Apple has relied on China’s efficient manufacturing for years. Then came zero-covid.

Matthew Zeitlin

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China’s zero-covid policies threw a wrench in the entire supply chain just in time for the holidays.

Citing China’s covid-19 restrictions, Apple announced earlier this month that its facility in Zhengzhou, China, was “operating at significantly reduced capacity,” resulting in fewer and delayed shipments of the iPhone 14 Pro and iPhone 14 Pro Max.

Meanwhile, Apple had already pulled back on manufacturing less expensive models of the iPhone 14 due to “softer demand,” according to Bloomberg. And, in another blow to the American business community’s relationship with China, the U.S. Department of Commerce had recently announced new restrictions on China’s semiconductor industry that may end Apple’s plans to use Chinese memory chips.

“It’s going to have some impact; lead times on a few of the models are pushed out into early January,” Ryan Reith, an analyst at IDC, told Grid. “There’s going to be challenges in getting certain [products] in certain markets by Christmas. Part of that is because of the factory disruption we’ve seen in China.”

That disruption escalated Wednesday, with workers in the Zhengzhou iPhone facility fighting with security personnel, according to videos from the scene and media reports.

Apple is just one of many American companies rethinking their extensive business ties in China, although there may not be any as well-resourced and also as entrenched. Apple’s supplier list includes 151 Chinese locations. China is not just a workshop for Apple, it’s a market; in its most recent fiscal year, almost a fifth — $68 billion of $366 billion — of its sales came from mainland China, Hong Kong and Taiwan.

“Apple is going through what virtually every U.S. company is going through: a risk reassessment. It’s not brand new, companies have been reassessing the political and economic risk of doing business in China for at least 10 years,” William Reinsch, Scholl chair in international business at the Center for Strategic and International Studies and a former export policy official at the Commerce Department, told Grid.

These efforts to reassess the risk of corporate entanglement with China were only accelerated by the Trump administration’s trade war with China — largely continued by the Biden White House — as well as covid-19 and the waves of factory shutdowns that have continued through today.

“This latest zero Covid situation is an absolute gut punch for Apple in its most important holiday quarter,” Wedbush Securities Analyst Daniel Ives wrote in a note to clients. “With demand remaining firm into holiday season, we would estimate this negatively impacting roughly 3% of iPhone sales this quarter based on impacted China production/supply issues.”

Apple has already begun to set up some manufacturing in Vietnam and India. Bloomberg reported that Apple is looking to expand its semiconductor sourcing not so much away from the manufacturing giant Taiwan Semiconductor Manufacturing Company (TSMC) — arguably “the most important tech company in the world,” Reith said — but to source it from a facility TSMC is working on in Arizona. The Wall Street Journal also reported that TSMC is looking at expanding in Japan.

An Apple spokesperson declined to comment.

How U.S. policy is changing the landscape for Apple

The export controls recently announced by the Biden administration, explained Reinsch, were due to the Biden administration deciding “that it was not in the U.S. interest to permit and facilitate China’s technological advances in AI and high-performance computing.”

Going forward, the Commerce Department rules will not necessarily imperil Apple’s existing manufacturing and assembly relationships with China, but they may mean that new Chinese suppliers, especially for advanced components, are probably out of the question. “If there’s a Chinese vendor that looks appealing, they will probably fall under sanctions. Apple will stop talking to Chinese semi manufacturers,” Goldberg said.

The most immediate impact of this new U.S. policy for Apple is that it likely shuttered conversations between Apple and Chinese company Yangtze Memory Technologies Corp (YMTC) to make memory chips for some phones sold in China, according to reporting from Nikkei. Instead, Apple will need to continue to rely on Taiwan Semiconductor Manufacturing Company, where it currently sources semiconductors. “They’re 100 percent reliant on TSMC no matter what,” Goldberg said.

Apple’s stop-and-start relationship with YMTC is a capsule example of how political winds blowing both east and west can affect the course set out by even the most powerful and well-resourced corporations.

“YMTC had a design win for the current iPhone. They were going to win a fairly significant order for Apple for the current iPhone cycle; they basically built a whole plant for Apple. They have very good products, and it was very reasonably priced, and it had a lot of capacity,” Jay Goldberg, founder of D2D Advisory, told Grid. “And that’s all gone now.”

While components can be sourced from all over the world, iPhone manufacturing largely takes place in China, and any effort to move that away would be mean ripping up years of investment in order to build a network of suppliers and train thousands of workers. “There are so many dependencies, and it’s such a complex set of stakeholders and ecosystems,” Goldberg said.

At the same time, working in China exposes companies to unpredictable government policy, whether it be covid lockdowns or more capricious interventions. “It doesn’t take much to send 24 health and safety inspectors in the Foxconn plant and discover 84 safety violations and shut down the plant,” Reinsch said. “It sends a message.”

Continuing concerns for Apple

While Taiwan — and with it its massive semiconductor industry — does not pose the same kind of political headaches as China does when it comes to covid policy or political disputes with the United States, there are obvious risks of conflict breaking out in the Taiwan Strait. “There’s no other option besides Taiwan,” Goldberg said. “There’s a whole lot of geopolitics buried deep inside there.”

For the time being, Goldberg said, Apple will continue to use chips made by TSMC, and “there’s nothing in the next year two or there that can really change that. The only thing that can maybe change that is Intel,” which is also working on semiconductor facilities in the United States, buoyed by tax incentives in the Chips and Science Act. But, Goldberg cautioned, “that’s an end of the decade, 2030 timeline.” Goldberg speculated that any work done by TSMC in Arizona will affect a small portion of Apple’s iPhone business: “Maybe it’s enough so that [chips in] iPhones sold in the U.S. can be [manufactured] in TSMC Arizona, but I’m not sure they can get all of that.”

“The buzzword is resilience — don’t put all your eggs in one basket,” Reinsch said. “For Apple, it means let’s not have chokepoints that are entirely dependent on Chinese products.”