How China is moving up Apple's supply chain

Apple is trying to move some of its production out of China. Yet, Chinese firms are taking over an increasingly high-tech share of Apple's manufacturing. What does this mean for decoupling?

May 03, 2024

(This builds on an earlier piece: How China uses foreign firms to turbocharge its industry.)

We all know that China makes the vast majority of Apple’s products and that this work is mostly done by large contract manufacturers like Foxconn in their factories in China. We also know that Apple is making a long-term push to shift production out of China to places like India and Vietnam, prompted by China’s COVID disruptions, US tech controls, and geopolitical tensions over Taiwan.

Yet, some big questions remained unanswered. How much of Apple’s China production is just final assembly versus high-tech core components? And how is this shifting over time?

Source: Financial Times: How Apple tied its fortunes to China

How much of Apple’s products are really “made in China”?

Chinese firms contribute a surprisingly small fraction of an iPhone’s total value. A Nikkei Asia analysis of the iPhone 15 Pro Max found that only 2.5% of the device’s total cost is attributable to parts made by Chinese firms. The vast majority of the iPhone’s total cost—over 80%—derives from components made by companies based in the US, South Korea, Japan, and Taiwan.

Indeed, if you look at the most valuable components of an iPhone, these are mostly made by non-Chinese firms: TSMC for the main processor chips, Samsung and SK hynix for memory, Qualcomm and Broadcom for cellular, Samsung for displays, and Sony for the camera image sensor. All of this might lead you to conclude that China’s share of Apple production is quite low, limited to low-value parts and final assembly. Labor costs only make up 2-5% of the price of each iPhone, according to an estimate from 2011.

Chart by author. Data source: Counterpoint

But if you look under the surface, you find a different story. While Chinese firms only make up a fraction of the iPhone’s total value, most of Apple’s non-Chinese suppliers actually do a large share of their manufacturing in China. A different Nikkei Asia analysis looked at Apple’s supplier list and found that of Apple’s 187 suppliers, 87% have production facilities in China. The same analysis shows that companies headquartered in China and Hong Kong make up more than half of Apple’s suppliers, and their share actually grew from the previous year.

Nikkei Asia: Apple moves closer to China despite supply chain shifts

While this analysis of Apple’s suppliers offers a useful starting point, it only looks at quantity (how many suppliers have plants in China) rather than quality (what share of the iPhone’s value is made in China). It’d be more useful to dive deeper into the iPhone’s high-value components, such as semiconductor chips, and see what share of these are made in China.

Let’s look at the iPhone’s memory chips. South Korean tech giants Samsung and SK hynix are two of Apple’s main suppliers for these chips. Both have large-scale manufacturing operations in China. Their NAND flash memory plants in China alone “accounted for 19% of global NAND output in 2022.” If we look at Apple’s supplier list, Samsung Electronics Company is listed with production sites in Jiangsu and Shaanxi. Cross-referencing this with a recent Fitch report, we see that Samsung has a NAND factory in Xi’an (Shaanxi province) that accounts for 40% of its NAND production. It also has a back-end processing plant in Suzhou (Jiangsu province).

SK hynix’s fab in Wuxi, China. Source: The Korean Herald

SK hynix shows up on Apple’s supplier list with production sites in Chongqing and Jiangsu (Apple is SK hynix’s largest customer). These production sites correspond with SK hynix’s DRAM fab in Wuxi (Jiangsu province), which accounts for 40-50% of the company’s total DRAM production, and SK hynix’s chip packaging plant in Chongqing that’s expected to account for 40% of the company’s flash memory production.

The true share of Samsung and SK hynix’s iPhone components that are made in China is hard to pin down, and this provides an indirect estimate rather than an exact answer. Moreover, SK hynix’s plants in China face an uncertain future due to possible US restrictions if SK hynix accepts Chips Act funding to build a US fab. In fact, both Samsung and SK hynix just narrowly escaped US export restrictions on semiconductor equipment that would have jeopardized their plants in China. But the broader point here is that even Apple’s high-value foreign suppliers like Samsung and SK hynix make a large share of their components in China.

