This year Apple, one of the world’s most valuable companies has started ramping up production of iPhones in India as opposed to China. It could mark a significant shift not only for Apple but for geopolitics and the world economic hierarchy for the next decade. “No matter if it’s India, Southeast Asia or the Americas, there will be a manufacturing ecosystem in each,” Foxconn chairman Young Liu told investors on a conference call sometime in August 2020.
Historically, Apple products have had close ties to China for over decades. This started in 2001 when the original iPod was manufactured by Foxconn in China. Over time this relationship between apple and china only grew stronger. In 2019, China accounted for 90% of Apple’s product factories. Then 2020 happened. The economy-wide shut down coupled with the china-us trade war forced the tech giant to reconsider but where would they turn to?
The answer is – India.
Apple has been here for several years albeit with low impact on the mobile phones market. However, Apple’s contract manufacturers have slowly been shifting its production to India to reduce dependence on China. Currently, iPhone XR and iPhone 11 are being assembled by Foxconn at its Chennai manufacturing plant while iPhone 7 is being assembled by wistron in Bengaluru. The new iPhone SE 2020 is also being assembled by apple’s supplier Wistron at its Bengaluru facility.
It is taken for granted but making a smartphone is a complicated process from raw materials, research and development, manufacturing, production and finally sales. Thus, local manufacturing alone may not solve the problem, but it’s better off in doing so.
About local manufacturing- “It’s a thoughtful move by the government aimed at wooing Apple to bring significant iPhone manufacturing to India” says Harry Om Rai, founder of Lava – one of India’s largest smartphone makers.
So why is Apple moving to India?
Foxconn began assembling top-end Apple iPhones in India in 2019. The primary reason is that India is one of the leading users of mobile phones owing to the large population. Another reason being they want to avoid high tariffs.
Recently, the Indian government has put in place high tariffs on the import of smartphones. At the same time offering cheaper import rates on smartphone parts to encourage manufacturers to build devices in India and drive the country’s manufacturing business.
India has a unique method to encourage tech companies to bring a portion of their manufacturing process to India and employ domestic workers. As part of that incentive, they will eliminate certain tariffs associated with bringing complete ready-to-sell smartphones into the country. This incentive scheme is important especially to Apple as iPhone sales have previously stagnated in India. Stagnation has been a direct consequence of the high price added to the high import tariffs in India. This makes the cost of purchasing an iPhone almost double.
If Apple’s bet on India is successful would other companies follow suit?
Since it’s not profitable to neglect a large population who are also potentially the largest consumer of the smartphone industry, Apple decided it’s time to move its manufacturing base to India. Moreover, other companies could take advantage of the apple’s venture in India and gain significant insights. Regardless, companies are looking to diversify their supply chains whether or not they find a country that currently meets their needs.
What’s in it for India?
India has a population of 1.3 billion including a young workforce and the government that’s actively trying to reboot their economy. It is the second-largest mobile phone manufacturer in the world. The Prime Minister, Narendra Modi has called for a self-reliant India and wants to encourage local manufacturing to create jobs. This plan is called the production linked incentive program if successful, India hopes to revive an economy that has been battered by the lockdown.
Part of the plan is trying to attract smartphone makers with a US$ 6.6 billion federal scheme. An incentive on capital expenditure will be provided for the production of electronic components,
Semiconductors and other projects in India whose efforts will employ over 800,000 people and lead to exports totalling around US$ 143 billion over the next five years. It could Make India a global hub for the manufacturing of electronics and smartphones.
Why is Apple moving out of china?
Apple requested the move as a way of making its supply chain less reliant on China. The increased economic tension between the two nations also accelerated the decision of shifting their manufacturing hub elsewhere.
As China became the manufacturing hub of the world, their wages also grew and this priced the nation at a disadvantage. The average wage in China was US$ 150 now it’s around US$ 13,000 and this has made manufacturing products in China more expensive. The low cost of living in India translates into low wages in comparison to Chinese wage rates. The Indian monthly manufacturing salaries are roughly one-third of that of China’s.
Despite all of this, it’s not easy for India to absorb and take over manufacturing capacity from china. Indian has its own set of challenges that it needs to overcome. In recent years, India has shown massive improvements with the help of government support encouraging investment into the nation. Now it only has to overcome the hurdles of infrastructure, tooling and training. This would result in millions of people being lifted out of poverty.
Indian officials revealed that Apple was considering shifting 20% of its production capacity out of China which sums up to around US$ 40 billion in investment over the next five years. When the iPhone manufacturer shifts an entire ecosystem, the following years will be dramatic and India could become the new China in phone manufacturing.
Significance for Apple and the Indian manufacturing sector
Apple’s largest contract manufacturer – Foxconn, started producing the iPhone XR in India. It was the first time that a top of the line iPhone was made in this country. It can be marked as a significant event for Apple’s supply chain. Previously, the apple only manufactured its older cheaper models but recently Apple has announced that iPhone 11 will be manufactured in India.
The move signals a renewed confidence in India’s manufacturing capabilities and demand in the market. Manufacturing in India saves the company 22% in import duties. If Apple chooses to pass this on to the customers, it would make its products very aggressively priced. This in turn would give a tough competition to the android-based smartphones.