Background

In our many commentaries focused on Apple’s supply chain, we have highlighted specific tactical and strategic moves, specifically supply chain segmentation efforts. This week features a report indicating another such move, but with a likely different and possibly risky strategic twist.

In 2012 and again in 2013, Supply Chain Matters called attention to reports of Apple augmenting its prime contract manufacturing supplier Foxconn with added contract manufacturers. The sheer output volume that Apple can command from suppliers tended to be both a blessing as well as a risk. Apple supply chain strategies

In the classical sense of supply chain segmentation strategy, prior moves focused on various cost lineups of the company’s iPhone, iPad or other consumer products line-up.  In 2015, Apple invited contract manufacturer’s Compal Electronics and Wistron, which tended to focus on personal computer and laptop contract manufacturing, to potentially provide a presence in the company’s production needs. In retrospect, such relationships do not seem to have resulted in any significant presence.

 

Newest Development

In a noted exclusive report published by Nikkei Asian Review and subsequently highlighted by both the London based Financial Times and 9To5Mac, the iconic consumer electronics provider is reportedly encouraging a long-time component supplier, Luxshare-ICT, to expand its product value-chain presence  to include making a significant investment in iPhone and MacBooks metal casings manufacturer Catcher, and to eventually encroach on long-time CMS Foxconn’s existing services.

Luxshare’s primary supply chain presence has been in providing manufacturing of Apple’s AirPods. When Apple fell behind in product development of AirPods, Luxshare was able to rise to the challenge of quickly ramping-up for 2019 Christmas holiday related demand. The Nikkei report points out that Apple is of the belief that this contract manufacturer can become a viable competitor to both existing CMS providers Foxconn and Pegatron with an additional investment in added capabilities.

The Financial Times report had a slightly different slant, opining that at a time when the U.S. is decoupling from China, Apple is strengthening its ties toward China-centric manufacturing, perhaps in an effort to deepen its capabilities to directly serve China’s vast consumer market.

 

Supply Chain Matters Perspectives

From our lens, this Apple development is perplexing at the surface. It could be a strategy component of supply chain segmentation for lower-priced iPhones, or it could be a component of a broader strategy involving regional market supply risk mitigation.

In June of last year, as trade tensions continued to heat up among the United States and China, The Wall Street Journal reported that Foxconn was ready to shift iPhone production out of China if directed by Apple. The revelation came from the contract manufacturer’s first-ever investor meeting.

After that report, there were continuing reports from Asia based sources including Nikkei, that the consumer electronics company had asked its largest suppliers to consider the feasibility of shifting 15  to 30 percent of output from China to other areas of Southeast Asia including either Vietnam or India.

In late April, this blog highlighted a South China Morning Post report indicating that Foxconn was accelerating plans to develop a semiconductor component supply chain internally within China. We viewed this move as very significant as well as controversial, perhaps leading to what China watchers view as an inevitable decoupling of U.S. and China high tech supply networks. However, that implies Apple would be in a difficult position as a U.S. based company.

Earlier this week, our blog commentary: Signs of Strategic Sourcing Changes Among Semiconductor Supply Networks highlighted broader moves underway that signal decoupling.

We speculate that this Luxshare move could be a strategy element of supply chain risk mitigation as well as geo-political balancing.

If Apple wants to grow its China based market for iPhones, it will need to have a strong China based manufacturing presence. Conversely, if Foxconn is indeed positioning for further horizontal product value-chain integration into semiconductor fab and packaged circuits, that could be the prelude to allowing existing China based high tech and consumer electronics companies to have sole China based sourcing for such termed strategic components.

Foxconn has and will likely remain Apple ace in the hole for the most difficult manufacturing challenges. That is not likely to change. However, Foxconn’s 15 million square foot Zhengzhou assembly facility, which at peak times, has employed upwards of 300,000 workers, has been characterized as the largest iPhone assembly facility in the world. With the trending of declining sales of iPhones, Foxconn will likely need to explore newer customer production opportunities for this, and other China based facilities. China has its own challenges related to COVID-19 economic shocks to employment levels.

Thus, a segmented supply chain strategy predicated on geo-political risk mitigation may be at-play for both Apple and Foxconn.

Time and added development will tell the full story, but undoubtedly, high tech supply networks are about to undergo structural changes centered on geo-political risk factors.

Industry supply chain and strategic sourcing teams are advised to continue to monitor industry developments.

 

Bob Ferrari

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