This Supply Chain Matters blog serves as a side panel to our previously published blog updating readers on the Biden Administration’s initial 100-day findings on the Executive Order signed by President Biden to review strategic U.S. supply chain strategy.

One of the deemed strategic supply chains for the United States is that of semiconductor and electronics manufacturing supply networks, and one significant influencer of ongoing global supply network strategies for this industry is that of Apple, designer of iPhones, Mac computers, iPads and Apple Watches, among other hardware products.

Earlier this month, Nikkei Asia published a report: China Ousts Taiwan as Apple’s Biggest Source of Suppliers. (Paid subscription or metered complimentary view)

The opening statement of this report declares:

China now boasts more Apple suppliers than any other country, a sign that Washington’s attempt to untangle U.S. and Chinese supply chains has had little impact on the world’s most valuable tech company.

The report cites the publication’s analysis of the recently released Apple Supplier List and reports that: “Of Apple’s top suppliers in 2020, 51 were based in China, including Hong Kong”, based on the analysis. That was up from 42 in 2018. These new numbers reportedly for the first time remove Taiwan from the top spot of supplier sourcing. That region now represents Apple’s second most favored region, but the overall supplier number dropped to 48 from that of 52 in 2017 and 47 in 2018. The Apple Supplier List represents 98 percent of the product designer’s spending on direct materials, manufacturing and assembly for the preceding fiscal year.

As many of our readers are aware, Apple has practiced outsourced manufacturing strategies since the consumer electronics provider’s earliest days.

Three other important observations stem from this Nikkei report.

First, Chinese and Taiwanese suppliers are now assisting Apple in supply network risk mitigation efforts towards other regions of Asia, including Vietnam. Reportedly, suppliers from that region grew to 21 last year from 14 in 2018. The context of supply chain resiliency has many dimensions, some non-U.S. in perspective.

The number of Apple’s U.S. based suppliers has dropped to 32 from the 37 reported in 2017. According to Nikkei, most of these suppliers supply high value semiconductors and materials that are difficult to source elsewhere. By our lens, the subtle inference is that if there was a lower cost, equivalent or superior technology alternative, it would be exercised.

As a Supply Chain Matters commentary observed in May, while Apple touted an accelerated commitment to invest $430 billion in U.S. focused investments, the majority is focused on U.S. based employees and added new corporate campuses, fostering software applications development, new product design, product and component engineering efforts.  Little of that number is direct materials spend. According to the Apple’s recent press release: “Apple spent $50 billion buying from more than 9,000 U.S. suppliers and manufacturers.” Obviously, the global wide supplier numbers do not add up.

The final rather important observation brought forward from the Nikkei report was cited from an Apple supply chain manager, observing that many Chinese suppliers win orders from Apple by purposely offering very-low pricing.  The reported rewards are being able to scale-up to Apple’s volume production numbers, further allowing opportunities to adopt more advanced technology capabilities, gaining the market credibility as an Apple qualified supplier and opening the door to other supply opportunities. Some influential Apple suppliers are chosen to guide Apple to other Asian based regions while providing overall management of such facilities. They are willing to accept low production margins in the hope of significantly high manufacturing volumes and the lure of new, higher margin business opportunities and added growth among other high-tech hardware designers.


Added Thoughts

As the Biden Administration efforts on defining needs for U.S. based strategic supply chain resiliency continue, one reality will be once again uncovered. Highly influential product designer’s such as Apple continue to favor a sourcing strategy that is dominated by a predominately lower-cost sourcing motivation.

The reasons stem from both from larger volumes of revenues originating from overseas markets, particularly China and other areas of Asia, and a business model that favors maximum free cash flows as a reward to investors. In the specific case of Apple, free cash flow amounted to in excess of $71 billion in fiscal 2020, with tens of billions of dollars channeled to stock buyback and shareholder dividend purposes.

The sum total of this Biden Administration analysis will be in weighting needed strategic national security and economic growth concerns with the realities of powerful investor interests with a continued singular focus on shorter-term monetary benefits. Indeed, one or more potential recommendations could be in addressing foreign investment tax policies, or in income taxing of excess stockholder cash benefits.  That is not likely to be a non-partisan set of discussions in the current U.S. political climate.


Bob Ferrari

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