China's Covid Policy and the Shift in Global Supply Chains
By Poorvi Hosabettu
Unlike the rest of the world in 2022, China still maintains a reign of strict COVID surveillance and a closed border policy that its contemporaries have moved past. In an effort to keep COVID at bay, the Chinese government has implemented a “zero-Covid” policy, a move that has caused an unusual amount of uproar within the country and, recently, destabilized world supply chains. Major corporations across the world are now discussing an unprecedented diversification of production locations, away from China and into South and Southeast Asia.
Background
A country with relatively rare protests, China has been rocked with demonstrations against the quarantine measures and lockdowns, as well as their strict implementation by guards and police as mandated by the zero-covid policy. Data from the Freedom House, a Washington D.C. non-profit, finds that two-thirds of the country’s provinces had at least one demonstration over the course of this year (Ford et al., 2022).
While the end goal of the policy is to eliminate Covid occurrences entirely - while the rest of the world has prepared to live with it - China is now struggling with deaths of another kind. Repeated instances of people in need of medical attention being denied care or emergency services being delayed due to lockdown rules caused a mass uproar on social media (Reuters, 2022). Political problems aside, China’s “Zero Covid” policy is now having a much more direct economic effect on the country’s greatest endeavor, mass production.
Apple’s largest manufacturing hub is in China, in a Foxconn factory in Zhengzhou called “iPhone City”. 95% of the tech megacompany’s devices are produced in China, and analysts estimate that 70% of all global iPhone production happens at this factory (Kharpal, 2022).
Foxconn, a Taiwanese-based electronics manufacturing corporation with factories across China, is buckling under the pressure of increased demand for the latest iPhones while balancing decreasing production capacity.
Foxconn protests
The issue kicked off in October when these strict guidelines caused a large number of workers to leave the Foxconn factory due to an outbreak. Desperate for workers, especially considering the upcoming predicted surge in demand due to Black Friday and Cyber Monday deals, as well as year-end holiday demand in the United States, factory management offered significant bonuses to factory workers from neighboring provinces to come and work at the Zhengzhou branch (Liu, 2022).
But violent and widespread protests have further rocked the factory’s productivity as workers claim that management has reneged on its promises to pay the promised wages on time. Rather, workers have claimed that they have been coerced into working an additional month to qualify for their sign-on bonuses (Tian et al., 2022). Workers also claimed to have been hired under false pretenses of the type of work being performed, as well as not being told the extent of Covid quarantine that was to be followed. In protests that have only increased in scale, videos of factory workers being clubbed by security personnel dressed in all-white hazmat suits have gone viral on social media (Kwon, 2022). Workers that clashed with management claimed that they were later offered cash to quit and leave.
The delays have doubled wait times for the iPhone 14 and 14 Pro, and Apple - which boasted record profits over the pandemic - is facing a dip in profits for the first time in three years (McGee, 2022). The increased protests across China and reduced optimism among Chinese citizens overall show a marked lack of trust in the Chinese administration’s economic decisions. These pessimistic sentiments are strongest in the middle to high earners, the target of the Apple market. Specifically, surveys show a negative intent to spend in the consumer electronics category. With iPhones falling in the category of luxury products for most of the Chinese population, this conservative spending streak has further reduced the sale of Apple’s latest phones (Consumer Sentiment in China during the Coronavirus Crisis | McKinsey, 2022).
The Zhengzhou factory - along with others in China - was already struggling to maintain normal efficiency with having to maintain social distancing and staff numbers under the Zero-Covid policy. But the Foxconn factory protests are a symptom of more than just a temporary lockdown-induced economic downturn; it has signaled a reduced trust of workers in management across the country, as well as a breakdown of cohesive communication in the sector as a whole.
Why did Apple not diversify earlier?
Despite the biggest meltdown happening in October-November, Apple had predicted this supply chain issue as early as April of this year (Iyengar, 2022). Apple’s longstanding and intricate relationship with China has been difficult for it to sever. China provides an enticing offer: cheap and plentiful labor (both skilled and unskilled), reduced production costs, solid expansive infrastructure, a strong business ecosystem, and reliable supply chains (Bajpai, 2021). The Chinese system is sophisticated and tried-and-tested, few countries are able to match it in scale.
Apple faces another risk at pulling out of China - China is Apple’s biggest consumer market outside of the United States. China currently makes up about 25% of Apple’s global sales, and Apple risks backlash from the Chinese government (Iyengar, 2022).
That said, the Zhengzhou factory dispute might have been the final push for Apple to begin redistributing production power to other countries.
Consequences
In the short term, the decreased efficiency will not have much of an effect on China’s deals with major foreign companies; these factories are still up and running with few alternatives so far. But in the long term, the series of events - costing Apple US$ 1 billion per week - has reduced international trust in China’s hitherto ironclad industrial supply pipelines (Liu, 2022). Despite China stating that guidelines around Covid outbreaks will be relaxed by March of next year, economists believe that it is too late, and that corporations around the world are gearing up to set up backup supply chains in countries like India, Thailand, and Vietnam to prevent losses similar to those already suffered by Apple (Tan, 2022).
Vietnam has proven a promising alternative, with it’s recent rapid economic growth that has propelled the nation from poverty to lower middle-class status. It had an impressive 7.6% GDP growth in 2019 (pre-Covid) and undertook extensive steps to make international business in Vietnam cheaper and “embraced trade liberalization with gusto” (Vanham, 2018). iPhone production aside, Apple is looking to diversify its production further, making plans to produce MacBooks, iPads, and Apple Watches in Vietnam (Cheng, 2022).
This stumbling block to China has opened up a long-awaited opportunity for India, which, unlike China, has long reopened borders and production, and is relying on the vaccine and exposure-built immunity - much like the rest of the world. India’s prime minister, Narendra Modi, has actively favored industrial policy and has been investing in attracting FDI with subsidies to potential investors (Nayyar, 2022). In 2023, analysts predict Foxconn will increase iPhone production in India by around 150%, shifting from about 4% total to 40-45% (Kuo, 2022). Foxconn had initially announced its plans to increase iPhone production in the South Indian state of Tamil Nadu in 2019, but the exact logistics of this shift are still unknown.
That said, India has other obstacles that have prevented it from becoming a global manufacturing base despite its sizable labor force. It lacks the infrastructure and organization that China has perfected, as well as the land rights required to set up mega-factories since state governments favor setting up smaller factories to protect local businesses. An additional battle is the unification of India’s varying interests to allow for a cohesive large-scale manufacturing operation that can compete with global hubs.
It has become clear that the Chinese policy of “Zero Covid” is unsustainable, and the people are buckling under the pressure, and so are China’s hitherto ultra-efficient production systems. The question of who will win the fight to fill the gap left by China in the production sector is unclear, but countries are gearing up to compete. Fixing the logistical problems posed by smaller and newer economies is an uphill battle that needs to be won soon to better its chances at competing with China as a manufacturing powerhouse.
References
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Cheng, T.-F. (2022, December 20). Apple to start making MacBooks in Vietnam by mid-2023. Nikkei Asia. https://asia.nikkei.com/Spotlight/Supply-Chain/Apple-to-start-making-MacBooks-in-Vietnam-by-mid-2023
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