When Exploiting China Becomes Unprofitable: Apple's Furious Exit

In the 1990s, Apple was on the verge of bankruptcy. Competitors were running laps around them and the Mac was losing to PCs. So Steve Jobs and Tim Cook made one of the biggest bets of their careers. They moved almost all production abroad to China. It paid off big time. But now, over 20 years later, things seem to be the opposite. Apple is now trying to pull out of China. Something has changed and Tim Cook has gotten cold feet. Yet, things aren't so simple. Apple can't pack up and leave with tens of billions invested there. Why is Apple breaking up with China? Can they even do it? As it turns out, they're not the only ones doing so. Something massive is taking place and Apple is in the middle of an international tug of war. With Apple's permanent spot at the top of the S&P 500, the idea that they were once in trouble seems crazy. But even with the return of Steve Jobs in the late 1990s, things were looking bleak. The race at the time was in home computers and they were losing. In 1993, Apple had 9.4% of the global PC market share in second place. But by 1998, they had shrunk so much that they didn't even make the list. IBM and Compaq were beating them badly and most of their computers had similar prices. Despite their high prices, Apple wasn't even profitable and other companies had way better manufacturing. They could produce computers faster and cheaper, which meant better margins and more competitive prices. In 1997, Apple reported a net loss of $1 billion or about $2 billion today. Over the following years, even when they did make some profit, it was highly inconsistent. It was only a matter of time before Apple was gone. Something needed to change, which is where someone else enters the story. Tim Cook. At this time, he was just appointed the Senior Vice President for Worldwide Operations and was given the task of revamping Apple's entire manufacturing. A gigantic challenge as is, but there was the ticking countdown of Apple's bankruptcy, so the pressure was on and Cook delivered. He improved efficiency and reduced the number of suppliers, but his main focus was to outsource as much of production as possible. Manufacturing would be moved to China. We know about Apple's product breakthroughs like the iPod and eventually the iPhone, but underpinning all their product breakthroughs was this key decision, and Cook was the perfect person for it. Cook was incredible at getting costs as low as possible while keeping them efficient. If you knew how to navigate that market really well, which Tim Cook and Apple did, you could really find the best partner who would make the best component for the cheapest price, and that was sort of the brilliance of the system. In 2001, Apple formed a tight agreement with China. Gigantic factories were built, roads were paved, and housing for workers were constructed. No matter what it took, even if it meant moving mountains, China was making way for Apple. I was around when they called up the local city and asked them to build another airport because we needed a larger airport to ship out more goods. At the heart of all of this was Apple's closest partner, Foxconn. With 24-7 production, fast and efficient, and miles cheaper than anything America could offer, Apple's margins skyrocketed and soon were climbing back to the top with consistent growing profits. Yet, possibly the most valuable thing about this partnership was Foxconn's flexibility and commitment to Apple's needs as seen in the launch of the iPhone. For example, in 2007, Steve Jobs called a meeting with executives. The iPhone was scheduled to hit stores in just over a month, but Jobs was furious. He held up the iPhone from his pocket. Across its surface, dozens of tiny scratches. The original iPhone had a plastic screen. I won't sell a product that gets scratched, Jobs said. I want a glass screen and I want it perfect in six weeks. Six weeks to overhaul production of Apple's biggest product ever. Apple's executives sheepishly looked at one another. Jobs had once again asked for the impossible, but luckily they had a silver bullet. Foxconn. At the last minute, Apple redesigned the screen and sent it to Foxconn. Immediately, thousands of workers poured into the assembly line and started a 12-hour shift fitting glass screens. In just four days, Foxconn was producing over 10,000 glass iPhones every day. The speed and flexibility is breathtaking, said one Apple executive. There's no American plant that can match that. Foxconn was on standby for whatever Apple needed. They could hire 3,000 people overnight, another manager said. Without Foxconn, it's hard to say if Apple would have survived to see the iPhone. All of us know what happened next. Apple began to dominate, became a powerhouse worth 3.5 trillion dollars. But the key to their success is their bottom line. They've consistently been the most profitable company in the S&P 500, while also being the most valuable in market cap. China has allowed Apple to keep costs as low as possible. There's economies of scale for one. Then there's their supply chain, which despite being one of the most complicated on earth, is kept efficient by placing many suppliers and manufacturers right next to each other. Almost