Apple Is Facing Major Challenges in China

Every September, Apple unveils its latest phones at its futuristic Silicon Valley campus. A few weeks later, millions of its new handsets, assembled by legions of seasonal workers hired by its suppliers, are shipped from Chinese factories to customers around the world.

Apple’s annual iPhone releases typically run like clockwork, a prime example of how the American tech giant has navigated seamlessly between the world’s two largest economies in the era of globalization. has become a more profitable company than

But this year, a smooth rollout for the iPhone 14 was the latest casualty of the growing difficulty of doing business in China. Beijing’s relentless efforts to contain Covid-19 and rising tensions with the United States have forced Apple to reassess key aspects of its business.

A recent outbreak of coronavirus cases in the area around Apple’s largest iPhone factory in central China’s Zhengzhou prompted local authorities to order a seven-day lockdown last week. As a result, the company said on Sunday, It won’t be able to produce enough phones. To meet the demands of the holiday season.

For much of this year, Apple has also been the focus of bipartisan interference in Washington, where alarm has faded. Beijing’s military provocation. And technological ambitions have eclipsed conservatism about free trade.

In March it was revealed that Apple was in talks with an obscure Chinese memory chip maker, Yangtze Memory Technology Corporation, or YMTC, to supply components for the iPhone 14.

That clashed with the work of a coalition of lawmakers and more than a dozen congressional aides, who spent months investigating the ins and outs of Apple’s supply chain in China. Commerce Department Sanctions issued. Last month that barred US companies from selling machinery to YMTC, making it difficult for Apple to pursue the deal.

Apple has publicly confirmed that it spoke with YMTC, which did not respond to requests for comment. But an Apple spokesman declined to comment when asked if the company had given up on working with the Chinese memory maker.

The recent development underscores how Apple’s close relationship with China, once considered a strength of its business, has turned into a liability.

It’s no coincidence that Apple’s rise from near-bankruptcy in the 1990s to the world’s most valuable company has closely followed China’s economic rise. It pioneered a best-of-both-worlds business model: products designed in California were cheaply assembled in China and sold to the country’s growing middle class.

As China’s economy roars, Apple boosts profits. But as relations between the U.S. and China deteriorate, and both governments meddle in Apple’s business, the company has become a symbol of its break with one of globalization’s greatest success stories.

“Apple is discovering that geopolitics drives business models — not the other way around,” said Matthew Turpin, a visiting fellow at the Hoover Institution who specializes in U.S. policy toward China. “This whole set of supply chain risks is creating a real liability for them.”

Chinese leader Xi Jinping forced business leaders to rethink long-held assumptions. About working in the country. Economic development has been the top priority of the Chinese government for decades. But Mr Xi used a key Communist Party congress last month to make clear that security issues and the party’s more ideological approach would take precedence over business concerns.

Mr Xi’s “zero Covid” policy has slowed factory production and Strangled the country’s economic development., and his government has faced pressure from business leaders and markets to ease restrictions. But he has not clearly indicated that this will change anything.

Jeff Feldeck, an analyst at Counterpoint Research, a technology research firm, said the easing of Covid restrictions could allow Apple to offset some of its supply shortfall and meet some demand, but the company still has sales this holiday season. will be deprived of

It will be difficult for Apple to separate itself from China. The company has spent two decades working with manufacturing partners to build huge factories in the country supported by an extensive network of suppliers. Over time, it has added more sugar ingredients to its products and benefited from their lower prices.

In an effort to limit its exposure to China, Apple launched a manufacturing A small percentage of its new iPhones in India. It shifted the production of many other products to Vietnam. But both markets offer factories with only tens of thousands of workers — a fraction of the scale Apple enjoys in China, where its manufacturing partners employ about 3 million workers.

Apple depends on factories like the iPhone manufacturing plant in Zhengzhou, which is run by its biggest assembly partner Foxconn. When cases of Covid-19 began to rise in the region, Foxconn cordoned off nearly 200,000 of its workers inside the grounds of a factory that can produce 85 percent of the world’s iPhones, according to Counterpoint Research. It wasn’t long before the outbreak of Covid and Foxconn struggled to balance business demands with the country’s strict pandemic policy.

