July 22, 2019
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Apple explores shift away from China

 Shoppers stand on the front of the new Apple Store as they attend the opening ceremony at the newly-opened shopping complex 'Iconsiam' on the banks of the Chao Phraya River in Bangkok, Thailand, Nov. 9, 2018. EPA-EFE/FILE/NARONG SANGNAK

Shoppers stand on the front of the new Apple Store as they attend the opening ceremony at the newly-opened shopping complex 'Iconsiam' on the banks of the Chao Phraya River in Bangkok, Thailand, Nov. 9, 2018. EPA-EFE/FILE/NARONG SANGNAK

By Yoko Kubota and Tripp Mickle

Beijing, Jun 21 (efe-epa).- Apple Inc. is asking suppliers to study shifting final assembly of some products out of China, people familiar with the matter said, as trade tensions prompt the company to consider diversifying its supply chain, according to a Dow Jones Newswires report made available to EFE on Friday.

While any major changes would be difficult and could take months to years to implement, Apple is looking into the feasibility of shifting up to about a third of the production for some devices, some of the people said.

"There is some flexibility to move Mac and other products, but it won't be easy," said Mehdi Hosseini, an analyst with Susquehanna International Group who focuses on the technology supply chain. "You have to have relatively skilled labor. You have to create an inventory hub. It would take time."

Destinations under consideration include Southeast Asia, the people said.

No decision has been made on such a move, some of the people said. Any transition, they said, is unlikely to significantly affect the iPhone in the near term because the company relies on hundreds of thousands of workers available in China to manufacture the high-volume product, which depends heavily on human hands for assembling, as well as a deep network of suppliers there.

In a letter to United States Trade Representative Robert Lighthizer this week, Apple said the latest tariffs on Chinese goods proposed by the Trump administration would limit the company's contributions to the US economy and impair its ability to compete world-wide. It said the tariffs would affect all of Apple's major products, including the iPhone, iPad, Mac, AirPods and accessories.

Apple is expected to launch updated iPhone models in the fall. Foxconn Technology Group, its biggest assembler, is getting ready to ramp up production for those models in China, other people familiar with the matter said.

Taiwan-based Foxconn said company policy precludes its commenting on current or potential customers or any of their products.

Manufacturers of apparel, footwear and other low-margin consumer items have been moving out of China in recent years due to rising costs, and tariffs have accelerated that trend. Many tech companies, however, find it more difficult to move production out of China.

Among China's chief attractions for businesses are well-developed chains of suppliers and reliable infrastructure, much of it built in the past two decades. A plentiful labor force skilled in precision manufacturing as well as trained engineers and pro-business government policies to assist in recruitment also make China appealing. And for those companies looking to sell into the large Chinese market, tariffs and other barriers make producing in the country more competitive than importing.

If manufacturers are now looking outside the country to avoid the higher tariffs Washington is imposing on Chinese-made goods, Apple remains deeply rooted in China and sensitive to government policies. About a fifth of its total sales are recorded in China, while on the manufacturing side its supply chain accounts for three million jobs in the country.

An Apple spokesman declined to comment.

Apple assembles most of its products - including the iPhone, iPad and MacBook - in China through contract assemblers such as Foxconn, which is formally known as Hon Hai Precision Industry Co., and fellow Taiwanese companies Pegatron Corp. and Wistron Corp.

Foxconn, which assembles iPhones, iPads and Macs, said this month that it is ready to shift production for Apple out of China to existing plants elsewhere if necessary.

Outsourcing to China helped solidify Apple as one of the world's largest and most profitable companies. Chief Executive Tim Cook helped build the company's sophisticated and efficient supply chain there, relying on Foxconn, Pegatron and others to crank out hundreds of millions of iPhones annually.

Cook has tried to remain neutral in the trade feud, saying repeatedly that the countries are bound to reach an agreement because it was in their best interests.

He met with President Donald Trump last week and visited the office of Lighthizer in January, according to public records. He also attended a Chinese government event in March in Beijing.

Still, Apple is making contingency plans. In May, the US laid out nearly $300 billion of additional Chinese imports that could be hit with levies of up to 25 percent as early as this summer - including smartphones and notebook PCs.

To avoid this potential wave of new tariffs, Apple has accelerated the production and shipment of some China-made products for stockpiling, people familiar with the matter said.

Apple has also been asking suppliers whether it is possible to further cut costs, some of the people said. Reductions in production expense could help Apple absorb the impact of added tariffs on its profit margins.

The Nikkei Asian Review earlier reported that Apple had asked its major suppliers to assess the costs of shifting 15 percent to 30 percent of their production capacity from China to Southeast Asia.

Trump and Chinese President Xi Jinping are to meet this month on the sidelines of a Group of 20 summit in Japan to discuss the two countries' trade dispute. Even if the two sides eventually strike a deal, many tech companies are likely to still feel pressure to diversify supply chains as both Washington and Beijing see securing technology trade secrets and supplies as vital to national security.

Foxconn has said it put more than $213 million into its India subsidiary late last year and early this year and that it is looking to invest in Vietnam, though detailed plans there haven't been divulged.

Earlier this week, Foxconn issued a statement noting that it started investing in mainland China in 1988 and that it isn't leaving.

Pegatron is investing around $10 million to expand a plant on the Indonesian island of Batam, near Singapore. The contract assembler is shifting production of some smart devices out of China to avoid the impact of tariffs, according to a person familiar with the matter.

Supply-chain executives have said that shifting production could be done in as little as three months if there is already a factory building at the destination.

Even so, international moves won't come easy. Production equipment and assembly lines would need to be dismantled, packed and cleared through customs before they can be shipped to a new location, one industry executive said.

They then must be reinstalled, tested and calibrated, and their output rate adjusted, Dow Jones added in a report made available to EFE.

On top of that, certain software and environmental-control systems would need to be put in place, and people such as line operators, engineers and quality managers must be available and trained, the person said.

Apple must approve the production lines built by its contract manufacturers, and the company is known to have tough standards, people familiar with the matter said.

"It's a big leviathan," one of these people said. "You can't just move these things around."

dj/hh

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