hardware production out of China. The trade war with China begun by U.S. President Donald Trump – which included, at the time, 25% tariffs on devices such as phones, laptops, and tablets made in China – was one motivation for Apple to diversify its international supply chain.

In that 2019 report, an executive at an Apple supplier offered this additional reasoning for reducing manufacturing exposure to China: "A lower birthrate, higher labor costs, and the risk of overly centralizing its production in one country. These adverse factors are not going anywhere … with or without the final round of the $300 billion tariff."

At the time, another supplier warned that shifting production out of China could be "painful and difficult." The reason was the vast business ecosystem that had grown in China to support Apple, plus that country's huge numbers of skilled workers and a more reliable infrastructure in key areas such as power generation than lower-cost countries.

Apple already has moved some AirPods Pro manufacturing to Vietnam, and the tech giant reportedly is planning to expand HomePod mini production and shift some MacBook production there as well. Meanwhile, some Mac mini production has been moved to Malaysia.

Significance for Investors

Apple's pivot away from dependence on China as its main manufacturing hub comes with both pluses and minuses. The major plus is that this hedges against the possibility that the United States and China will remain locked in a protracted trade war, with U.S.-imposed tariffs persisting. Another plus is that Apple will realize savings by moving production to lower-cost locales.

On the minus side of the ledger, Apple is moving production away from a country with, as noted above, a well-developed business ecosystem and infrastructure that has served Apple well. As a result, it is possible that Apple's further diversification of production across international boundaries actually may do the opposite of the expected and increase risk. One example was the recent worker riot in India, due to the missteps of a subcontractor under pressure from Apple to ramp up production rapidly at a new plant, in a country whose laws and culture it did not understand.