China supply chain: Shenzhen was not built in a day
The Financial Times recently published a detailed review how Apple built its supply chain in China. This is a deep dive into an important subject, and author Patrick McGee reveals some surprising details. Because we provided some color quotes at the end, we’ve been getting a lot of questions lately about how long it will take to spin this supply chain – for both China and the US tech industry. The short answer is a long time ago.
The problem with this analysis is that there is no easy way to quantify the problem. We could look at global output, which is China’s 28.7% and the US’s 16.8%, or just consumer electronics’ share, which is even more uneven. But that’s only part of the picture.
South China’s electronic complex is built on human capital and intangible assets as well as plain old-fashioned capital and money. This makes it difficult for anyone else to repeat.
Much of China’s current capability goes beyond simple manufacturing. One of the most exciting aspects of South China’s electronic complex is the extent to which it has become ingrained in the overall economy. The FT has published incredible statistics. They looked at ISO certificates. ISO is an international standards body that certifies companies based on a detailed set of process qualifications and has established that:
China’s dominance can be partly measured. In 2021, the number of organizations in the country that have been audited for excellence in “quality management systems” – ISO 9001 certification – was 426,716, or approximately 42% of the global total. For India, the figure was 36,505; for the US it was 25,561.
Financial Times: How China tied its fortunes to China
In parts of southern China, ISO has become such a feature of large employers that local service companies are adopting many of these practices, and restaurants and nightclubs are also seeking ISO certification, apparently on the assumption that their customers value quality.
And it really gets to the heart of the matter: China’s productive capabilities are measured by intangible assets and human capital as much as they are measured by hard statistics and simple, old-fashioned physical capital and money.
Guest Author Jonathan Goldberg is the founder of D2D Advisory, a multifunctional consulting firm. Jonathan has developed growth strategies and alliances for mobile, networking, gaming and software companies.
For companies like Apple, this means scale—the ability to manufacture several hundred million iPhones a year with a high degree of reliability. For smaller companies, this means flexibility and fast turnover. We recently worked with a company that wanted a product from a US manufacturer. In the middle of planning, they discovered that they needed a custom tool for production, but the contract manufacturer had no experience with the device, which delayed production for months while they looked for rentals, and it was even harder to find. a team that knew how to use it.
On the contrary, there are a dozen firms in Shenzhen that specialize in exactly this tool, which they can deliver to the factory tomorrow, along with a team that will service it. Industrial clusters are a well-known phenomenon, but today there are no clusters of such scale and depth that can be compared with Shenzhen.
The train then left the station. American companies are doing their best to reduce and/or eliminate their dependence on China. We’ve heard rumors that Apple wants to move most of its manufacturing out of China within five years. We have no idea if this is true, but only Apple could even imagine such a timeline. There is no ready-made alternative and probably never will be.
The future electronics supply chain is likely to be split into a dozen countries such as Mexico, Vietnam and Malaysia. And this fragmentation will add friction to the system and likely make it more vulnerable to intermittent failures.
China is also not standing still. The cost of labor in China has been rising for years on the back of rising incomes and an unfavorable demographic situation. When Apple began production in China, most Foxconn employees worked seasonally, traveling to and from their rural homes during periods of downtime. Their children, who work at the plant today, most likely grew up at least partly in cities and want iPhones and iPads for themselves. While the recent trade disputes between China and the US provided the catalyst for the process to begin, it was almost certainly inevitable anyway.
Image credit: Robert Bai, CGTN