Chinese suppliers are moving up Apple’s value chain

If you look at Chinese firms directly, you find that Apple’s Chinese suppliers are moving up the value chain.

YMTC is the most striking case. State-backed semiconductor firm Yangtze Memory Technologies Co. (YMTC) is China’s most advanced NAND flash memory maker. In 2022, Apple was planning to use YMTC’s NAND chips for its iPhones, which are reportedly 20% cheaper than its competitors’ chips. In fact, Apple was gearing up to make YMTC one of its largest NAND suppliers with plans to eventually purchase “up to 40% of the NAND flash memory needed for all iPhones from YMTC.” While the US ended up basically blocking Apple’s supply deal by placing YMTC on its “unverified list,” the fact that Apple was preparing to make YMTC a major supplier shows how sophisticated its chips have become. Despite US sanctions, YMTC has continued to make breakthroughs and recently produced “the world’s most advanced 3D NAND memory chip.”

Sunny Optical’s lenses in a Huawei phone. Source: SCMP

Sunny Optical offers another example of a Chinese firm gaining share in the iPhone supply chain. The company began as a township and village enterprise (TVE) in Zhejiang in the 1980s. It later became China’s leading optical parts manufacturers, and its skyrocketing growth turned many of its employees, including janitors and cafeteria workers, into millionaires. Apple started using Sunny Optical in recent years to make the main camera lens for its iPhones, which had previously come from Taiwanese companies like Largan Precision and GSEO. Interestingly, one of Sunny Optical’s rising competitors is another Chinese company, AAC Technologies, which already makes acoustic and haptic components for the iPhone.

Foxconn’s production of titanium casing for the iPhone 15 pro models is yet another example. The titanium iPhone frames made by Foxconn cost $50 or 43% more than traditional stainless steel iPhone frames. Foxconn is able to take advantage of the fact that China makes more than 60% of the world’s titanium and titanium alloys. (I’ve written previously about how China’s dominance in industrial commodities helps its other industries.) The iPhone 15 pro models are only made in China, not India, and I suspect that Foxconn’s production of these titanium frames in China is one reason for this.

Then there are Chinese companies like Lens Technology that have grown up with Apple over time. Lens Technology was started in Hunan by Zhou Qunfei, a former high school dropout and factory worker who later became the world’s richest self-made woman. The company got its big break making the cover glass for the first iPhones in 2007. Over time, Apple has shared manufacturing technology from foreign firms with Lens Technology, like a new scratch-resistant screen material, to help the Chinese company improve its products. Today, Lens Technology is the world’s largest supplier of touchscreens, not only for most Apple products but also for Samsung, Huawei, Xiaomi, Oppo, and Vivo.

The rise of Chinese contract manufacturers

Historically, Apple relied on the big three Taiwanese contract manufacturers to make its products in China: Foxconn, Pegatron, and Wistron. But the past few years have witnessed the rise of homegrown Chinese contract manufacturers, such as Luxshare and Wingtech, which have been taking on a growing share of Apple’s manufacturing.

Luxshare’s story is especially fascinating. Grace Wang, Luxshare’s co-founder and chair, started as a migrant worker at Foxconn’s first factory in Shenzhen in 1988. She became a manager and then used what she learned at Foxconn to start her own competitor. Her company Luxshare began by making cables and connectors for Apple’s products and later moved into iPhone production by acquiring Wistron’s iPhone plant in Kunshan in 2020. Apple itself has been helping China turn Luxshare into a “national champion,” sending engineers to help train Luxshare’s staff for years. Today, Luxshare is not only Foxconn’s primary competitor for iPhone production but was also selected by Apple as the exclusive manufacturer for its Vision Pro. As a result of Luxshare’s success, Grace Wang has become a multibillionaire and one of the richest self-made women in the world, alongside Lens Technology’s Zhou Qunfei. (According to a 2015 New York Times article, “No country has more self-made female billionaires than China.)

