Designed in US, made in China: Why Apple is stuck

Every iPhone box bears the inscription “Designed by Apple in California,” yet the journey of these ubiquitous smartphones often begins thousands of miles away. While conceived in the United States, the intricate manufacturing and assembly of iPhones predominantly occur in China, a nation significantly impacted by heightened US-China trade relations and tariffs. Despite recent tariff exemptions on smartphones, the long-term implications for Apple’s intricate supply chain and its reliance on Chinese manufacturing remain a subject of considerable discussion as geopolitical tensions persist.

Apple’s annual production exceeds 220 million iPhones, with estimations suggesting that approximately 90% are manufactured in China. From the sophisticated displays to the power cells, a significant portion of Apple product components are produced, procured, and assembled within China, encompassing iPhones, iPads, and MacBooks. The majority of these finished goods are then dispatched to the US, Apple’s primary consumer market.

A recent reprieve for Apple arrived when smartphones, computers, and select electronic devices were temporarily exempted from tariffs. However, this respite appears to be short-lived.

Indications of further tariffs have since emerged, with statements suggesting ongoing investigations into “semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN,” signaling potential future economic pressures.

Apple’s globally recognized supply chain, once considered a core strength, is now perceived by some as a potential vulnerability in the face of escalating trade disputes.

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The economic interdependence between the US and China, the world’s two largest economies, has been abruptly challenged by substantial tariffs, prompting critical questions about the depth and implications of this reliance.

China has significantly benefited from hosting manufacturing operations for Apple, a leading global corporation. This partnership acted as a demonstration of China’s manufacturing capabilities to Western nations, fostering advancements in domestic innovation.

Apple initially entered the Chinese market in the 1990s, distributing computers through external vendors.

Around 1997, during a period of financial instability for Apple as it faced intense competition, China emerged as a crucial opportunity. China’s burgeoning economy was increasingly open to international companies, seeking to stimulate manufacturing and generate employment opportunities.

Apple’s formal establishment in China occurred in 2001 through a Shanghai-based trade entity, marking the commencement of domestic production. Collaboration with Foxconn, a Taiwanese electronics manufacturer with a substantial presence in China, facilitated the production of iPods, followed by iMacs and subsequently, iPhones.

As China expanded its global trade engagement, encouraged partly by the US, Apple strategically increased its manufacturing footprint within China, evolving into a global manufacturing hub.

Initially, China lacked the infrastructure for iPhone production. However, Apple meticulously selected suppliers and facilitated their growth into prominent “manufacturing leaders,” according to supply chain specialist Lin Xueping.

Mr. Lin cites Beijing Jingdiao as an example, now a premier manufacturer of high-speed precision machinery essential for advanced component production. Initially focused on acrylic cutting, the company transitioned to glass-cutting machinery, becoming a key player in Apple’s mobile phone surface processing.

In 2008, Apple inaugurated its first retail outlet in Beijing, coinciding with the Olympics and a peak in China-West relations. This presence expanded to 50 stores, characterized by significant customer demand.

Apple’s escalating profit margins corresponded with the expansion of its Chinese assembly operations, with Foxconn’s Zhengzhou facility becoming the world’s largest iPhone factory, often referred to as “iPhone City.”

For a rapidly developing China, Apple symbolized sophisticated Western technology – user-friendly, innovative, and refined.

Currently, Foxconn remains the primary manufacturer for most iPhones. Advanced processors are produced in Taiwan by TSMC, the world’s leading chip manufacturer. Manufacturing processes also necessitate rare earth elements found in audio and camera technologies.

An analysis by Nikkei Asia indicated that approximately 150 of Apple’s top 187 suppliers in 2024 maintain production facilities in China.

“No supply chain globally is more vital to our operations than China,” stated Apple CEO Tim Cook in a recent interview.

During the previous administration, Apple secured exemptions from tariffs imposed on Chinese goods.

