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Inside Apple’s Search for an Indian Supply Chain
By
Wayne Ma
March 5, 2020 7:01 AM PST ·
Comments by Arthur P. Johnson, Prashant Balaji and 2 others
Subscribe now
Several years ago, employees at Apple investigated whether components for the iPhone could be made in India. The results weren’t encouraging.
While the employees found some companies that could make power adapters or packaging, none could make phone speakers, headphones or small mechanical parts. Many Indian suppliers weren’t able to meet Apple’s environmental, health and safety standards. Apple contractors visited one potential factory in the southern Indian state of Karnataka, only to find that its workers were on strike. Some of Apple’s existing suppliers said they weren’t interested in manufacturing in India because of the investment required, The Information has learned.
These episodes demonstrate what is increasingly a critical challenge for Apple: how to diversify its production away from China. While Apple has made slow but steady progress diversifying into places like Vietnam, where some suppliers make AirPods and organic light-emitting diode displays, the vast majority of its components are still made in China, according to people familiar with the matter.
THE TAKEAWAY
• Small iPhone orders deter component suppliers from producing in India
• Many Indian companies can’t meet Apple’s health and safety standards
• Apple’s sales in India fell nearly 19% to $1.5 billion in the year leading up to March 2019
The risk of Apple’s reliance on China became clear even before the recent outbreak of the deadly coronavirus. The Trump administration’s imposition of tariffs on Chinese-made goods would have forced Apple to raise prices on many of its products or absorb the cost of the tariffs, both of which would have hurt profits. The virus has added to worries by putting many factories in China out of action for weeks, delaying production for Apple. The iPhone maker last month said it wouldn’t meet its revenue guidance for the March quarter.
Apple has found companies to assemble the iPhone in India. Since 2017, its Taiwanese supplier Wistron has been assembling older models sold in India, starting with the iPhone SE and currently the iPhone 7. Last year Foxconn, Apple’s biggest iPhone manufacturing partner, agreed to assemble the iPhone XR at a factory outside the city of Chennai. However, most of the parts that go into these phones are still made in China, these people say. India-based companies supply packaging materials, phone chargers and batteries, but nothing more, they say. Last year, Apple had seven major suppliers operating in India, compared to 135 operating in China, its public disclosures show.
The biggest challenge for Apple may simply be the less developed nature of manufacturing in India compared to China. This situation is a legacy of protectionist trade policies and bureaucratic interference. Many smartphone component factories in India, for example, are still operated by Asian or European companies that have long-standing relationships with well-known consumer brands and years—if not decades—of manufacturing experience.
“India has much to [do to] catch up to China when it comes to the smartphone manufacturing ecosystem,” said Rushabh Doshi, research director for mobility at research firm Canalys. “Players in the market are scarce, and besides assembly of the iPhone and printed circuit boards, critical elements like the display and chipsets are made in China.”
Sales Restrictions
Developing a robust supply chain in India not only would reduce Apple’s reliance on China but also is important for Apple’s sale of phones there.
Until last year, Apple had been unable to operate its own online store or Apple Store in India because of a local law requiring foreign single-brand retailers to spend the equivalent of at least 30% of their India sales on local materials, which was impossible given the lack of suppliers. Apple also wasn’t allowed to sell refurbished models, which it could have sold to Indian consumers at lower prices than for new ones.
Partly as a result of these constraints, Apple is a distant ninth in smartphone market share, according to Canalys. Cut-rate Chinese brands, led by Xiaomi, dominate the market. A major reason is that Apple’s phones are simply too expensive for the market. While India has a population of nearly 1.37 billion—almost as big as China’s—its middle class is around one-fifth the size of China’s.
In the 12 months leading up to March 31, Apple’s India subsidiary reported sales of around $1.5 billion, down 19% from a year earlier, according to local corporate filings. It’s a tiny fraction of Apple’s global revenue over the same period of nearly $260 billion.
