‘Once-in-a-lifetime opportunity’: How a mass lockdown at the world’s biggest iPhone factory is India’s big chance to beat out China as Apple’s favorite supplier - Fortune

They were workers from Foxconn Technology Group—the world’s biggest electronics manufacturer—who were fleeing the institution compound. Some scaled barbed-wire fences to escape; others walked 25 miles to get home. 

A fewer days aft the wide exodus, China locked down the concern parkland wherever Foxconn’s Zhengzhou facilities are located, known arsenic “iPhone City.” That further isolated the facilities’ 200,000 workers, who were antecedently asked to enactment wrong a “closed loop” strategy due to the fact that of a COVID outbreak, successful which they sleep, live, and enactment wrong a designated country isolated from the extracurricular world. The closed loop strategy near Foxconn’s workers exposed to the virus and lacking basal necessities, which drove them to flee. 

This isn’t the archetypal lockdown astatine a Foxconn factory. Foxconn facilities crossed China suffered accumulation hits respective times this twelvemonth owing to government-enforced lockdowns and closed-loop systems. As a effect of the caller disruptions successful Zhengzhou, including some the lockdown itself and earlier idiosyncratic escapes, accumulation astatine Apple’s favourite iPhone mill has slipped to “significantly reduced capacity,” the Cupertino-based institution acknowledged in a enactment past week.

For astir 3 years, companies similar Apple person operated with the uncertainty of not knowing erstwhile and wherever the adjacent lockdown volition strike—and for however long—owing to Beijing’s strict zero-COVID playbook, underscoring the risks of being overdependent connected Chinese factories. 

Those lockdown uncertainties, combined with increasing Sino-U.S. commercialized tensions, has led Apple to accelerate its hunt for caller manufacturing hubs. And India has emerged arsenic 1 wide winner, with immoderate analysts betting that the world’s third-largest system is connected a accelerated way to becoming 1 of Apple’s favored suppliers.

Unpredictability 

Beijing’s dogged pursuit of zero-COVID has locked radical successful buying malls and bureau buildings, connected factory floors, and adjacent successful Disneyland. China’s microorganism containment measures, immoderate of the harshest successful the world, person fueled anxiety, depression, and intelligence trauma. 

For planetary businesses operating successful China, the government’s microorganism containment strategy has translated into large accumulation and income disruptions. 

Shanghai’s grueling 60-day outpouring lockdown prompted Starbucks’ China income to plunge 40% successful that quarter; Tesla delivered 18% less cars successful the aforesaid period, compared with the erstwhile quarter. Over the outpouring and summer, Apple lost $4 billion successful anticipated iPad and Mac income alone. As a effect of China’s microorganism containment measures—which show nary end successful sight—business sentiment has tanked. Only 55% of companies surveyed by Shanghai’s American Chamber of Commerce successful October said they were optimistic astir their five-year concern outlook successful China. It was the lowest speechmaking successful the survey’s 23-year history.

China’s adherence to zero-COVID, alongside increasing Sino-U.S. commercialized tensions, has made it progressively hard for businesses to “solely trust connected Chinese suppliers for product,” Patrick Penfield, prof of supply-chain signifier astatine Syracuse University, told Fortune.

“Many multinationals successful China are struggling to support production, person supplies, and conscionable demand,” helium said. 

Foxconn’s wide idiosyncratic flight and consequent lockdown successful Zhengzhou lone reinforces the “severity” of China’s microorganism containment strategy, Edith Terry, managing manager astatine consultancy Cotton Tree Advisors, which focuses connected concern and nationalist affairs successful East Asia, told Fortune. 

The consequences of China’s zero-COVID argumentation is an “absolute gut punch for Apple successful its astir important vacation quarter,” Dan Ives, managing manager astatine concern steadfast Wedbush Securities, tweeted past week. “We estimation this negatively impacting astir 3% of iPhone income this 4th based on…China accumulation [and] proviso issues. The albatross continues successful China,” helium said. 

Zhengzhou is simply a important tract for Apple’s iPhone production, peculiarly its newest models. iPhone accumulation could dilatory as overmuch arsenic 30% due to the fact that of the caller events—unwelcome quality for the electronics elephantine up of the vacation season. Apple said connected Sunday that it volition marque less iPhones and shipments volition beryllium delayed. Unpredictability successful Chinese proviso chains has created glaring uncertainties for firms similar Apple that “rely connected a unchangeable proviso of goods from China,” Chris Tang, distinguished prof successful concern medication astatine UCLA, told Fortune. 

“For this reason, Apple present has nary prime [but] to diversify its proviso base.”

And that base, helium added, is moving to emerging markets similar India and Southeast Asian countries.

