Scaling manufacturing power: Apple in China, key lessons for India

One company turned China into a manufacturing powerhouse. Now India must ride the diversification wave to do the same

I am in the middle of reading this fascinating book, Apple in China – The Capture of the World’s Greatest Company. The book has been written by Patrick McGee, a Financial Times journalist based in San Francisco and responsible for covering Apple. The book tells two intersecting stories. First, how Apple moved from being just days away from bankruptcy in 1996 to becoming the most valuable company in the world within a span of 15 years. Second, it traces the contribution Apple has made to transforming China from a third-world, low-skill manufacturing base into the world’s largest and most sophisticated manufacturing location — a hub for advanced manufacturing.

 

Apple began as a vertically integrated company that wanted to do its own manufacturing and control its destiny. Given cost pressures and the need to compete with others who had outsourced, however, it eventually offloaded its manufacturing.

 

The book traces how Apple was actually the last of the PC original equipment manufacturers  to outsource manufacturing — initially to LG of Korea, with operations across Europe, Asia, and North America. You learn how Foxconn and Terry Gou enter the picture, and how manufacturing, starting from Taiwan, eventually becomes entirely consolidated in China. The author highlights the importance of Apple — and the iPhone specifically — in establishing China’s manufacturing prowess and building a highly capable and sophisticated supply chain within the country.

 

The iPhone is probably the most iconic and successful consumer product ever launched. It ramped up from sales of about 5 million phones in 2007 to over 230 million in 2015. Almost $3 trillion worth of iPhones have been sold since launch. Despite a global smartphone market share of only about 20 per cent, the iPhone accounts for more than 80 per cent of the profit pool. Unlike other consumer electronic products, pricing has only gone up. The initial iPhone was launched at a price of $499; today, the price is over $1,000.

 

The author, in various interviews, has made the point that Apple employs — through its suppliers —almost 3 million workers in China. Given the churn, Apple has trained 28 million workers in the country. For context, the entire IT services industry in India employs fewer than 6 million people.

 

Apple was investing over $55 billion per annum into China by 2015, and by 2018 had installed over $18 billion worth of specialised machinery at its suppliers. Due to its obsession with quality, it invested heavily in training its supply base in cutting-edge manufacturing technologies, processes, and quality standards. The book highlights how Apple was sending engineers by the thousands to sit with and train its suppliers. It also had people stationed full-time at critical manufacturers.

 

We come to the realisation that one of the key reasons China is so good at advanced manufacturing is the training its suppliers received at the hands of Apple. Apple was unique — given its scale (at its peak, China was producing almost 500 million i-gadgets with a retail value of over $250 billion), its focus on quality and finish, and its willingness to handhold and train its supply chain. Even if the main supplier was Foxconn, a Taiwanese company, all the manufacturing was done in China, and the components were increasingly sourced from within the country. China now has the most dense, cost-effective, and sophisticated supply chain in the world across components. No other country has a supply base that can match the iPhone’s scale and quality.

 

Mr McGee goes on to make the point that these manufacturing skills have enabled China 2025 (the thrust on indigenisation of advanced manufacturing) and facilitated Chinese domination of other sectors such as drones and electric vehicles. The rise of the Chinese smartphone industry — with Huawei, Xiaomi, Oppo, and Vivo together accounting for over 50 per cent of the global market share — can also be traced to this trained and sophisticated supply chain.The book also highlights the strategic challenge facing Apple today. It needs to diversify, given the geopolitical challenges but cannot afford to annoy China, which is making any diversification difficult through export controls and visa restrictions.

 

From India’s perspective, it’s striking how one world-class multinational corporation can build an entire ecosystem of manufacturing excellence. Apple may be unique given its scale and willingness to train its supply chain but other global giants can have a similar impact. The targeted production-linked incentive (PLI) in smartphone manufacturing (especially Apple) was good policy. As Apple scales, it will ensure the ecosystem becomes cost competitive. We should not be shy to roll out the red carpet and target specific companies to come to India. The book also highlights the importance, even in China, of government support for Apple — from subsidising land and capital to ensuring the availability of a floating labour force, the Chinese government left no stone unturned to encourage Apple to concentrate its supply chain in the country.

 

We should also recognise that we are being presented with a once-in-a-lifetime opportunity to become part of global supply chains. Viewed purely through an economic lens, Apple has no reason to move manufacturing out of China — the supply chain there is so finely honed that no other location can match it in terms of cost or quality. It is geopolitics that is driving the shift. Creating an alternative supply chain will be incredibly hard work. Apple will do it because it has no choice. India is the obvious destination, but we must recognise our good fortune, the potential upside for the country, and the fact that we cannot become a world-class manufacturing base unless we plug into global supply chains.

 

We must follow the same playbook and target other large category leaders with limited in-house manufacturing — such as Nike in apparel and footwear, or Syngenta in speciality chemicals. Many of these companies do little manufacturing themselves and rely heavily on sourcing from China. With growing pressure from their boards to diversify supply chains, India must position itself as an alternative base through targeted PLI schemes. As Apple has shown, one large player can catalyse an entire supply chain ecosystem.

 

While we have been successful in getting Apple to move some final assembly to India, the real upside will come if components are manufactured in the country. The PLI on components is helpful and focus has to remain on increasing value addition.  China will resist any shift that allows India to emerge as an alternative base. It will, therefore, take years of sustained effort — we cannot afford to be impatient.

 

Given their focus on profitability, few Indian groups seem willing to invest to build out this supply chain for Apple. We must learn from China and see the upside for local manufacturers in terms of skill upgrade. Supplying Apple may not make you much money, but it will give you the skills and capabilities to become a global supplier.

 

China has ridden on the back of Apple’s success to build out its advanced manufacturing ecosystem. A single company has been instrumental in making it the world’s leading destination for high-end manufacturing. Similarly, we must ride the wave of global supply chain diversification out of China to develop our own manufacturing and supply chain ecosystem. This is an opportunity like never before. We must pull every policy lever, across all levels of government, to make this transition happen. We will not get another chance.

                  

  The author is with Amansa Capital