Indian Prime Minister Narendra Modi has relaxed rules on local sourcing and refurbished phones, and Apple now plans to open an online store in India this year and its first retail store by next year.
But costs are still a factor. India places a 20% tax on imported smartphones, making the iPhone more expensive than in most other parts of the world. Building iPhones in India would allow Apple to set a more attractive price for Indian consumers. It would also take advantage of cheaper labor. The average Chinese worker at Wistron, which assembles iPhones in both India and China, makes about $700 a month. Its Indian counterpart might make only one-fourth that amount, one person close to Wistron said.
But the fact that Apple has to import all the components offsets those savings. Customs duties, and the cost of shipping and storing iPhone components from China, together add about 10% to the iPhone’s manufacturing costs in the country, people familiar with the matter say.
Even the labor savings aren’t as great as they could be. Indian labor laws prevent workers from working as much overtime as Chinese workers, meaning manufacturers must hire more Indian workers for the same amount of work. Trade unions in India also operate more freely than in China, which can add to costs, a person close to Apple said.
The size of Apple’s orders is also much smaller in India than in China because these phones are made primarily for domestic sale rather than export, and that market is limited in India. Last year, Apple shipped 2 million iPhones to local retailers in India, compared to 30 million in mainland China, according to Canalys. Because of the low volumes, Apple can’t take advantage of economies of scale and pays 60% more per unit for Wistron to assemble the iPhone in India, the person close to Wistron said.
Indian Push
In 2017, Apple struck a deal with Wistron to begin making older models of the iPhone in India. One reason why Apple chose Wistron over Apple’s longtime partner, Foxconn, was because Wistron had a factory in the southern city of Bangalore that it could dedicate to iPhone production, according to people close to the companies. Foxconn had been assembling smartphones in India for Xiaomi and didn’t have a production line for the iPhone that could operate separately from those of other brands, which was one of Apple’s stipulations.
Initial iPhone production at Wistron’s Indian plant was small—about 1,200 units a day, according to former employees.
Finding suppliers that could produce components locally proved difficult. One major issue was compliance with Apple’s supplier standards for health, safety and the environment, which are among the toughest in the consumer electronics business. Many Indian companies were unable to or unwilling to fix problems Apple’s auditors uncovered, according to people familiar with the matter.
For example, one Indian supplier Apple approached in 2018 was Superpacks, which operated a packaging factory in Bangalore. Apple sent auditors to assess whether its supplier responsibility practices were up to Apple’s standards. The audits revealed dozens of violations. The site had no safety measures for storing chemicals, lacked monitoring for noise and wastewater, and didn’t have several environmental and construction permits. It didn’t properly test drinking water for workers and the site lacked a fire hydrant system, according to a person close to Apple.
Apple spent months pushing Superpacks to fix the violations. However, the Indian company stopped giving updates and missed deadlines for fixes. Apple ultimately didn’t give it a business contract. Superpacks didn’t respond to a request for comment.
One reason why suppliers aren’t willing to improve factories in India to meet Apple’s requirements is because of its small order sizes. Current and former employees at Apple suppliers such as Shenzhen Yuto, Salcomp and Sunwoda, which make packaging, power adapters and batteries, say order sizes in India are in the thousands per month. By contrast, Apple’s orders in China are in the hundreds of thousands per week, according to people familiar with the matter.
Component Industry
India attempted to build a smartphone manufacturing ecosystem in 2009, when rich government incentives and a dedicated special economic zone in Chennai lured Nokia, the largest mobile phone maker at the time, to the country. At the time, Nokia persuaded half a dozen foreign component makers—such as Salcomp, which makes power adapters—to set up operations in the zone.
But in 2014, Nokia abandoned the country after a tax dispute with the Indian government, and most of its suppliers left in tandem. Salcomp was the only company that remained, and it expanded its business thanks to the arrival of Chinese smartphone makers such as Xiaomi, Vivo and Oppo. The popularity of the Chinese brands encouraged Chinese suppliers such as Yuto, which makes packaging materials, and Sunwoda, which makes batteries, to open their own factories in India. Salcomp also began expanding: Last year, it bought a dormant facility in the special economic zone to expand production.
