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The twin challenges of China’s technology supply chain

The twin challenges of China's technology supply chain

The twin challenges of China’s technology supply chain

As a supply chain source said Asian NikkeiApple has notified several partners to reduce production of AirPods, Apple Watch and MacBook components in the first quarter of 2023 due to weak demand.

“Apple has informed us that orders have decreased compared to last quarter, in part due to weak demand,” said an executive at one of Apple’s suppliers. “China’s supply chain is still struggling to adapt to the sudden change in pandemic policies, leading to labor shortages in many places due to the Covid-19 outbreak.”

Workers assemble Apple devices at a Foxconn factory.  Photo: apple

Workers assemble Apple devices at a Foxconn factory. Photo: Apple

China has changed its policy from zero-Covid to less restrictive, scrapping many controls like testing and lockdowns to keep the economy afloat. Initially, technology companies welcomed government regulations. But now they are faced with the challenge of accepting the “new normal”, namely increasing numbers of infections with lax controls.

“The situation is very chaotic,” said the CEO of the electronics manufacturer, which supplies Samsung, Apple and several Chinese smartphone companies.

Meanwhile, a Honor employee described the current environment at the factory as mostly “acceptable” for contracting the virus. “The typical greeting now is, ‘Did you get a positive result?'” said the man. “Now it’s taken for granted. If it can’t be avoided, we’d better pick it up earlier. Otherwise, our work will continue to be disrupted in the future.”

Local governments in many factories lobbied for this change. Zhejiang, Chongqing and Anhui have announced workers, including medical workers, who have no or only mild symptoms can return to work with “protection”.

But some experts fear the sudden easing could have side effects. Natixis economist Alicia Garcia Herrero predicts “visible” impact on manufacturing once China reopens. However, he believes the condition will not last long and will likely subside after the Lunar New Year.

On folk day On Dec. 20, China’s Commerce Minister Wang Wentao said global supply chains have been fragmented due to the pandemic and the war in Ukraine. He urged Chinese companies to strive to “become manufacturing experts” to remain resilient in the face of multiple disruptions.

While the article makes no mention of Apple or foreign companies operating in China, SCMP Wentao’s call comes as China risks losing its pivotal role in global supply chains due to its policy response to Covid-19 over the past three years.

Citing research, Counterpoint analysts Bai Shenhao and Ivan Lam both said Foxconn plans to shift 10-30% of its capacity from China to countries like India, Vietnam and Brazil, while the opposite is happening. Rival Pegatron is also investing in state-of-the-art manufacturing facilities and employee training in India.

“Global industrial supply chains are gradually expanding beyond China to avoid the risk of dependency on a single manufacturing center,” Shenhao and Lam said.

The peak of faith will soon be over

People like the Honor employees mentioned above think it’s better to fight the wave of infections when demand stagnates, because sooner or later it will. “More than half of the people in my nest are infected, they are on vacation because the orders are not good,” the person said.

Ding Yi, owner of Wuxi Huansheng Materials, said his factory had been closed since mid-December after most workers became infected. But now everything works fine. “It doesn’t matter because the number of orders decreases at the end of the year, I’m not too worried,” Yi said.

Big companies like Foxconn, Apple’s largest iPhone manufacturing partner, have been suffering from labor shortages since late October last year following the outbreak of Covid-19. The company currently lures employees with bonuses of up to 14,000 yuan (2013 USD) and also asks employees to hire new employees. Other tech supply chain companies such as Chengdu-based Jabil, Shanghai-based Pagatron and Shenzhen-based LY iTech also raised salaries and bonuses earlier this month.

“Most of us expect the Covid wave to peak in February and things will gradually return to normal from March,” said an executive at SMIC, China’s largest chipmaker. “We went through a dark period where almost half the team got infected and less than 50% of the staff were working. But now the situation is gradually improving.”

Jonah Cheng, chief investment officer at J&J Investment, is no less optimistic. In his opinion, the market is still “digesting” excess supplies that are produced from time to time. He predicts the recession will ease this year and pick up again next year.

Bao Lam (Track SCMP Nikkei Asia)

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