iPhone 14 is already a product jointly created by China and the United States

This fall, Apple will be the first to produce some iPhone flagships outside of China. It's a small but significant change for a company that has built one of the world's most complex supply chains in China. Still, the development process for the upcoming iPhone 14 shows how complicated it will be for Apple to actually leave China.

Sino-US co-creation of products

The iPhone has been around for 15 years. Today, Apple’s Chinese employees and suppliers are contributing more complex work and precision parts to the flagship phone than ever before, including manufacturing design, speakers, and batteries, people familiar with the matter said. As a result, the iPhone has gone from a "designed in California, made in China" product to a product created by the two countries.

The critical work China has provided on iPhone development reflects the country's progress over the past decade and the new level of engagement of Chinese engineers in iPhone development. After China lured companies to its factories with relatively cheap labor and unparalleled capacity, the country's engineers and suppliers have moved up the supply chain to get a cut of what U.S. companies spend on high-tech products.

China's growing role in iPhone development could challenge Apple's efforts to reduce its reliance on China. Affected by the external environment, Apple is trying to reduce its dependence on China.

Diversified production still needs China

Apple plans to manufacture some of its iPhones in India, but Chinese companies with operations there will still play a key role. In Chennai, India, Taiwanese supplier Foxconn will lead Indian workers to assemble iPhones with the support of nearby suppliers in mainland China, including Lingyi, whose subsidiary supplies chargers and other parts for iPhones, people familiar with the matter said. China's BYD is also building a display glass cutting business in India, these people said.

“They (Apple) want to diversify production, but it’s a tough road,” said Gene Munster, managing partner at venture capital firm Loup Ventures. “They’re too dependent on China.”

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

Chinese engineers are on the rise

Travel disruptions caused by the Covid-19 pandemic have exacerbated Apple's woes. In 2020, Apple was forced to make a major overhaul of its business, abandoning the practice of sending armies of California engineers to China to design the assembly process for its flagship iPhone.

Rather than subjecting employees to prolonged isolation, Apple began decentralizing and hiring more Chinese engineers in Shenzhen and Shanghai to lead key design elements of its best-selling products, according to people familiar with the matter.

Apple's manufacturing and product design teams began late-night video calls with their Asian counterparts. After travel resumed, Apple tried to encourage employees to return to China, offering workers a $1,000-a-day stipend during two weeks of quarantine and four weeks of work, the people said. Despite stipends of up to $50,000, many U.S. engineers are reluctant to travel because they're not sure how long they'll need to quarantine.

With U.S. employees unable to travel, Apple has encouraged employees in Asia to host meetings that were once hosted by colleagues in California, people familiar with the matter said. The employees are also responsible for selecting some of the Asian suppliers for future iPhone components.

Apple is now increasingly relying on China to provide well-paid employees for these jobs. This year, Apple posted 50% more jobs in China than in all of 2020, according to data provided by GlobalData, which tracks hiring trends in the tech industry. Many of these new hires are Western-educated Chinese citizens.

Significant increase in value of Chinese suppliers

As Apple adjusts the way it works, it uses an increasing number of Chinese suppliers. More than a decade ago, China made a tiny contribution to the value of iPhone production, mainly providing relatively cheap labor to assemble the device using components shipped from the U.S., Japan and South Korea. According to a study by Yuqing Xing, a professor of economics at the National Institute for Policy Studies in Tokyo, the job is about $6, or 3.6 percent, of the value of an iPhone.

Gradually, however, China cultivated local suppliers that began to replace Apple's suppliers around the world. Chinese companies started producing speakers, cutting glass, supplying batteries and making camera modules. According to Xing Yuqing, Chinese suppliers now account for more than 25 percent of the iPhone's value.

Wang Dan, a technology analyst at Longzhou Economics, an independent economic research firm, believes the growth is a sign of China's expanding control over the smartphone supply chain. "The trend is not slowing down," he said.

Chinese production helps iPhones sell well

For much of the pandemic, Apple's reliance on China for manufacturing has also paid off. While other countries have shut down production for a while in 2020 and 2021, steady production in China has helped Apple boost its smartphone market share, selling the most iPhones ever, analysts said. That's a remarkable achievement for an iPhone that's been around for more than a decade. It has now moved from delivering revolutionary innovations to incremental improvements.

Analysts expect Apple to release four iPhone 14 models this year with smaller “notches” for facial recognition than previous models. Apple is releasing the iPhone 14 a week earlier this year than in the past, which could boost sales for the current quarter by adding a week to sales. Apple is also expected to increase the price of the iPhone 14 Pro models by $100 to more than $1,600 to offset higher costs for some components.

Apple wants the iPhone 14 to build on the success of the past few years. While other smartphone makers cut production due to the global economic downturn, Apple is asking its suppliers to make more phones than a year ago, according to financial firm Heina International Group. The rise in manufacturing orders is a testament to the resilience of Apple's wealthy customers, whose deep pockets allow them to buy high-priced smartphones amid rising inflation and a recession.

"There is a huge gap between rich and poor in consumer spending in the smartphone industry," said Wayne Lam, a technology analyst at research firm CCS Insight. "Apple is safe relative to its competitors."

When the news media and Apple employees gathered at Apple's California headquarters for the iPhone 14 event in the early hours of Thursday morning, Beijing time, Apple would emphasize what the phone does, rather than how it's made. The only sign of changing that process will be the flow of flights in and out of the nearby San Francisco International Airport.

A promotional banner for American airline United shows that Apple once spent $150 million a year on United flights. Former Apple employees recalled that before the outbreak, business-class seats were filled with Apple employees on their flights to Shanghai and Hong Kong.

Now, United no longer offers direct flights from San Francisco to Hong Kong. It has direct flights to Shanghai four days a week.

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