Those component makers, however, have been the exception rather than rule. People familiar with India’s smartphone industry say that while the government showers large manufacturers like Wistron and Foxconn with incentives because of their size, small component makers don’t get similar treatment. For instance, the government has waived certain taxes for Foxconn for a 10-year grace period, according to people close to the company.
Apple also has struggled to convince existing suppliers to produce in India. In 2017, Apple employees approached European manufacturer AT&S—which makes printed circuit boards for Apple in China—about making them in India, according to people familiar with the matter. AT&S executives determined that Apple’s business in India would be incremental and wasn’t worth the investment in a new factory, one of the people said. Apple also approached China’s Goertek about making headphones in India, one of the people said. However, Geortek also wasn’t interested due to the amount of investment required, the person said.
Some of Apple’s suppliers have tried setting up operations in India only to get burned. Taiwan’s Inventec, a major assembler of AirPods and EarPods,reportedly got into a dispute with local government officials over taxes and halted operations in the country. Other Apple suppliers such as Jabil and Wintek left India after the Nokia fiasco. Apple also has been in the crosshairs of Indian government agencies: It is involved in ongoing disputes over unpaid taxes, employment benefits and customs duties with several agencies, according to local corporate filings. In 2019, Apple had $75 million in taxes under dispute with various Indian agencies, up from $7.7 million in 2016.
One executive at a European manufacturer that works with Apple in China rattled off a list of reasons why producing components in India would be challenging. An Indian factory would still need to import raw materials from China. India’s roads are poor. If certain manufacturing equipment breaks down, a factory might lie idle for days as companies fly in repair technicians from China. Finding factory land would be difficult as landowners have more rights in India than in China.
Government Policy
While the Indian government wants foreign investment, it has sent mixed signals to both smartphone makers and component suppliers with its industrial policies. Apple suppliers such as Salcomp and Yuto have succeeded in India because the Indian government put tariffs on imported phone chargers and retail boxes to encourage the purchase of these products locally. At the same time, some smartphone components, such as printed circuit boards, are still cheaper to import from China than to make in India.
Indian government policies have also hurt Apple. Several years ago, the Indian government added tariffs for PCB-As, printed circuit boards with chips already installed on them. While some smartphone brands like Xiaomi directed suppliers to begin assembling PCB-As in the country, Apple initially absorbed the tariff, according to people familiar with the matter.
The Indian government is planning to raise tariffs on PCB-As again. Foxconn, which agreed last year to assemble the iPhone XR, will also assemble PCB-As at the Chennai factory, a person familiar with the matter said.
While India continues to raise tariffs on smartphone components, it recently unveiled a package of new incentives for component manufacturers in India. Apple has soldiered on with its government relations efforts and recently pledged to spend $1 billion in India, according to local media. Last week, Apple CEO Tim Cook said India still represents a “huge opportunity” for Apple.
It isn’t clear whether the trade war between China and the U.S. or the recent outbreak of the coronavirus have accelerated Apple’s plans in India. Apple began exporting some iPhones assembled in India to other countries last year, though shipments remain small, according to people familiar with the matter. Foxconn also has started pushing its component suppliers to set up operations in India, according to one person familiar with the matter.
Last week, Cook told Fox Business News that he didn’t think the coronavirus would require big changes to its supply chain. “We’ve worked through earthquakes, tornadoes, fires, floods, tsunamis and SARS,” he said. “The question for us after we get on the other side will be: Was the resilience there or not, and do we have to make some changes?…If there are changes, you’re talking about adjusting some knobs, not some sort of wholesale fundamental change.”
Cook added that Apple considers not only lower costs but also quality, time to market, and speed and depth of engineering when choosing locations. “Somebody would have to meet all of those [requirements],” he said.
