Beijing built a city for the iPhone. Or more exactly for its manufacturer, the Taiwanese group Foxconn. Zhengzhou is an agglomeration of 6 million inhabitants, capital of Henan province, 1400 kilometers north of Hong Kong, on the banks of the Yellow River. Nicknamed The iPhone City, it is the heart of the Apple system with its daily production capacity of half a million units.
Long before the revolt of the workers confined within the framework of the “zero Covid” policy of recent weeks, Apple had started a release of this device. A small part of the production is now carried out in Indian and Vietnamese factories. But the most advanced devices, those with the highest margins, are still produced in the giant factory in Zhengzhou and getting out will be complicated.
There was a time when Apple made its Macs in American factories, in California and Colorado. But in the early 2000s, when it came to considering the mass production of iPods, iPads and especially iPhones, it was necessary to consider a completely different system that could produce millions of devices each year. This required organizing complex logistics flows with hundreds of suppliers, many of whom were already in China, and setting up an export circuit unique in its scale and precision. It was Tim Cook, then Director of Operations, who took charge of this with a small team of engineers. For years, Apple reserved 50 seats a day on scheduled flights between San Francisco and Shanghai to set up this circuit.
The counterparties requested by Beijing from Apple
For their part, the Chinese authorities did not skimp to welcome the factories of Foxconn. The Hunan provincial government has spent the equivalent of 1.5 billion dollars to build the necessary infrastructure: roads, power plants, customs clearance centers attached to factories, dormitory towns. Even the airport has been expanded to accommodate the noria of cargo planes leaving for Western logistics centers. The Chinese administration was also in charge of recruitment to provide factories totaling 200,000 people in Zhengzhou – for about 1 million people employed in mainland China by Foxconn.
For years, everything worked perfectly. Twice a year, Apple announced the release of new devices, and these were available to order a few weeks later in New York or Paris. Then, as Apple’s market share increased in the Chinese market, Beijing began asking for compensation. New iPhone models were subject to increasingly thorough inspections, especially for everything related to security. the New York Times, author of the most detailed articles on the subject, says that the Chinese have even requested access to certain elements of the source code of the iPhone software. If Apple was able to refuse, it had to give in on the storage of the data transferred to Chinese servers to respond to the relentless national surveillance system. Similarly, the Chinese AppStore has been cleaned of anything that could appear subversive in the eyes of the Chinese Communist Party.
From all sides, the pressure continued to increase. Even before the catastrophic management of the pandemic, Chinese wages quadrupled. Apple also had to manage the deterioration of Sino-American relations. Thirty companies have seen their components banned from entering the US market; according to Washington, these suppliers had too close ties to the People’s Liberation Army.
For Apple, this pincer movement has become untenable. But switching such a complex production does not happen overnight. In total, Apple depends on around 750 suppliers for all of its products, including 200 for the iPhone. However, more than 300 of these companies are in China and will have to obtain from the Chinese authorities the possibility of exporting their production to India or Vietnam. Finally, in addition to hundreds of thousands of workers, China has also provided Foxconn with highly qualified production engineers who will have to be trained elsewhere.
All of this will have a cost. Either Apple will take it on its margins, but this will affect its income statement, and therefore its stock price, or it will pass it on to its customers. In any case, Apple is about to turn a decisive page in its history.