As stories of unrest and food shortages flooded Chinese social media, workers began to fear for their lives. Hundreds The runaway assembler initially offered workers an extra $14 a day to keep working. He later nearly quadrupled that amount, to $55 a day.

Apple said on Sunday that the factory was forced to operate at “significantly reduced capacity” after authorities ordered a lockdown of the area around the plant. It is unclear when operations will return to full capacity.

The production slowdown in Zhengzhou prompted Apple to warn investors – for the third time in three years – that sales would be affected by pandemic-related disruptions at its operations in China.

While Beijing’s strict Covid policies are crushing Apple’s plans to manufacture iPhones, Washington is watching closely what happens to its products.

YMTC, a small Chinese chipmaker, was founded in 2016 with $2.9 billion in government investment and to help reduce China’s dependence on foreign chipmakers.

Apple, which declined to comment, was in talks with the Chinese firm about a supply deal, according to two people familiar with the discussions. Memory chips, a specialty of YMTC, are one of the iPhone’s most expensive components, accounting for about 25 percent of its material costs, according to Susquehanna International Group, a financial firm.

Because it would offer lower prices to gain market share, YMTC could help Apple pressure its existing Western suppliers to lower their costs, said Walter Cowan, a semiconductor analyst at Yule Group. , a market research firm.

But the YMTC’s importance to China has made it a target for US national security researchers. In late 2020, a team led by James Mulvinon, a Chinese linguist and researcher at the US defense contractor SOS International, issued a 17-page report detailing YMTC’s use of these entities through its parent company, Tsinghua Unigroup. Details of contacts who sold products to China were also provided. soldier

In February 2021, Mr. Mulvain presented his findings to about two dozen Republican and Democratic staff members on Capitol Hill. He outlined the threats he believed YMTC posed, as its government subsidies could empower it to undercut competitors on price.

“It never made sense to cluster the entire supply chain within a country that was the most potent cyber threat to the United States,” Mr. Mulvainen said.

As Apple prepares for the release of this year’s iPhone, Wall Street analysts at Credit Suisse released a report suggesting that Apple may include YMTC chips in upcoming models. While Apple and the YMTC neither confirmed nor denied the report, the potential deal has raised concerns among lawmakers, including Senators Chuck Schumer, Democrat of New York and Majority Leader, and Marco Rubio, Republican of Florida and Senate Majority Leader. A member of the Intelligence Committee, forced to send The letters urge the Biden administration to investigate Apple’s plans..

Semiconductor industry officials also raised concerns with lawmakers that Apple had helped YMTC recruit engineers from Western companies to help improve its production, according to three people familiar with the matter.

Apple later tried to reassure lawmakers. Tell them That it will only use YMTC chips for iPhones sold in China. But that did not allay concerns among congressional leaders that any purchase from YMTC would hurt the market for memory chips.

Lawmakers urged Gina Raimondo, the Commerce Secretary, to put YMTC on the United States’ “entity list,” a designation that would bar it from buying U.S. technology and components without exemptions. On October 7, the department reduced it, Restrictions on exports YMTC and 30 other companies are believed to have ties to China’s military.

The new restrictions cost YMTC access to critical U.S. machinery for a new factory in Wuhan and could limit its ability to work with a company like Apple.

In the days after the sanctions were issued, Japanese business watchdog Nikkei published a report that said: Apple had scrapped its plan. To use YMTC. An Apple spokesperson declined to comment when asked if the Nikkei report was accurate.

Lawmakers continue to pressure Apple and YMTC. In a statement to The New York Times, Mr. Rubio quoted Apple’s chief executive as saying: “If Tim Cook understands the dangers that YMTC and the rest of the Chinese Communist Party’s chip-making efforts pose to American national security and our national security. Allies, then he and his company must clearly commit not to advance.

Anna Swanson and Edward Wong contributed reporting from Washington.

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