An employee at a Foxconn factory in India. Photo by Bloomberg.
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Wayne Ma
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Comments by Arthur P. Johnson, Prashant Balaji and 2 others
Subscribe now
Several years ago, employees at Apple investigated whether components for the iPhone could be made in India. The results weren’t encouraging.
While the employees found some companies that could make power adapters or packaging, none could make phone speakers, headphones or small mechanical parts. Many Indian suppliers weren’t able to meet Apple’s environmental, health and safety standards. Apple contractors visited one potential factory in the southern Indian state of Karnataka, only to find that its workers were on strike. Some of Apple’s existing suppliers said they weren’t interested in manufacturing in India because of the investment required, The Information has learned.
These episodes demonstrate what is increasingly a critical challenge for Apple: how to diversify its production away from China. While Apple has made slow but steady progress diversifying into places like Vietnam, where some suppliers make AirPods and organic light-emitting diode displays, the vast majority of its components are still made in China, according to people familiar with the matter.
THE TAKEAWAY
• Small iPhone orders deter component suppliers from producing in India
• Many Indian companies can’t meet Apple’s health and safety standards
• Apple’s sales in India fell nearly 19% to $1.5 billion in the year leading up to March 2019
The risk of Apple’s reliance on China became clear even before the recent outbreak of the deadly coronavirus. The Trump administration’s imposition of tariffs on Chinese-made goods would have forced Apple to raise prices on many of its products or absorb the cost of the tariffs, both of which would have hurt profits. The virus has added to worries by putting many factories in China out of action for weeks, delaying production for Apple. The iPhone maker last month said it wouldn’t meet its revenue guidance for the March quarter.
Apple has found companies to assemble the iPhone in India. Since 2017, its Taiwanese supplier Wistron has been assembling older models sold in India, starting with the iPhone SE and currently the iPhone 7. Last year Foxconn, Apple’s biggest iPhone manufacturing partner, agreed to assemble the iPhone XR at a factory outside the city of Chennai. However, most of the parts that go into these phones are still made in China, these people say. India-based companies supply packaging materials, phone chargers and batteries, but nothing more, they say. Last year, Apple had seven major suppliers operating in India, compared to 135 operating in China, its public disclosures show.
The biggest challenge for Apple may simply be the less developed nature of manufacturing in India compared to China. This situation is a legacy of protectionist trade policies and bureaucratic interference. Many smartphone component factories in India, for example, are still operated by Asian or European companies that have long-standing relationships with well-known consumer brands and years—if not decades—of manufacturing experience.
“India has much to [do to] catch up to China when it comes to the smartphone manufacturing ecosystem,” said Rushabh Doshi, research director for mobility at research firm Canalys. “Players in the market are scarce, and besides assembly of the iPhone and printed circuit boards, critical elements like the display and chipsets are made in China.”
Sales Restrictions
Developing a robust supply chain in India not only would reduce Apple’s reliance on China but also is important for Apple’s sale of phones there.
Until last year, Apple had been unable to operate its own online store or Apple Store in India because of a local law requiring foreign single-brand retailers to spend the equivalent of at least 30% of their India sales on local materials, which was impossible given the lack of suppliers. Apple also wasn’t allowed to sell refurbished models, which it could have sold to Indian consumers at lower prices than for new ones.
Partly as a result of these constraints, Apple is a distant ninth in smartphone market share, according to Canalys. Cut-rate Chinese brands, led by Xiaomi, dominate the market. A major reason is that Apple’s phones are simply too expensive for the market. While India has a population of nearly 1.37 billion—almost as big as China’s—its middle class is around one-fifth the size of China’s.
In the 12 months leading up to March 31, Apple’s India subsidiary reported sales of around $1.5 billion, down 19% from a year earlier, according to local corporate filings. It’s a tiny fraction of Apple’s global revenue over the same period of nearly $260 billion.
