One of the most frequently used buzzwords in business and political circles these days is deglobalisation. The end of an era as highlighted in one of the features from last week, referring to the end of four decades of globalisation when China emerged as the factory to the world, is best epitomised by this piece in The Economist. The article talks about the world’s most valuable company, Apple and its relationship with China – both as its biggest manufacturing base as well as the biggest market for its products and how that relationship is likely to have peaked. Whilst deglobalisation might overstate the situation somewhat, realignment of supply chains given the pandemic induced supply chain breakdowns, especially China’s zero Covid policy led lockdowns is a reality. Furthermore, geo-political issues with American embargo on Chinese tech firms and Xi Jinping’s vision of technological superiority has accelerated this reality.
“Apple’s extraordinarily successful past two decades—revenue up 70-fold, share price up 600-fold, a market value of $2.4trn—is partly the result of a big bet on China. Apple banked on China-based factories, which now churn out more than 90% of its products, and wooed Chinese consumers, who in some years contributed up to a quarter of its revenue.
…..[China] where 150 of Apple’s biggest suppliers operate production facilities. Tim Cook, who was Apple’s head of operations before he became chief executive in 2011, pioneered the firm’s approach to contract manufacturing. A regular visitor to China, Mr Cook has maintained good relations with the Chinese government, obeying its requirements to remove apps and to hold Chinese users’ data locally, where it is available to the authorities.”
So what’s changed?
“…Apple’s latest earnings, due out after The Economist went to press on October 27th, may be dented by creaky Chinese supply chains and softening demand from Chinese consumers. So Mr Cook, who has not been seen in China since 2019, is wooing new partners. In May he entertained Vietnam’s prime minister, Pham Minh Chinh, at Apple’s futuristic headquarters. Next year Apple is expected to open its first physical store in India (whose prime minister, Narendra Modi, is a fan of gold iPhones).
The two countries are the main beneficiaries of Apple’s strategic shift. In 2017 Apple listed 18 large suppliers in India and Vietnam; last year it had 37. In September, to much local fanfare, Apple started making its new iPhone 14 in India, where it had previously made only older models. The previous month it was reported that Apple would soon start making its MacBook laptops in Vietnam. Some of Apple’s newer gadgets show the way things are going. Almost half its AirPod earphones are made in Vietnam and by 2025 two-thirds will be, forecasts JPMorgan Chase. The bank reckons that, whereas today less than 5% of Apple’s products are made outside China, by 2025 the figure will be 25%”
So what’s driving this move away from China:
“…The most urgent reason for the scramble is the need to spread operational risk. Two decades ago the garment industry beefed up its operations outside China after the sars epidemic paralysed supply chains. “sars made it very clear to everyone operating in China that you needed a ‘China+1’ strategy,” observes Dominic Scriven of Dragon Capital, an investment firm in Vietnam. Covid taught tech firms the same lesson. Lockdowns in Shanghai in the spring temporarily shut a factory run by Quanta, a Taiwanese firm, believed to be making most of Apple’s MacBooks. Avoiding this kind of chaos is the “primary driving force” for Apple’s supply-chain moves, says Gokul Hariharan of JPMorgan Chase.
Another motive is containing costs. Average wages in China have doubled in the past decade. By 2020 a Chinese manufacturing worker typically earned $530 a month, about twice as much as one in India or Vietnam, according to a survey by jetro, a Japanese industry body. India’s ropey infrastructure, with bad roads and an unreliable electrical grid, held the country back. But it has improved, and the Indian government has sweetened the deal with subsidies. Vietnam offers tax rebates and holidays, too, as well as free-trade deals, including one recently signed with the eu. Bureaucracy around visas and customs remains a pain. But the work ethic is similar to that in China: “Confucius still gets them out of bed in the morning,” says one foreign executive in Vietnam.”
But the most important reason for this shift away from China is geopolitics:
“Rising Sino-American tensions are making China an awkward place to do business. Heightened Chinese sensitivity is adding friction. This summer Apple reportedly had to ask Taiwanese manufacturers to label their products “Made in Chinese Taipei” to appease newly finicky Chinese customs officials (at the risk of angering Taiwanese ones).
America, for its part, has become more aggressive in its competition with China’s domestic tech industry. On October 7th America announced a ban on “us persons” working for some Chinese chipmakers. On the same day it added 30 Chinese companies to a list of “unverified” firms its officials had been unable to inspect. Apple had reportedly been about to sign a deal to buy iPhone memory chips from one such company, ymtc, which can offer low prices thanks in part to Chinese government subsidies. Following America’s export controls that deal was put on ice, according to Nikkei, a Japanese newspaper.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.
Get weekly insights on our investment strategies and more...