Hedging China – Could Apple Manufacture the iPad in India?
Op-Ed Commentary: Chris Devonshire-Ellis
Feb. 17 – The recent dispute between Apple and Proview over the rights to the “iPad” trademark in China has seen some potentially disruptive actions taken, including legal requests made to China Customs looking to prevent Apple from shipping its iPads from China to overseas markets. This is a potentially highly damaging situation given that the bulk of global iPad sales are from Apple’s subcontracted China-based production facilities. The different component parts are being manufactured by a variety of foreign-invested (mainly Taiwanese) and Chinese suppliers before then being assembled, packaged, and exported.
The trademark dispute is having some effects: Apple has sent a request to Amazon to stop selling the product in China, and several Chinese cities have placed embargoes on the sale of the iPad in stores within their jurisdiction. That the China supply chain model has been working well up to this point is beyond doubt – Apple sold 15 million original iPads in 2010, worth some US$9.5 billion in revenues. Demand for the product, now in an upgraded second edition and the soon-to-be-delivered iPad3, has escalated exponentially. The company sold 15.4 million iPads in Q4 last year alone. In global terms, the iPad has a 90 percent share of the tablet computer market, a phenomenal success by any stretch of the imagination.
Of the China-based component manufacturers, several are Taiwanese owned, a factor that enables the manufacturer to enjoy a high degree of familiarity with the Mainland Chinese market, and certainly in terms of operating and managing their factories in China. These include Foxconn, Catcher Technology, Cheng Loong, Chi Mei Innolux, Dynapack International, Novatek Microelectrics, Riteng Computers, Simplo Technology, Quanta Computers and Wintek, while several other Mainland Chinese companies are also in the supply chain mix, including Anjie Insultating Metals of Suzhou, Kunshan Changyun Electronics, Suzhou Panel Electrics, Tianjin Lishen Joint Stock Battery among others. A full list of Apple’s suppliers (and their responsibility agreements) can be found here.
Supply chains of this breadth and nature require a great deal of energy, investment and time to establish, and both Apple and its suppliers have conducted a tremendous job in developing this in order to cater for an IT-hungry and rapidly-growing global market demanding high technology at affordable prices. Part of the success in China is the latent discipline instilled in Chinese workers. It may be a side product of what is effectively a single party state with a strong police management structure in place, but it keeps Chinese citizens by and large in good behavior and permits the establishment of such reliable supply chain structures as a result. However, as Apple is now finding out – even that can be damaged by an errant law suit.
It is a natural consequence of investing in emerging economies that things can and do go wrong; a degree of unreliability comes with the territory. But even as Apple seems to have ticked all the boxes, there will always be challenges to financial success from envious eyes. This is essentially where Apple now sits, and of course the dispute also impacts upon their Taiwanese suppliers. It could be said that Apple’s risk in the China supply chain was in fact to place too much emphasis on sourcing component parts from Chinese factories run by Taiwanese businessmen. Although it makes sense to have done so as the cultural capabilities of the Taiwanese to run operations in China are generally far superior to many others. The cultural aspects and language (leaving the politics aside) are largely of the same stock, yet that strength has also become a weakness. In hindsight, clearly Apple would have been better off by spreading their supply chain further afield to minimize the China risk. It’s also entirely possible that they intend to do so – I’m sure demand for the iPad has been far more than their initial expectations, and just keeping pace with global demand with an existing China-based supply chain would always have been an easier option. Yet the Proview legal case demonstrates once again that too much reliance on one market – even one as seemingly well-ordered as China – can lead to problems. It also seems to be occurring more regularly. The rare earths issue, where China has cut back on global supplies, is another recent example.
The China hedge is therefore going to become part of global supply chains – the question of where else to establish a network to hedge against things going wrong in China. In a case such as Apple’s, the obvious answer would be India. The nation is famously IT savvy, has a huge latent pool of workers, and is developing its own infrastructure to take advantage of their new labor demographic dividend. The average age of an Indian worker is 23 while in China it is 35, and this affects worker supply as well as salary expenses. However, Apple has not as yet made moves into India in terms of establishing a supply chain and iPads in India are all imported and sold (just as in China) through official stores. Apple stores will soon become as familiar a sight in India as they are in China. The Indian government liberalized the single brand retail market to 100 percent investment by foreign companies in December, and foreign brands are rushing to get into a consumer market almost as large and dynamic as the one found in China.
In dealing with the supply chain dynamics in Apple’s case study, an obvious question to ask when assessing India as a hedge against China in this particular scenario is whether any of Apple’s China suppliers are already in lndia. Indeed they are – Foxconn has a facility in a Special Economic Zone in Chennai. This could possibly be the start of an Apple cluster in India, in much the same way that both Apple and their Taiwanese suppliers have clustered together in China. However, they remain the odd man out in terms of Apple’s Taiwanese suppliers in India. In order for Apple to hedge against China and develop a supply chain there, it also needs companies in India to supply its components – and in quantities catering for a massive global demand. In China, Foxconn’s factories employ up to 100,000 workers. Are there Indian companies in the same business that have these or similar mass production capabilities? It turns out there are: including Bharti (22,000 employees), HCL Technologies (83,000), Reliance Communications (28,000), TVS Electronics (30,000), Videocon Industries (5,000), and Wipro (137,000). And where are they? Chennai.
The other interesting point about Apple’s suppliers in China is that they are almost all listed companies. That is important as it demonstrates a high degree of business sustainability – important in a supply chain – and the ability to gain access to funds quickly. Obtaining a major contract from Apple may require immediate financing in order to upgrade and expand production facilities. The Indian companies mentioned above? The same. All are listed on the Bombay Stock Exchange and all are billion U.S. dollar turnover businesses in their own right. In the case of Reliance, the communications company, their global income reached US$296 billion in 2011.
Chennai, meanwhile, is India’s second largest port (after Mumbai) and is on India’s east coast alongside the Bay of Bengal across from Sri Lanka, Burma and Thailand, therefore facing the rest of Asia. Possessing some 26 berths, the port handled some 1.7 million TEUs in 2011, with capacity set to rise by an additional 60 percent by 2014.
The answer then to the question posed is this – Could Apple hedge against China by developing a supply chain in India? The answer appears to be yes, it could, providing that Apple can convince Indian suppliers to fund their own developments and cluster together. The Indians certainly appear to have the financial capability to do so. Quite when that hedge appears is probably just a matter of time, however it may not be long before a “made in India” mark appears on an iPad. Clearly, issues posed to global brands such as Apple by cases as disrupting as that instigated by Proview may dictate that strategic moves to develop supply chains in India begin sooner rather than later.
Ankit Shrivastava in India and Gregor Hastings in China contributed research to this article.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates. The firm provides foreign direct investment due diligence, establishment, tax planning and related business advisory services to foreign investors throughout Asia and has 12 offices in China and 5 in India. Ankit Shrivastava is based in the firm’s Delhi office, while Gregor Hastings is with the firm in Shanghai. Please contact the practice at email@example.com or visit the firm’s web site at www.dezshira.com.
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