Can India relieve Apple's iPhone woes in China?

China has been the backbone of Apple's tech dominance for the best part of two decades. Starting with the iPod in 2001, Chinese contract manufacturers now make more than 90% of the US tech giant's products. China's own economic miracle also spurned a burgeoning middle-class market for Apple's iPhones and other devices that now account for a fifth of its global revenues.

But trade and geopolitical tensions, along with China's zero-COVID policy, have taken the shine off a collaboration the New York Times described as a "best-of-both-worlds business model" where products designed in the United States were manufactured at lower cost in China.

Apple's main production partners recently announced they were shifting some iPhone production to India, taking advantage of an incentive program introduced by Indian Prime Minister Narendra Modi's government. The move will quickly see around 5% of the firm's smartphones made in the South Asian country, up from the current 3%.

The moves by Pegatron Corp and Foxconn — Apple's main manufacturing partner — are widely seen as a sign of growing frustration over Beijing's draconic COVID-19 lockdowns, despite low infection rates, and while the rest of the world has reopened their economies.

Zhengzhou lockdown hits iPhone production

The latest virus curbs have hit Foxconn's main Zhengzhou plant in central China particularly hard. The facility, which employs about 200,000 people, has adopted so-called closed-loop operations, where staff live on-site, isolated from the wider community. Foxconn, China's largest private employer, has been forced to offer bonuses to entice workers back, who had fled the facility to avoid the strict curbs.

Apple has said Zhengzhou is "operating at significantly reduced capacity," and warned customers of a longer wait for its latest smartphone model, the iPhone 14. The last quarter of the year is typically a busy season for companies like Foxconn as they ramp up production ahead of the end-of-year holiday rush.

Market research firm TrendForce said last week that Zhengzhou's capacity utilization rates were now around 70%, while Ming-Chi Kuo, an analyst at TF International Securities, wrote on Twitter last week that more than 10% of global iPhone production capacity was affected by the current lockdown.

India to benefit but by how much?

In a new post this week, he predicted a 150% year-on-year growth in iPhones made by Foxconn in India next year, adding that the medium/long-term goal is now "to ship 40-45% of iPhones from India." 

Apple's production shift to India — and to a lesser extent Vietnam — may be easier said than done due to the huge logistics networks that support the China facilities, Ivan Lam, senior analyst at the Hong Kong-based Counterpoint Research, told DW.

"These supply chains are not only built on manufacturers but also component suppliers. It's not easy to build up manufacturing in India if you don't have component makers nearby. Foxconn will still need to ship components to India, so it may not be worth it in terms of scale."

Lam said it would also take time for India to build up the same expertise in producing advanced models like the iPhone. Foxconn has a trained workforce in China in the millions rather than tens of thousands in India and has made huge investments in upgrading its China facilities, he added.

Geopolitical storm clouds prompt rethink

COVID isn't the only threat to Apple's longtime love affair with Asia's largest economy. The enduring US-China trade war along with Beijing's threat to retake by force the island of Taiwan — which China considers part of its territory — are forcing the tech giant to rethink its manufacturing priorities.

Last month, the US Commerce Department effectively blocked a deal between Apple and Chinese memory-chip maker YMTC to supply components for the iPhone 14. 

"Apple is discovering that geopolitics drive business models — not the other way around," Matthew Turpin, a specialist in US policy toward China, told the New York Times. "This whole collection of supply chain risks is creating a real liability for them."

Apple's sales growth in China has also been hit by a major slowdown in the economy. Sales of the four new iPhone 14 models were down almost a third in their first 38 days on the market, Bloomberg News reported last week, comparing similar data with the iPhone 13.

Can Apple rely on China growth plans?

Like most multinationals, Apple is awaiting Chinese President Xi Jinping's next move to shore up economic growth. Xi, who is set for an unprecedented third term next year, has sought to rein in the country's economic excesses through a policy of common prosperity, which aims to redistribute more wealth to the poor.

He has cracked down on China's own booming tech sector and sparked a real estate crash that saw apartment prices plummet 20-30%. 

Despite the current headwinds, Bank of America Apple analyst Wamsi Mohan doesn't expect a "rapid decoupling" from China.

"Given Apple remains a major employer indirectly in China and has close ties across city, province and central government levels, we expect Apple to continue to navigate the US-China cross currents as they have done exceedingly well over the past several years," he told DW.

Edited by: Uwe Hessler