Zhengzhou, China, is home to a state-of-the-art facility built several years ago to serve a single global exporter: Apple, now the world’s most valuable company and one of China’s largest retailers. The sprawling manufacturing complex, run by Apple’s manufacturing partner Foxconn, is known to many as iPhone City. At the beginning of this week, many of the 200,000 employees had already spent weeks in forced isolation in garbage-filled dormitories.
In fact, those workers have been living on meager rations since October as management wanted to keep producing iPhones while containing a Covid-19 outbreak and endured a very strict Covid Zero policy. On normal days, Foxconn’s mega factory can produce 500,000 iPhones a day, but that hasn’t been the case lately, especially after Apple its latest lineup of iPhones in September.
Why is China so important to Apple?
No American company makes as much money in China as Apple. While few make that much money, Apple brought in $68.4 billion in revenue in Greater China in fiscal year 2021, mostly from iPhone sales. The technology giant even became China’s top OEM in the same year, with a market share of 23%, the highest ever. Few countries have had as much power as China to shape Apple’s fortunes.
But Apple is not alone strong in China. Its meteoric rise has a lot to do with its partnership with the world’s largest contract repairer of smartphones and other electronics – Foxconn, a Taiwanese giant formerly known as Hon Hai Precision Industry. Foxconn is not only Apple’s subcontractor, its fortune remains closely intertwined with that of the American company.
What’s going on at iPhone City?
The tensions that have built up since October have led to this Wednesday, where hundreds of Foxconn factory workers, angry to learn they might not get the wages they were promised, unless they continued to work during the Spring Festival and mid-spring. March caused a riot and caused a physical confrontation with police.
“The violence that peaked on November 23 showed how inadequate that effort was, while also exposing the increasing futility of China’s Covid strategy. During the pandemic, the Chinese Communist Party has shown a willingness to go to great lengths in its efforts to fight Covid. It forced companies such as Foxconn Technology Group and Tesla Inc. to seal off their facilities from the outside world and then continue to use them as ‘closed-loop systems’,” according to a report by Bloomberg noted.
For context, Foxconn of Taiwan, Apple’s main manufacturing partner, operates iPhone City independently. It has acknowledged that it made mistakes in managing workers there, while blaming local officials for unpredictable policies that made delivery and maintenance of meals nearly impossible, Bloomberg said, citing a person familiar with the company.
Production of iPhones has also continued to fall since October due to “significantly reduced capacity,” according to Apple. The company added that the manufacturing issues would lead to customers experiencing longer wait times between the purchase and delivery of the high-end iPhone 14 Pro and 14 Pro Max. While Apple has repeatedly said Covid-19 restrictions have caused billions of dollars in supply disruptions during the pandemic, it has not issued such a warning outside of earnings calls since February 2020.
The closure of the Zhengzhou factory is actually the second to hit Apple this year. It lost about US$4 billion in revenue from iPads and Macs in spring and summer, according to estimates, after factories outside Shanghai were closed to limit the spread of Covid-19. So you can only imagine the cost to Apple of everything that goes on at the largest factory for its iPhone – after all, it’s a factory that accounts for more than half of its annual phone sales.
Zero-Covid policy harms production
The truth is, as long as China doesn’t give in zero Covid policy, it will have a big impact on Foxconn and Apple, because these premium phones were the last part of the smartphone market that was in high demand. As of now, people have had enough of China’s zero-Covid policy — which is why protests have erupted in Zhengzhou. The ruling Communist Party faces increasing frustration over repetitive, if not extensive, restrictions in areas across China.
When Foxconn shut down its factory in Zhengzhou, some factory workers even went so far as to flee the facility and begin walking across the countryside to their homes. Images and videos of their departure circulated on social media. But Foxconn can’t afford to lose employees, so the company responded by offering employees an extra $14 a day to keep working. It later increased those payments to $55 per day.
Early this month, Foxconn’s offer had risen to 10,000 yuan (US$1,400) for newly hired workers who wanted to quit and return home, the financial news outlet said. Cailianshe reported, citing unidentified recruiting agents. But many stayed – at least until this week. On Wednesday, employees heard in a video that Foxconn had not fulfilled its promise of an attractive bonus and salary package after they arrived at the plant.
BloombergAlicia Garcia Herrero, Natixis’ chief economist for Asia and the Pacific, quoted that while Foxconn’s troubles have attracted the most attention due to the company’s fame and size, the troubles also indicate that others may struggle even more to operate within the parameters of Chinese policy. “You see cases like Foxconn, and every company is now wondering, ‘Is that going to happen to me?'”
“Any company that depends on production must consider alternatives. It will be expensive, but it will be less expensive than just relying on China and then China will not open up.” In fact, Herrero suggested that it could be another year to 18 months before the Chinese economy opens up, and that could spell doom for both Apple and Foxconn. The upside is that Apple, under the leadership of Tim Cook, has developed alternatives in its supply chains.
Assembly partners like Foxconn are now make more iPhone 14 models in India than any previous generation, and are beginning to use the country as an export base. The same Taiwanese giant is too expand in Vietnam and Thailand, to further support Apple.