Indian Prime Minister Narendra Modi has relaxed rules on local sourcing and refurbished phones, and Apple now plans to open an online store in India this year and its first retail store by next year.
But costs are still a factor. India places a 20% tax on imported smartphones, making the iPhone more expensive than in most other parts of the world. Building iPhones in India would allow Apple to set a more attractive price for Indian consumers. It would also take advantage of cheaper labor. The average Chinese worker at Wistron, which assembles iPhones in both India and China, makes about $700 a month. Its Indian counterpart might make only one-fourth that amount, one person close to Wistron said.
But the fact that Apple has to import all the components offsets those savings. Customs duties, and the cost of shipping and storing iPhone components from China, together add about 10% to the iPhone’s manufacturing costs in the country, people familiar with the matter say.
Even the labor savings aren’t as great as they could be. Indian labor laws prevent workers from working as much overtime as Chinese workers, meaning manufacturers must hire more Indian workers for the same amount of work. Trade unions in India also operate more freely than in China, which can add to costs, a person close to Apple said.
The size of Apple’s orders is also much smaller in India than in China because these phones are made primarily for domestic sale rather than export, and that market is limited in India. Last year, Apple shipped 2 million iPhones to local retailers in India, compared to 30 million in mainland China, according to Canalys. Because of the low volumes, Apple can’t take advantage of economies of scale and pays 60% more per unit for Wistron to assemble the iPhone in India, the person close to Wistron said.
Indian Push
In 2017, Apple struck a deal with Wistron to begin making older models of the iPhone in India. One reason why Apple chose Wistron over Apple’s longtime partner, Foxconn, was because Wistron had a factory in the southern city of Bangalore that it could dedicate to iPhone production, according to people close to the companies. Foxconn had been assembling smartphones in India for Xiaomi and didn’t have a production line for the iPhone that could operate separately from those of other brands, which was one of Apple’s stipulations.
Initial iPhone production at Wistron’s Indian plant was small—about 1,200 units a day, according to former employees.
Finding suppliers that could produce components locally proved difficult. One major issue was compliance with Apple’s supplier standards for health, safety and the environment, which are among the toughest in the consumer electronics business. Many Indian companies were unable to or unwilling to fix problems Apple’s auditors uncovered, according to people familiar with the matter.
For example, one Indian supplier Apple approached in 2018 was Superpacks, which operated a packaging factory in Bangalore. Apple sent auditors to assess whether its supplier responsibility practices were up to Apple’s standards. The audits revealed dozens of violations. The site had no safety measures for storing chemicals, lacked monitoring for noise and wastewater, and didn’t have several environmental and construction permits. It didn’t properly test drinking water for workers and the site lacked a fire hydrant system, according to a person close to Apple.
Apple spent months pushing Superpacks to fix the violations. However, the Indian company stopped giving updates and missed deadlines for fixes. Apple ultimately didn’t give it a business contract. Superpacks didn’t respond to a request for comment.
One reason why suppliers aren’t willing to improve factories in India to meet Apple’s requirements is because of its small order sizes. Current and former employees at Apple suppliers such as Shenzhen Yuto, Salcomp and Sunwoda, which make packaging, power adapters and batteries, say order sizes in India are in the thousands per month. By contrast, Apple’s orders in China are in the hundreds of thousands per week, according to people familiar with the matter.
Component Industry
India attempted to build a smartphone manufacturing ecosystem in 2009, when rich government incentives and a dedicated special economic zone in Chennai lured Nokia, the largest mobile phone maker at the time, to the country. At the time, Nokia persuaded half a dozen foreign component makers—such as Salcomp, which makes power adapters—to set up operations in the zone.
But in 2014, Nokia abandoned the country after a tax dispute with the Indian government, and most of its suppliers left in tandem. Salcomp was the only company that remained, and it expanded its business thanks to the arrival of Chinese smartphone makers such as Xiaomi, Vivo and Oppo. The popularity of the Chinese brands encouraged Chinese suppliers such as Yuto, which makes packaging materials, and Sunwoda, which makes batteries, to open their own factories in India. Salcomp also began expanding: Last year, it bought a dormant facility in the special economic zone to expand production.
