In the next few weeks, Apple and Google will supposedly present a new generation of flagship smartphones. These are the iPhone 14 for Apple and the new Pixel for Google. The twist is that the tech giants are not manufacturing these phones in China.
The socialist powerhouse was, for a long time, an ideal option for manufacturers. It boasted relatively large manufacturing capacity and low wages, keeping production costs low. But, as the situation in China changes, tech manufacturers are looking for other options.
This shift likely happened due to these 3 reasons:
- Increasing geopolitical tensions
- Rising manufacturing cost
- Rising shipping costs
Geopolitical tensions are the most popular reason for American companies, but they aren’t the main reason. European companies also feel the push. This may create long-lasting growth issues for the Asian giant.
Conflict with the US Is Just the Tip of the Iceberg
Apple and Google claim they moved production due to the growing conflict between the US and China, including some chip manufacturers being banned from exporting to China.
But those tensions have been present for over a decade. Yet, these companies had never expressed any desire to change manufacturing locations. So what has changed? The Covid-19 pandemic has created supply chain issues, making it harder for materials and goods to come in and out of China.
Growing pollution concerns in provinces like Liaoning (辽宁) have also increased manufacturing costs and slowed supply. For US-based companies, this drove down profit margins and customer satisfaction.
Additionally, US politicians keep taking digs at the Chinese government. For instance, Nancy Pelosi is visiting Taiwan, which calls itself the Republic of China. It has a long-lasting political conflict with the mainland.
Why Are Manufacturing Costs Increasing?
Growing fuel prices are increasing raw materials prices. This, in turn, contributes to the increasing manufacturing costs. Costs, however, might not be the most important consideration for US and European manufacturers with plants in China.
Namely, the same issues would affect other nations and frequently affect tech manufacturers with plants in the US and Europe. These price oscillations are already envisioned within products’ final prices.
The specific issue in China is rising labor costs. Wages in China have grown 155% in the last decade, from 41,799 Yuan (~$6054) in 2011 to 106,837 Yuan (~$15,474) in 2021, according to Statista.
Even though this is still roughly a third of what a comparative worker would make in the US, the difference is no longer staggering. Chinese labor costs, once the attraction of China-based manufacturing, are no longer offering a great advantage.
Rising Shipping Costs
Fuel prices are increasing globally, with only countries extracting gas to keep prices low. That said, shipping prices in China started growing due to the expensive Covid legislation, preventing shipping, especially in the Guangdong Province.
The 126 million-strong province, slightly smaller than the State of New York, is one of the main shipping hubs for the entire world. Its value as a shipping hub has been dragged down by the increasing rules slowing down shipping, growing labor costs in the urban community, and increased tariffs for certain goods.
Because of this shift, tech manufacturers are looking elsewhere for production and shipping ports.
China is still the biggest manufacturer and consumer of electronics. This fact alone might not save the nation from a manufacturer exodus but may slow the process down.
The Other East Asia States and India
Chinese market requirements would still be significant. As a result, manufacturers like Apple and Google are looking toward other East Asia countries, especially Vietnam and Malaysia.
In 2020, China closed many of its manufacturing plants, causing Apple to move some manufacturing to Vietnam, including iPad model productions.
In recent reports, Apple disclosed that out of its 200 suppliers, 10% have manufacturing in Vietnam. This is still not as significant as the 155 suppliers with plants in China but is a visible step in one direction.
The tech giants also view India as a solid option. The over-billion people country may become the next biggest electronics consumer, making it a lucrative market. Foxconn, one of the biggest contract manufacturers for Apple, formed a factory there, which will produce much of the new iPhone 14 stock.
Eastern Europe and Turkey
One of the other options for many US and EU brands was Eastern Europe, including Poland, Slovakia, Ukraine, and the Balkans. But, due to the recent Russian aggression on Ukraine, those plans were, in most situations, scrapped.
Viable manufacturing in Eastern Europe requires good relations with Russia. Otherwise, products would not have a suitable transit road toward the Chinese market. But, as the situation stands now, the only possibility is partial movement either to Balkan countries such as Bulgaria, North Macedonia, and Serbia or to northern parts of Turkey.
Unlike East Asia, these countries do not have the large manufacturing potential required for a complete move. But, they offer a suitable location and reduced shipping costs to the EU and the US.
Possible Future for Western Africa
Western Africa does not share direct connections with East Asian markets, so it may not benefit many global brands. This region, however, could become the future of manufacturing. And with the growing demand for tech talent in the region, the demand for consumer electronics will soar as well.
Countries like Senegal, Mauritania, and Guinea-Bissau offer quick access to North and South America and Western Europe. Additionally, fuel and shipping prices and labor costs in these countries are still very low compared to the rest of the world.
The only issue expressed by many brands is the relatively low manufacturing capacity. But, with growing development and education in these countries, these issues might resolve sooner rather than later.