However, current policy stances suggest a different approach, initially targeting Apple before some electronics tariffs were eased. The administration’s objective is purportedly to incentivize domestic production through tariff pressures.

Former Commerce Secretary Howard Lutnick commented on the intent to bring manufacturing jobs back to America, particularly in sectors like smartphone assembly.

White House Press Secretary Karoline Leavitt emphasized the administration’s stance that the US should reduce reliance on China for essential technologies, including semiconductors, chips, smartphones, and laptops.

She further indicated that companies are actively pursuing the relocation of manufacturing to the United States under presidential direction.

However, skepticism regarding the feasibility of significant manufacturing relocation persists among industry experts.

The notion of Apple shifting assembly operations to the US is considered “unrealistic” by Eli Friedman, a former member of Apple’s academic advisory board.

According to Mr. Friedman, discussions about diversifying Apple’s supply chain away from China began around 2013, but the US was never considered a viable alternative.

Mr. Friedman noted limited progress in diversification over the subsequent decade but acknowledged increased efforts post-pandemic, prompted by manufacturing disruptions due to China’s strict Covid-19 lockdowns.

“Vietnam and India have emerged as key alternative locations for assembly. Nevertheless, the majority of Apple’s assembly processes remain concentrated in China.”

While Apple did not officially comment, its website indicates a supply chain encompassing “thousands of businesses and over 50 countries.”

Any substantial alteration to Apple’s existing supply chain framework would present significant challenges for China, which is currently focused on revitalizing economic growth after the pandemic.

The fundamental reasons that initially attracted Western manufacturers to China in the early 2000s remain relevant today: large-scale job creation and the reinforcement of China’s position in global commerce.

“Apple is positioned at the intersection of US-China tensions, and tariffs underscore the risks associated with this exposure,” notes Jigar Dixit, a supply chain and operations consultant.

This context might explain China’s measured response to trade pressures, opting for retaliatory tariffs and export controls on critical rare earth minerals, impacting the US.

Despite exemptions for some sectors, existing US tariffs on other Chinese industries will likely have adverse effects.

Furthermore, tariff implications extend beyond Beijing, with potential targeting of countries within the Chinese supply chain, such as Vietnam, where Apple has shifted AirPods production. This broader tariff strategy complicates relocation efforts within Asia.

“Viable locations capable of accommodating Foxconn’s large assembly complexes are primarily within Asia, and these nations are increasingly subject to higher tariffs,” Mr. Friedman observes.

The overarching question remains: what strategic adjustments will Apple undertake?

Apple faces intensifying competition from domestic Chinese companies as the government prioritizes advanced technology manufacturing, creating a competitive landscape with the US.

According to Mr. Lin, Apple’s cultivation of China’s electronics manufacturing capabilities has indirectly benefited domestic competitors like Huawei, Xiaomi, and Oppo, who can leverage this mature supply chain.

Recent market trends indicate shifts, with Apple losing its position as China’s leading smartphone vendor to Huawei and Vivo. Economic factors and restrictions on services like ChatGPT within China also present challenges for Apple’s market position. Apple has resorted to promotional pricing strategies to stimulate sales amid these pressures.

Operating within China’s evolving regulatory environment, Apple has also navigated restrictions on functionalities like Bluetooth and Airdrop, reflecting governmental efforts to manage information dissemination. The broader tech sector in China has faced increased regulatory scrutiny.

Apple has announced substantial investments in the US economy, though the extent to which these measures will satisfy long-term policy objectives remains uncertain.

Given the dynamic nature of trade policies and potential for unexpected tariffs, Apple faces ongoing strategic and operational challenges with limited flexibility.

Mr. Dixit suggests that while future smartphone tariffs may not incapacitate Apple, they will undoubtedly intensify operational and political pressures on a supply chain that is inherently complex to restructure rapidly.

“While the immediate severity of the crisis has diminished,” Mr. Friedman states, “it does not imply that Apple can afford to become complacent.”