Apple (AAPL) CEO Tim Cook toured Southeast Asia last week, visiting Vietnam, Indonesia, and Singapore, as part of a multiday trip geared toward reducing Apple’s reliance on China as its central manufacturing hub.
And while Apple isn’t looking to abandon China — Cook spent a number of days in the country just last month — the company is hedging against the potential for future manufacturing roadblocks in the region.
At the same time, the company is slowly setting its sights on India as its next major growth opportunity now that China has become a more mature smartphone market.
“Apple is in the beginning stages of a decade[-long] transition away from reliance on China and diversify that to other countries in Southeast Asia on both the manufacturing front and the demand front,” Deepwater Asset Management managing partner Gene Munster told Yahoo Finance.
But reducing Apple’s dependence on China for building its devices and growing its market share could take some time.
Manufacturing growth beyond China
China accounts for a disproportionate amount of Apple’s supply chain partners such as Foxconn and Pegatron. That concentration of manufacturing capacity in one area proved especially damaging during the pandemic when China forced factories to shut down, limiting Apple’s ability to build and ship devices.
Once capacity came back online, Apple was able to meet consumer demand again. But the fact that a factory closure had such an impact on the company was a troubling sign of fragility in its supply chain.
“Apple basically said they fulfilled about $5 billion of back revenue on the last conference call,” BofA Securities analyst Wamsi Mohan told Yahoo Finance. “That’s $5 billion for one facility shut down in China.”
Left unchecked, that lack of supply chain resiliency could come back to bite Apple again given the gloomy state of the US and China’s relationship and tit-for-tat maneuvers the countries are making with regard to their respective tech companies. The US has tried to box out Huawei from getting access to high-end processors and is working to get ByteDance to sell TikTok, while China is reportedly requiring state employees to ditch devices made by Western companies.
“We see Cupertino going aggressively after [Southeast Asian] countries on the supply front,” Wedbush analyst Dan Ives told Yahoo Finance. “Cook is hedging his bets as China remains a very dicey situation for Apple while Vietnam and Indonesia are soft landing spots for iPhone production.”
Apple’s problems in China extend beyond manufacturing complexities. The company is also contending with a slowdown in iPhone sales in the region as economic growth flags and regional rivals grab market share.
Greater China is Apple’s third-largest market by revenue behind the Americas and Europe. But iPhone sales in the region are slowing. In Q1, Apple reported revenue in Greater China fell 13% year over year, and that’s after falling 2% for all of 2023. Apple previously reported 9% growth in the region in 2022.
China is also a relatively mature smartphone market, making massive growth gains a difficult proposition, which is where India comes in.
India as the next China
The most populous country in the world, India has a growing middle class that could prove to be a boon for Apple.
“China took probably five years before it really mattered,” Munster explained. “India probably takes 10 years, and the reason is they’ve got the population on their side, but the GDP per capita is about a quarter in India what it is in China. And so just in general, people don’t have … the same wealth in India as they do in China.”
Apple opened its first official store in India last year, with Cook himself kicking off the festivities for the Mumbai location. Apple also builds some of its latest iPhones in the country, making it even more important for the company.
Emerging markets like India are going to be key to Apple’s growth in the coming years, as its larger markets continue to mature and growth declines. The company has been telegraphing that much as well. In earnings calls, executives repeatedly point to emerging markets as growth areas during earnings calls, with Tim Cook specifically pointing to the likes of India and other growth markets in his opening remarks during Apple’s Q1 call.
Still, Apple’s push to expand its manufacturing and market share outside of China will take years. So, for the foreseeable future, the company will have to continue to rely on China and figure out how to make the best of it.
Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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