Placing all its eggs in one basket has shown Apple the folly of relying highly on one country, China. In early 2015, much before the COVID-19 pandemic struck, Apple Inc.’s management teams had suggested that the company relocate assembly of at least one iPhone product to Vietnam which would allow Apple to begin the multiyear process of training workers and creating a new cluster of component providers outside of China. However, Tim Cook’s leadership at Apple failed to heed to the advice then. Now, both the pandemic that originated in Wuhan, China and the undercurrents of the trade war between Washington and Beijing are forcing Apple and Tim Cook to re-evaluate and reconsider the decision. Early or late, Apple is now in talks with India to shift nearly 20% of its production capacity from China to India, aiming at USD 40 billion in revenue. Will India gain from Apple iPhones MAKE IN INDIA?

The Shift from China to India

• Chairman Simon Lin of  Wistron Corp, Apple’s manufacturing partner, declared that half its capacity would reside outside China within a year. It is setting aside USD 1 billion to fund the expansion this year and next to set up manufacturing in India.
• Alex Yang, Foxconn Technology Group investors relations chief, told investors in a recent call, “Trade, the virus, all these things will make the world very different in the next decade,” Foxconn which already has a presence in India, manufacturing iPhones since last year, is now rethinking to expand its present capacity.
• Similarly, Chief Executive Officer Liao Syh-jang at iPhone assembler Pegatron said, they would also be diversifying manufacturing sites, and it’s further looking at India as a location for new facilities.

Apple set to become India’s top mobile phone exporter

Apple Inc. is in talks with Indian officials to produce up to USD 40 billion worth of iPhones, mainly for exports through its contract manufacturers Wistron and Foxconn, under India’s production-linked incentive (PLI) scheme.

The PLI scheme with an outlay of INR 40,000 crore will be applicable from August 1, 2020, on mobile phones and specified electronic components such as Printed Circuit Boards (PCB), photopolymer films, and Assembly, Testing, Marking and Packaging (ATMP) units among others. The scheme outlines that companies which make phone priced at INR 15,000 and above and which will make a cumulative investment of INR 1000 crore over four years starting with INR 250 crore in the first year will qualify for an incentive of 6% for the first two years followed by 5% for the next two and 4% in the fifth year. Incremental sales of manufactured goods over the base year should be INR 4000 crore for these companies in the first year with sales totaling INR 25,000 crore by the fifth year.

Apple is currently ironing out a few issues it is facing under PLI. As one of its executives’ mentions, “There are some problems with some of the clauses. For instance, valuing the entire plant and machinery already in use in its plants across China and other places at 40% of that value and the extent of the business information sought under the scheme are some of the irritants.”

Apple Inc wants to reap the benefits of the Indian government’s new PLI scheme in order to make the big shift from China to India and eventually become India’s top mobile phone exporter.

The Facts and the Figures

In February, 2020, Apple CEO Tim Cook expressed taking small steps to partly move out of China on account of the supply-chain being effected by the pandemic. The process would be slow and well-thought of. He said “We’re talking about adjusting some knobs, not some sort of wholesale, fundamental change.”  But then again in May 2020, Apple Inc. started serious talks with the Government of India to seek alternatives to China for shifting a part of its production facility.

• Apple’s revenue touched USD 260 billion in 2019.
• In the last quarter, Apple held a 62.7% market share in India’s premium smartphone market.
• Apple sells phones worth approximately USD 1.5 billion in India, of which less than USD 500 million are manufactured locally.
• In China, it produced merchandise valued at USD 220 billion in 2018-19, of which USD 185 billion worth of goods were exported.
• Apple, directly and indirectly, employs over 4.5 million people in China.
• Apple Inc. partners are looking to diversify their factories outside of China to include additional manufacturing units in countries like India, Vietnam, and Indonesia.

Conclusion

In the wake of the current coronavirus (COVID-19) pandemic, a tech giant like Apple Inc. is eyeing India, to shift some of its current manufacturing from China to India. Whether India can match the ease and efficiency of basing manufacturing in China, waits to be seen. The optimism surrounding India’s growth is founded upon foreign capital moving to India from China. Under the leadership of PM Narendra Modi, India is yet to improve its ranking in ‘Ease of Doing Business’ in the country. First Japan announced USD 2.2 billion in monetary support for Japanese-based businesses to shift their production and manufacturing out of China. Soon riding the wave were South Korean and US companies who approached the Government of India to relocate some of its manufacturing from China to India. Will India be able to capitalize on that, remains to be seen.

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On April 7, 2020, Japan reported it is ready to spend 2.2 billion dollars to help companies to shift out of China and now South Korea is looking to move some of its manufacturing units from China to India. China is not just facing skepticism for its lack of cautiousness in handling the Coronavirus (COVID-19) that unfolded in Wuhan but also for under-reporting the extent of the epidemic and causing a devastating effect on global trade. The world has lost faith in China. It’s time for a paradigm shift and the emergence of new trade partners.

South Korea is now considering to pull out its manufacturing units from China and looking at India as a ‘favorable nation’ to relocate. The Korean consulate in Chennai, India has already received requests from its companies in the iron and steel sector, hospitality sector, and few start-ups who want to make this shift from China to India. Yup Lee, the deputy consul general for the Consulate General of The Republic of Korea, said the government of India had shown interest in setting up Posco and Hyundai Steel factories in Andhra Pradesh. Besides the two behemoths, there are several companies which want to come to India. But with COVID, there might be some delays,” he said.