all of China's manufacturing and supply chain is within China itself, but most of all was the wage gap. In 2001, when Apple first began their exodus to China, the average annual wage was about 9,333 yuan a year, or about 1,127 US dollars. In the US, it was about 30,800, or almost 30 times higher. Not to mention China's gigantic population. It makes sense Foxconn could hire so many people so quickly. Apple now has over 1,600 factories in China. Over 5 million people are in some way employed by Apple, either directly, through suppliers, or through manufacturers. China made Apple rich, and vice versa. But this is also underpinned by a glaring weakness, which is starting to cost them. In October of 2023, when Tim Cook visited one of the Chinese manufacturers, Cook revealed that over 95% of Apple's products are still manufactured and assembled in China. Apple isn't just reliant on China, they're entirely dependent on them. Even components that technically are produced elsewhere are still tied back to China. The screens are produced by LG and Samsung, but assembled in China. Same with the processors, manufactured in Taiwan, but assembled in China, along with the cameras from Sony. The manufacturing for all of Apple's products, be it the iPhone, AirPods, or Mac computers, are beginning to decrease their reliance on China, or at least attempting to. On the surface, Cook is positive and enthusiastic, but in reality, there's a reason to be nervous. Cook has gotten cold feet with his long-term partner, and when we take a step back, it's easy to see why. The Chinese market has also provided a huge opportunity for sales, especially with it being on the doorstep of manufacturing. But recently, things aren't looking so good. Apple was once the biggest smartphone in China, but no longer. In fact, they've dropped all the way to third in 2024, and only have 15% market share, after iPhone sales dropped over 18%. The largest drop they've seen in eight years. Wild to think. Hard to imagine, given how much they've grown their dominance in the West. Local brands like Huawei and Xiaomi have taken Apple's throne, though there's a much bigger factor at play in this, which we'll get to soon. But for now, there's something else beckoning Apple to abandon China. Tim Cook has found himself at the center of a strange tug of war. The deep ties to China are now coming back to bite them. Low labor costs, inhumane working conditions, and even the accusations of slavery within Foxconn. They wake up, they have breakfast, they go to work, they work a solid shift, they come back to their dormitory, they sleep. It's a very dehumanizing place, and the workers are little more than the machines there. In 2010, after 14 workers killed themselves at another factory producing iPhones, Apple published promises to protect workers. So have things changed. Our undercover reporters got jobs through agencies, and within minutes, Apple's rules were broken. This has tainted Apple's brand for quite some time, but to them, it seemed to be a necessary evil. But now, it seems like enough is enough. Do I think Apple's an evil company? No. Do I think that sometimes they benefit from Chinese slave labor? Yeah, and that's pretty sick. And I think that a company that wants to benefit from American markets should also have to pay American workers a fair wage. America, and especially Trump, is trying to bring manufacturing back home, particularly in technology like semiconductors, not just for jobs but for national security. With the rise of tariffs and pressure to move business back to America, Apple is becoming worried. The additional 10% tariffs on goods made in China being imposed by the Trump administration this time around are, for now, expected to include the iPhone. Last time this happened, Apple escaped most of these tariffs, but that likely won't be the case this time. The reliance on China that helped Apple's profits soar are now threatening to hurt them. A 10% tariff would mean a huge price hike for customers or a huge loss in margin for Apple. I love this comment from an Apple veteran. Supply chain goes all back to one guy, Tim Cook. This mess is his fault. This isn't just the buck stops at the top, it's that the buck stops with the guy who headed the supply chain, and Tim is the master of supply chain. Tim Cook's decision was the right one for the short term and medium term, but now we're in the long term. Apple moved to China to cut costs, but ironically, being in China is now what's making things expensive. So Apple is trying to break up this marriage. Apple is trying to escape because the waters are getting dangerous. They have seen the storm and are trying to evacuate. So where? Back to the United States? Not exactly. As much as Trump and the United States want manufacturing back in America, that's probably never going to happen, at least on a large scale. Instead, Apple has begun pouring billions elsewhere. Apple is bringing much of their manufacturing to India, and like China in the 2000s, it's mutually beneficial. In 2020, India passed the Production Linked Incentive, or PLI. The nation wanted to position itself not only as an alternative to China, but as the leading global manufacturing hub. The scheme shall extend an incentive of 4-6% on