How China Has Added to Its Affect Over the iPhone

This fall, Apple will manufacture some of its flagship iPhones outside of China for the first time, a small but significant change for a company that has built one of the most advanced supply chains in the world with the help of Chinese authorities. But the development of the iPhone 14, which is expected to be unveiled on Wednesday, shows how complicated it will be for Apple to truly break away from China.

More than ever, Apple’s Chinese employees and suppliers have contributed complex work and sophisticated components to its flagship device’s 15-year anniversary, including aspects of manufacturing design, speakers and batteries, according to four people and analysts familiar with the new operations. As a result, the iPhone has evolved from being a California-designed, China-made product to being a product of both countries.

The critical work done by China reflects the country’s advances over the past decade and a new level of involvement by Chinese engineers in iPhone development. After the country lured companies into its factories with legions of cheap labor and unrivaled manufacturing capacity, its engineers and suppliers have moved up the supply chain to claim a larger share of the money US companies spend on manufacturing high-tech equipment .

The increased responsibility China has assumed for the iPhone could challenge Apple’s efforts to reduce its dependence on the country, a goal that has gained urgency amid rising geopolitical tensions over Taiwan and simmering concerns in Washington over China’s rise as a technology competitor .

Chinese companies with branches in India will continue to play a key role in Apple’s plan to manufacture some iPhones in the country. In Chennai, India, Taiwanese supplier Foxconn, which already makes iPhones in factories across China, will lead the device’s assembly by Indian workers, with support from nearby Chinese suppliers including Lingyi iTech, which has subsidiaries to make chargers and others Supplying components for iPhones, according to two people familiar with the plans. China’s BYD is also setting up operations to cut glass for displays, these people said.

“They want to diversify, but it’s a tough road,” said Gene Munster, managing partner of Loup Ventures, a technology research firm. “They are so dependent on China.”

Apple declined to comment. Foxconn, BYD and Lingyi iTech did not respond to requests for comment.

Covid-related disruptions have compounded Apple’s predicament. When China closed its borders in 2020, Apple was forced to overhaul its operations and abandon its practice of flying hordes of California-based engineers to China to design the assembly process for flagship iPhones.

Rather than subjecting employees to lengthy quarantines, Apple began empowering and hiring more Chinese engineers in Shenzhen and Shanghai to lead critical design elements for its best-selling product, according to the four people familiar with the operation.

The company’s manufacturing and product design teams began holding nightly video calls with colleagues in Asia. After travel resumed, Apple tried to encourage its employees to return to China by offering them a $1,000-a-day stipend during the two-week quarantine and four weeks of work, these people said. Although the payout could be as high as $50,000, many engineers were reluctant to go because they weren’t sure how long they would have to be quarantined for.

In the absence of travel, the company has encouraged employees in Asia to chair meetings that colleagues once chaired in California, these people said. The staff also took responsibility for selecting some Asian suppliers of future iPhone parts.

The company is now increasingly opening up China to provide high-paying labor for those jobs, the people said. Apple posted 50 percent more jobs in China this year than it did in all of 2020, according to GlobalData, which tracks hiring trends across the tech space. Many of those hires are Chinese nationals with Western education, these people said.

Apple’s change in the way it operates has coincided with an increase in the number of Chinese suppliers Apple uses. Just over a decade ago, China contributed little to the production of an iPhone. It primarily supplied the low-wage workers who assembled the device with components shipped in from the United States, Japan and South Korea. The work accounted for about $6 — or 3.6 percent — of the iPhone’s value, according to a study by Yuqing Xing, an economics professor at Tokyo’s National Graduate Institute for Policy Studies.

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Gradually, China encouraged domestic suppliers, which began crowding out Apple’s suppliers from around the world. Chinese companies began making speakers, cutting glass, providing batteries, and manufacturing camera modules. According to Mr. Xing, its suppliers now account for more than 25 percent of an iPhone’s value.

The gains show how China has increased its dominance of the smartphone supply chain, said Dan Wang, an analyst at Gavekal Dragonomics, an independent economic research firm. “This trend is not slowing down,” he said.

For most of the pandemic, China has rewarded Apple’s trust in the country in manufacturing. Its steady production — even as other countries paused at times in 2020 and 2021 — helped Apple increase its smartphone market share and sell the most iPhones of all time, according to analysts, a remarkable feat for a decades-old electronics device that has changed offers revolutionary innovations for incremental improvements.

Analysts expect Apple to release four iPhones this year that have smaller indentations for Face ID than previous models. It’s introducing the phones a week earlier than usual, which could boost sales in the current quarter by adding a sales week. It is also expected to increase the price of its iPhone 14 Pro models by $100 to more than $1,600 to offset the higher cost of some components.

Apple assumes that the iPhone 14 will continue the success of the past few years. While other smartphone makers are cutting back production while the global economy falters, Apple is asking its suppliers to make more phones than they were a year ago, according to Susquehanna International Group, a financial firm.

The increased production order is a testament to the resilience of Apple’s wealthy customers, whose deep pockets allow them to buy high-priced smartphones despite rising inflation and the economic downturn.

“There is a huge consumer spending wealth gap in the smartphone industry,” said Wayne Lam, a tech analyst at CCS Insight. “Apple is safe compared to the competition.”

When the news media and employees gather at the company’s headquarters in Cupertino, California, on Wednesday for the product debut, Apple will be highlighting the phone’s capabilities — not how it’s made. The only signs of changes to this process will be visible in flights arriving and departing from nearby San Francisco International Airport.

Apple once spent $150 million annually on United Airlines flights, according to a United banner ad. Former employees recall boarding flights to Shanghai and Hong Kong before the pandemic, where business class seats were occupied by people who worked at Apple.

Now United no longer offers non-stop flights from San Francisco to Hong Kong. It flies direct to Shanghai four days a week.

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