WSJ News Exclusive | Apple Looks to Boost Production Outside China

More than 90% of Apple products such as iPhones, iPads and MacBook laptops are manufactured in China by outside contractors, according to analysts. Apple’s heavy dependence on the country is a potential risk because of Beijing’s authoritarian Communist government and its clashes with the U.S., analysts have said.

Any move by Apple, the largest U.S. company by market capitalization, to emphasize production outside China could influence the thinking of other Western companies that have been considering how to reduce dependence on China for manufacturing or key materials. Such consideration has stepped up this year after Beijing refrained from criticizing Russia for its invasion of Ukraine and carried out lockdowns in some cities to fight Covid-19.

An Apple spokesman declined to comment. Asked generally about Apple’s supply chain in April, Chief Executive Officer

Tim Cook

said, “Our supply chain is truly global, and so the products are made everywhere.” He also said, “We continue to look at optimizing.”

Apple was seeking to diversify away from China before Covid-19 spread around the globe in early 2020, but those plans were complicated by the pandemic. Now the Cupertino, Calif., company is pushing again and telling contractors where they should be looking to build new manufacturing capacity, the people involved in the discussions said.

Lockdowns in Shanghai and other cities as part of China’s anti-Covid policy have caused supply-chain bottlenecks for many Western companies. Apple cautioned in April that the resurgence of Covid-19 threatens to hinder sales by as much as $8 billion in the current quarter.

China’s travel restrictions have meant that Apple has curtailed sending executives and engineers into the country over the past two years, making it hard to check production sites in person. Power outages last year also dented China’s reputation for reliability.

While many Western companies face similar issues in China, Apple’s size gives it bargaining power with contractors, said Ming-chi Kuo, a supply-chain analyst at TF International Securities. “Only a company like Apple can press for such supply-chain shifts,” Mr. Kuo said.

Still, people in the industry said many of the reasons Apple has long kept China as its manufacturing hub remain in place: a well-trained workforce, low costs relative to the U.S. and a deep network of parts suppliers that is hard to recreate elsewhere without years of effort.

With the exception of India, the pool of qualified workers in China exceeds the entire population of many alternative countries in Asia. Local governments in China have worked closely with Apple to ensure its contractors have adequate land, labor and supplies to assemble iPhones and other electronics in giant factories.

Chinese Premier

Li Keqiang

said Thursday that Beijing wants to be a hot spot for foreign investment and will work closely with foreign companies to make sure its rules are predictable.

Another advantage is that Apple can sell many of its made-in-China phones and computers in the same country, with China often accounting for about one-fifth of Apple’s global sales. Apple’s Mr. Cook said in January that the company had the top four bestselling phones in urban China.

“Given the size of the domestic market and the well-established ecosystem for manufacturing, China would stay at the head of the pack and handle more value-added work for companies like Apple,” an industry executive involved in the Apple supply chain said.

People who have spoken with Apple about its manufacturing plans said the company sees India as the closest thing to the next China, owing to its large population and low costs.

Taiwan-based assemblers

Foxconn Technology Group

2317 -0.47%

and

Wistron Corp.

3231 -0.89%

have already set up factories in India to produce iPhones mainly for that country’s domestic market, where Apple sales are growing rapidly. In April, Apple said it has begun producing the latest generation of iPhones, the iPhone 13 series, in India.

Apple is now speaking to some existing suppliers about expanding in India, including potentially production for export, the people said.

One problem with India is the difficulty China-based assemblers have setting up shop there because of chilly relations between New Delhi and Beijing, analysts and suppliers said. The two countries’ militaries fought a deadly clash along their disputed border in 2020, and recently have had a diplomatic dispute over Indian regulators’ treatment of Chinese smartphone maker Xiaomi Corp.

For that reason, China-based manufacturing contractors that do business with Apple are looking more to Vietnam and other Southeast Asian nations, according to people familiar with the matter.

Vietnam borders China and is already a smartphone manufacturing hub for Apple’s leading global rival,

Samsung Electronics Co.

South Korea-based

Samsung

has generally limited its exposure to China manufacturing.

India made 3.1% of the world’s iPhones last year, and the proportion is forecast to increase to 6% to 7% this year, according to research firm Counterpoint. China accounts for almost all of the rest.

One China-based manufacturing contractor,

Luxshare Precision Industry Co.

, has been making AirPods earbuds for Apple in Vietnam.

On recent calls with investors, Luxshare executives said some clients were worried about problems with power supply and pandemic restrictions–a reference to China’s challenges. The executives didn’t name the clients.

Luxshare said these clients were asking manufacturing partners to look outside China when they carry out key preliminary work for mass production, a stage known as new product introduction, or NPI. In this stage, contractors translate a brand’s product blueprints and prototypes into a detailed manufacturing plan.

Apple has told its manufacturing partners that it wants them to do more NPI outside of China, people familiar with the discussions said. If that happens, the non-Chinese sites would be more likely to develop into full-scale production hubs rather than simply copying plans developed in China.

Such steps require considerable investment by suppliers, analysts and suppliers said, which makes them uneasy at a time when the global economic outlook is clouded by high commodity prices, the war in Ukraine and stock-market gyrations.

Cash is important in uncertain times, a contractor executive said, but suppliers need to go where Apple goes if they want to keep the business.