Luxshare’s Grace Wang (center) with Apple’s Tim Cook. Source: Nikkei Asia

Wingtech is another Chinese contract manufacturer that’s quickly moving up. As “China’s biggest smartphone assembler,” Wingtech began by doing assembly work for smartphone brands like Vivo and Oppo as well as laptop brands like HP, Dell, and Lenovo. Now Wingtech is starting to make Apple products in its rapidly expanding production facilities in Kunming.

Chinese contract manufacturers are also moving deeper into the supply chain, into areas such as semiconductors. Wingtech bought Dutch chipmaker Nexperia in 2019 and then bought the UK’s largest chipmaker Newport Wafer Fab in 2021, which it later had to sell due to UK national security concerns. Luxshare has been building up its chip packaging capabilities by hiring Taiwanese semiconductor engineers. AirPods maker Goertek recently spun off its own chipmaking unit. These efforts are aimed not only at winning a greater share of the smartphone market but also at gearing up for EV production. For example, Luxshare is already partnering with Chinese automakers like Chery to make EVs.

Chinese suppliers are helping Apple move out

One of most interesting twists in the China decoupling story is the role of Chinese firms themselves in helping to move production to places like India and Vietnam. BYD, better known for its success in batteries and EVs, also makes iPads for Apple. BYD has already begun moving some of its iPad production to Vietnam. Goertek, the Chinese acoustics firm that makes AirPods, is building a new factory in Vietnam. Luxshare has already shifted some Apple production to a plant in Vietnam. Desay, a Chinese maker of iPhone batteries, is being pushed by Apple to set up factories in India. Sunny Optical is teaming up with Apple to build a $300 million camera module manufacturing plant in India.

While Apple has been able to move some of its production out of China, what does it mean if this production is done by plants outside of China but still under Chinese ownership?

The China decoupling conundrum

As the world tries to move production away from China, China’s share of manufacturing seems to continue growing. How can this be? Part of the explanation is straightforward. As companies like Apple move lower-end production out of China, China is moving up Apple’s production value chain into high-tech, high-value components. This echoes a similar finding from a Rhodium Group report: “Diversification has been taking place for years in these industries, but it has been obscured by a concomitant expansion of manufacturing value chains in China.” It also doesn’t hurt that Chinese leaders have long pressured foreign companies to help develop China’s domestic industry. For example, Chinese officials got Apple CEO Tim Cook to sign a secret $275 billion deal in 2016 to help Apple’s Chinese suppliers move up the value chain.

This raises a big question for other countries. As China moves up the value chain, this might create room at the lower end for countries like India and Vietnam to step in. But will the competitiveness of Chinese firms in the middle levels of the value chain create a ceiling on how far up other countries can go? India’s share of iPhone production has already surged to 14% this year. But, as one Indian journalist recently asked me, how far can the country go in winning over not just a larger share of iPhone assembly work but also deeper parts of the supply chain? As I’ve written earlier, countries like India should borrow from China’s playbook, bringing in foreign firms—including Chinese firms—and then using them to build out domestic supply chains.

One last thing to note is the virtuous cycle between Chinese brands and China’s broader manufacturing ecosystem. Much has been written on why it’s so hard for Apple to move iPhone production away from China, citing China’s vast and nimble supplier base. This supplier base, which Apple and Foxconn helped to develop, later empowered China’s own smartphone companies like Huawei, Xiaomi, and Oppo. Apple’s suppliers in China—like Samsung, SK hynix, Sunny Optical, and Lens Technology—supply similar components to its Chinese smartphone competitors.

The kicker is that even as companies like Apple try to move away from China, China’s manufacturing ecosystem will continue to be supported and pushed forward by its own homegrown smartphone companies. And now these same Chinese suppliers are already supporting China’s expansion into other industries, like semiconductors and EVs.