Once-in-a-lifetime opportunity 

In caller years, India has courted multinationals with the goal of becoming the world’s apical electronics and smartphone manufacturing hub. In June 2020, it announced a $6.6 cardinal inducement strategy to pull planetary firms to nutrient their electronics successful India. 

The Modi authorities has recognized the existent infinitesimal arsenic a “once-in-a-lifetime opportunity” to sway planetary companies arsenic China’s zero-COVID strategy rattles their proviso chains, Akshobh Giridharadas, advisor astatine concern advocacy radical U.S.-India Strategic Partnership Forum, told Fortune. “India has constricted time—and [Narendra Modi] realizes that. The authorities is fast-tracking policies that volition springiness India an vantage arsenic companies progressively diversify their proviso chains,” helium said.

India’s beardown authorities enactment for smartphone manufacturing, coupled with its ample labour unit of skilled and young professionals, is incentivizing the world’s mobile-phone makers to ramp up accumulation successful the country, Tarun Pathak, probe manager astatine smartphone-focused consultancy Counterpoint Research, told Fortune. And 1 cardinal selling constituent that differentiates India from different emerging markets is its immense marketplace size. 

“Foxconn moving accumulation to India from China is besides astir getting person to a high-growth market, alternatively than, say, pursuing U.S. argumentation signaling to incorporate China,” Terry said. Apple besides wants to predominate India’s fast-growing high-end smartphone market, which is expected to deed 10% adjacent twelvemonth from 7%, Pathak said.

Now, experts say, India is rapidly becoming a favored mill hub of Apple’s astatine China’s expense. 

In September of this year, Apple began manufacturing iPhone 14s astatine a mill extracurricular the metropolis of Chennai—the archetypal clip ever that the Cupertino-based institution has based accumulation of its newest smartphones successful India, marking a large displacement successful its manufacturing strategy. 

After the latest Zhengzhou lockdown, Apple asked a 2nd supplier—Taiwan’s Pegatron—to commencement cranking retired its latest iPhone exemplary successful Tamil Nadu, according to a Bloomberg report. Foxconn present plans to quadruple its India workforce successful the adjacent 2 years to 70,000, says a Reuters report.

Analysts present expect a bigger and quicker-than-expected iPhone accumulation displacement to India. In September, JPMorgan analysts predicted that India could nutrient 5% of Apple’s iPhone 14 inventory and 25% successful 3 years. Ming-Chi Kuo, an Apple-focused tech expert astatine Hong Kong–based TF International Securities, said past week that the Zhengzhou lockdown prompted Foxconn and Apple to accelerate iPhone accumulation successful India. Kuo expects iPhones made successful India—still by Foxconn—to turn by astatine slightest 150% adjacent year. 

“Foxconn’s medium- to semipermanent extremity is to vessel 40% to 45% of iPhones from India, versus the existent 2% to 4%, meaning Foxconn’s iPhone accumulation capableness successful India volition summation rapidly successful the adjacent fewer years,” Kuo suggests.

Pathak believes that Apple “can standard successful India” with iPhone accumulation successful the state apt to treble adjacent year. But helium argues that India contributing fractional of each iPhone assembly worldwide is an “ambitious” extremity owing to China’s still-outsize relation successful the iPhone proviso concatenation and stiff contention from different emerging markets.

Apple isn’t unsocial successful diversifying its accumulation to India. Rivals similar Samsung, Xiaomi, and Google (which makes the Pixel smartphone), are besides shifting accumulation to India. From 2021 to 2022, India’s smartphone accumulation surged 126%, making the state the world’s second-biggest smartphone shaper down China.

Companies similar “Apple, Abbott, Boeing-Tata, Flex, Pratt & Whitney…are conscionable the commencement of this wave” of multinationals shifting to India, Gunjan Bagla, India managing manager astatine concern consultancy Amritt and concern prof astatine Arizona State University, told Fortune.

Still, India needs to physique retired the infrastructure and endowment that these companies need. China inactive offers businesslike and high-value manufacturing networks that Apple—and different multinationals—will find hard to regenerate successful India, Paul Hong, distinguished prof of planetary supply-chain absorption astatine the University of Toledo, told Fortune. India imports the bulk of iPhone components from China. “For Apple, wholly decoupling from China [is] not realistic successful the abbreviated run,” Hong said. Rather, companies are present pursuing a “China positive one” strategy that sees them retaining operations successful China, but diversifying proviso chains to India and competing economies similar Vietnam and Mexico, Bagla said.

The Chinese authorities person present lifted the lockdown successful Zhengzhou, but the Foxconn compound remains nether a strict closed-loop system, with institution and authorities officials providing nary denotation of erstwhile it volition end.

And India volition proceed successful its ngo to instrumentality vantage of China’s zero-COVID pain, Giridharadas argues. 

“India is lone getting started.”