Those component makers, however, have been the exception rather than rule. People familiar with India’s smartphone industry say that while the government showers large manufacturers like Wistron and Foxconn with incentives because of their size, small component makers don’t get similar treatment. For instance, the government has waived certain taxes for Foxconn for a 10-year grace period, according to people close to the company.
Apple also has struggled to convince existing suppliers to produce in India. In 2017, Apple employees approached European manufacturer AT&S—which makes printed circuit boards for Apple in China—about making them in India, according to people familiar with the matter. AT&S executives determined that Apple’s business in India would be incremental and wasn’t worth the investment in a new factory, one of the people said. Apple also approached China’s Goertek about making headphones in India, one of the people said. However, Geortek also wasn’t interested due to the amount of investment required, the person said.
Some of Apple’s suppliers have tried setting up operations in India only to get burned. Taiwan’s Inventec, a major assembler of AirPods and EarPods,reportedly got into a dispute with local government officials over taxes and halted operations in the country. Other Apple suppliers such as Jabil and Wintek left India after the Nokia fiasco. Apple also has been in the crosshairs of Indian government agencies: It is involved in ongoing disputes over unpaid taxes, employment benefits and customs duties with several agencies, according to local corporate filings. In 2019, Apple had $75 million in taxes under dispute with various Indian agencies, up from $7.7 million in 2016.
One executive at a European manufacturer that works with Apple in China rattled off a list of reasons why producing components in India would be challenging. An Indian factory would still need to import raw materials from China. India’s roads are poor. If certain manufacturing equipment breaks down, a factory might lie idle for days as companies fly in repair technicians from China. Finding factory land would be difficult as landowners have more rights in India than in China.
Government Policy
While the Indian government wants foreign investment, it has sent mixed signals to both smartphone makers and component suppliers with its industrial policies. Apple suppliers such as Salcomp and Yuto have succeeded in India because the Indian government put tariffs on imported phone chargers and retail boxes to encourage the purchase of these products locally. At the same time, some smartphone components, such as printed circuit boards, are still cheaper to import from China than to make in India.
Indian government policies have also hurt Apple. Several years ago, the Indian government added tariffs for PCB-As, printed circuit boards with chips already installed on them. While some smartphone brands like Xiaomi directed suppliers to begin assembling PCB-As in the country, Apple initially absorbed the tariff, according to people familiar with the matter.
The Indian government is planning to raise tariffs on PCB-As again. Foxconn, which agreed last year to assemble the iPhone XR, will also assemble PCB-As at the Chennai factory, a person familiar with the matter said.
While India continues to raise tariffs on smartphone components, it recently unveiled a package of new incentives for component manufacturers in India. Apple has soldiered on with its government relations efforts and recently pledged to spend $1 billion in India, according to local media. Last week, Apple CEO Tim Cook said India still represents a “huge opportunity” for Apple.
It isn’t clear whether the trade war between China and the U.S. or the recent outbreak of the coronavirus have accelerated Apple’s plans in India. Apple began exporting some iPhones assembled in India to other countries last year, though shipments remain small, according to people familiar with the matter. Foxconn also has started pushing its component suppliers to set up operations in India, according to one person familiar with the matter.
Last week, Cook told Fox Business News that he didn’t think the coronavirus would require big changes to its supply chain. “We’ve worked through earthquakes, tornadoes, fires, floods, tsunamis and SARS,” he said. “The question for us after we get on the other side will be: Was the resilience there or not, and do we have to make some changes?…If there are changes, you’re talking about adjusting some knobs, not some sort of wholesale fundamental change.”
Cook added that Apple considers not only lower costs but also quality, time to market, and speed and depth of engineering when choosing locations. “Somebody would have to meet all of those [requirements],” he said.
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