incremental sales of goods manufactured in India to eligible companies for a period of 5 years. Essentially, the more a company increases production in India, the more they get in cash back. This has worked wonders. Since 2020, the scheme has brought over $17 billion in foreign investment. A significant chunk of that comes from Apple, but also their existing partners, Foxconn. India accounted for 14% of iPhone production in 2024. Still a small chunk, but their growth in international manufacturing is starting to take off. From 2.7% of electronics exports in 2019 to 6.7% in 2024. But there's a problem. Predictions indicate India's iPhone production volumes could match China's within 5 years. However, achieving comparable revenue contributions to Apple's global operations could take 10-15 years. Apple is trying to break up with China, but it's still going to take a long time to match the efficiency and the lower costs. What's really interesting though, is that they're not breaking up with Foxconn, who are also expanding into India. Apple is partnering with other companies for sure, but Foxconn is still a key relationship, even in India. It seems Apple's new stance is anywhere but China. Not only that, Apple started this move a couple of years ago, before the new Trump administration. As it turns out, Trump is not the main reason they're leaving China. Something much bigger is happening. Beijing's National Bureau of Statistics reported that in 2022 and 2023, over $160 billion of earnings were pulled out of China. Then in 2024, the unthinkable happened. China's foreign direct investment, FDI, fell. In fact, it fell 29% compared to the previous year. Something is happening, something big. Walmart sold a stake in one of China's e-commerce platforms worth $3.6 billion, which it had held for 6 years. IBM closed a research facility in China. Honda halted production of three Chinese plants. Giant U.S. law firms announced the closures of offices in Beijing and Hong Kong. And Dell announced it's moving manufacturing away from China. Most of this is very recent. There is a corporate exodus from China, with many moving to India, back to the U.S., or Southeast Asia. Trump's tariffs are undoubtedly at work here, but in my opinion, that's just the catalyst that pushed things over the edge. I believe this actually started a few years ago. The pandemic was a wake-up call for companies. China's tight lockdowns caused a gigantic disruption to supply chains. The world became suddenly volatile for business, but this was even worse for companies like Apple. When all manufacturing is located in one country, you're at the mercy of whatever that country wants. The pandemic made companies realize just how reliant they were on China, but that's not all. China has been slowly changing. They're becoming stricter towards foreign companies. For example, in 2017, they enacted China's cybersecurity law, which requires data generated in China to be stored within the country. This law also came with stricter regulations and more audits by the Chinese government. Then in 2021 came the anti-foreign sanctions law. If companies follow sanctions placed on them by the West, the Chinese government will punish them. For a company like Apple who has special attention from multiple governments, this puts them in a difficult position. China began to abuse its position and leverage all the companies who had become reliant on them. But possibly worst of all was the revision of China's company law in 2024. Foreign companies in China with over 300 employees must put a Chinese employee on the board of directors. This doesn't sound so bad. After all, it's just someone who can advocate for employees, right? Well, in reality, this is likely to give power to the CCP and give them an inside hand in all of these giant foreign companies. Laws like this only further the international tension. But the biggest factor in this exodus is probably the simplest. The cost of labor in China has risen. In 2023, it was more than doubled than what it was in 2013. Citizens have gotten richer, more educated, and more skilled. The salaries in Foxconn and other factories have gradually gone up, but there's something else. There's a generational shift in China. Young Chinese people today aren't so interested in low-cost repetitive factory work, and they often have many other options. So not only are manufacturing jobs more expensive, but hiring workers in China is harder than it's ever been. China is losing its spot as the king of manufacturing, and they've begun to realize. Recently, the Shanghai city government said that one of the biggest challenges was the hallowing of the fruit chain. It's pretty obvious which company they're talking about here. Apple. Officials are now trying to bring back foreign investment, but it might be too late. China will always be a hub for manufacturing and may be the king for a long time. But Apple and others are starting to realize the risks of leaving all their eggs in China. Will India soon have 95% of Apple's manufacturing? I don't think so, but they are diversifying, and that's probably for the best. If you would like to see more questions logically answered, comment that down below. But until then, I'm Hari, and I'll see you guys on the next one.