India-Republic of Korea bilateral co-operation since February 1996

India-South Korea relations have been relatively strong. In July 2018, the President of South Korea, Moon Jae-in and the Prime Minister of India, Narendra Modi jointly inaugurated the Samsung Electronics smartphone assembly plant in Noida. The India-South Korea partnership has also seen companies like LG Electronics and Hyundai Motors well-established in India.

India has a chance to replace China as a global economic leader

The coronavirus is expected to cost the global economy up to $2 trillion this year. Once the pandemic is brought under control India will have to participate in rebuilding its economy. It will need to address immediately the incentives to attract more South Korean companies moving out of China. Taking a cue from countries like Vietnam, which provide preferential tax rates and the tax holidays, the Indian government will require to devise a lucrative policy where both countries benefit. HDFC Bank chairman Deepak Parekh already voiced his sentiments about the Indian government readying itself to receive companies that want to get out of China. He said, “We should make it easy for the Japanese to come to India rather than them going to Malaysia, Vietnam or Thailand. States have to take the initiative and offer them 2,000 to 5,000 acres in some special zone where they do not have to look for land or building approvals,”

Make In India

In the post-corona pandemic, India will have to accelerate reforms to remain in the race with countries like Vietnam, Malaysia, Taiwan and Bangladesh, who are looking to get a piece of the Chinese pie. It’s time for the country to seize this opportunity to emerge as a viable alternative to China. ‘Make in India’ has to be a success story and not just a government initiative. From IT, pharmaceuticals, electronics, consumer appliances, electric vehicles, footwear and toys, India has the hands, the head and highways to support global industries. If India succeeds, it will be able to bring its economy back on track sooner than later. Prime Minister Narendra Modi’s timely lockdown in India has already won him respect among world leaders. The world is looking at INDIA!

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The Wake-Up Call for Countries around the World 

Japan

The Shinzo Abe government of Japan in response to the coronavirus pandemic, is the very first to take drastic action against China by urging Japanese companies to move factories out of China, and back to Japan or any other country. Despite the scheduled visit of the Chinese President Xi Jinping to Japan in April, and ongoing trade relations between China and Japan (China is Japan’s No.1 trading partner), the Prime Minister Shinzo Abe-led Japanese government has taken what one calls ‘a historical decision against China’. China as a hub with the lowest costs of production is slowing dying as countries are preparing to reduce their dependence on China and look for other suppliers.

The government of Japan earmarked a $2.2 billion economic stimulus package to help its manufacturers shift production out of China claiming the coronavirus disrupts supply chains between the major trading partners. This budget aiming to offset the devastating effects of the pandemic, includes 220 billion yen ($2 billion) for companies shifting production back to Japan and 23.5 billion yen for those seeking to move the production to other countries. The government panel discussed the need for manufacturing of high-added value products to be shifted back to Japan, and for production of other goods to be diversified across Southeast Asia.

A February 2020 survey by Tokyo Shoko Research Ltd. found 37% of the more than 2,600 companies that responded were already diversifying procurement to places other than China amid the corona virus crisis.

USA

Though President Trump signed an initial trade deal with China in January 2020, the underlying message was to bring back manufacturing of items, back to the US and reduce its dependency on China over the coming years. The Trump administration made only a small cut in tariffs on a few Chinese goods, leaving in place hefty 25% duties on about $250 billion of imports from China. On account of these duties, a slow exodus from China was already underway as companies started to shift from their China partners to Vietnam, Bangladesh and throughout Southeast Asia.

For American companies like Apple, Microsoft, Google, and Procter & Gamble, the corona virus crisis highlighted the downside of their dependency on China. P&G, for example, said it has 387 suppliers in China that ship 9,000 materials globally, affecting about 17,600 finished products leading to a major drop in profits. Apple’s chief executive, Tim Cook, when the corona virus spread through China, told investors that it wasn’t going to meet its revenue projections in the current quarter because its contract factories weren’t resuming production as quickly as it had expected. Apple is not only recooking into its supply chain for a major overhaul, but it has taken baby steps to diversify and depend less on China.

The Trump administration need not say it aloud but the current coronavirus has exposed American companies to the downside of relying on cheap goods from China. In the coming months, once the air clears, US-China trade figures will tell another story.

Europe

Who could have foreseen the extent of the coronavirus in Italy? Italy blames Matteo Renzi ex-prime Minister when in 2014 he allowed the Chinese to begin buying a property in Italy. His politics and policies soon led the Chinese to own 300 companies including banks, telecoms, fashion and represent 27% of the major Italian companies. In December 2019, the first coronavirus case had been imported by Italy from China in the Chinese neighborhoods of Lombardy. The people of Italy are learning a hard-hit lesson allowing the Chinese to foray into their businesses and taking over lives.

The French Finance Minister Bruno Le Maire on April 6, 2020, said on radio France Inter “We have to decrease our dependence on a couple of large powers, in particular China, for the supply of certain products” and “strengthen our sovereignty in strategic value chains” like cars, aerospace, and medicines.

Even Chief Security Officer Thomas Tschersich of Deutsche Telekom, Germany, said, “We need to be willing to invest in Europe to balance out the dependency on China”.

Slowly but surely more countries and companies in Europe are facing up to the economic reality.

Conclusion

While Japan said ‘pack up and get out of there’, US talked about ‘decoupling’ from China, and Europe spoke about ‘break dependence’ on China. Companies are now looking to source components outside of China and also increasing their vendors in more than one country for a single product keeping in mind materials safety, environmental rules, and labor practices. Will China survive the reverse effects of globalization and how it will benefit countries like India, Mexico, Vietnam, and Bangladesh, remains to be seen.

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