【想看中文的读者请点击这里

As the coronavirus, or COVID-19, affects more of the global economy, there has been an uptick in volume in the business media and analyst circle, clamoring for tech companies to leave or diversify away from China as its main supply chain. Apple has been a frequent target of this narrative.

Like most things in life, it’s easier said than done.

The Information recently published a detailed report of Apple’s previous attempts to move its supply chain away from China to India. The article presented a sobering look at just how hard it is to move to a different country. And not just any country -- India, the largest democracy in the world by population with the 2nd most STEM graduates produced annually.

So what makes this shift for Apple from China to India so difficult?

(I’ll cite from this Information article often in this post, because it is well-researched, high-quality tech journalism.)

You Have To Want It

One of the reasons why Apple’s foray into India’s supply chain maze has yet to succeed is because “suppliers aren’t willing to improve factories in India to meet Apple’s requirements...because of its small order sizes.” “Small” in this context is apparently “thousands per month.”

"[Indian] suppliers aren’t willing to improve factories in India to meet Apple’s requirements is because of its small order sizes." – The Information

This observation says to me that Indian manufacturers care more about short-term benefits than long-term learning and improvement of their skills, processes, and capacities. The opportunity to work with a company like Apple yields benefits far beyond immediate unit economics. The Indian manufacturers mentioned in The Information’s reporting clearly wasn’t interested.

The attitude in China has always been different. Shenzhen, the hardware manufacturing hub, routinely has factories that would take tiny orders from no-name companies from the U.S. and Europe to prototype, produce small batches or make to order. These orders most likely lose money or are done at cost. And that’s ok for these Chinese manufacturers, because they keep their workers busy, their processes sharp, and their product senses attuned to the latest designs and trends from more developed economies. (Some people will cast this behavior as a form of “piracy”; we can debate this point of view’s validity in a different post.)

Even though Shenzhen is now a dominant manufacturing center, its “do or die” attitude has not gone away. That raw, ultra-competitive drive will only get stronger when the COVID-19 crisis is over, because it will try to claw back from the coronavirus shadow. The rest of China will be too.

India, despite its vast potential, does not seem to want it nearly as much as China.

Cost vs. Quality Tradeoff

It has been objectively true for quite a few years now that China is not the cheapest place to make something.

When recently asked about possibly moving away from China’s supply chain in light of COVID-19, Tim Cook made clear that when Apple considers a supply chain location, it’s not only about lowering costs but also work quality, time to market, and the speed and depth of engineering. He also said that if Apple were to make changes to its supply chain operations, it’s “adjusting some knobs, not some sort of wholesale fundamental change.”

In short: Apple isn’t leaving China any time soon. And the reason is straightforward: the high quality manufacturing is too valuable to trade off for lower cost locations that produce less quality work.

Tim Cook Fox Business Interview

As disclosed in its most recent earning report for Q1 2020, Apple products’ profit margin is at a healthy 34.2%. To maintain or expand on that margin, it has to be able to command its premium price and brand. And that means quality above all other considerations.

Now, if your business model isn’t predicated on making money from the hardware devices themselves, but on the software and services in your ecosystem, moving away from China might make sense. That’s why Xiaomi and Samsung both make smartphones and, more importantly, sell smartphones in India locally. They barely make a hair of profit from the devices, thus lowering the production cost while selling to a lower spending economy to grow a user base, while trading off quality makes some business sense.

Xiaomi and Samsung aren’t alone. Except for Apple, pretty much all smartphone makers are deploying the cheap-device-plus-ecosystem business model in one fashion or another. Jury is out on whether moving supply chains to lower cost economies like India, Vietnam, and Thailand will help with this strategy. I have my doubts. Until a country has a large and quickly growing middle class, consumers of cheap smartphones won’t spend much on apps, ads, or services. (India’s middle class is only around 20% the size of China’s.)

Democracies Are Confusing

One under-analyzed, under-appreciated aspect of the global supply chain is that working with a low or mid-income country that happens to be a democracy is actually quite hard and confusing.

Before you take out your digital pitchfork, I’m not suggesting that doing business with non-democratic states are at all easy. But those challenges are well-documented and (hopefully) well-understood.

However, people tend to have a hand-wavy attitude towards democratic countries as a category, when the reality is far more complicated.

Democracies tend to be more stable and fair, because independent institutions and multi-party elections are supposed to moderate against extreme outcomes, but not always. The controversy, protests, and violence around India’s amended Citizenship Act is a telling example.

Democracies tend to be more liberal and open to the outside world, but not always. The India has long standing tariffs on imported phone chargers, retail boxes, and PCB-As (printed circuit boards with chips already installed on them).

Democracies tend to be less corrupt and less bureaucratic, but not always. Apple’s own experience of owing taxes to various Indian government agencies is an example. Based on The Information’s report, “In 2019, Apple had $75 million in taxes under dispute with various Indian agencies, up from $7.7 million in 2016.” That’s a 10x jump in three years!

“Taxes” are often a source of personal or political slush fund for government officials in a country laden with corruption and without strong campaign finance regulations, which unfortunately is the case in India. On Transparency International’s Corruption Perceptions Index, India is ranked 80 out of 180 countries with a score of 40 out of 100. (Coincidentally, China has the exact same ranking and score.)

I highly doubt that between 2016 and 2019, Apple’s commercial activities increased 10x in India, or India’s overall taxation increased 10x for the purpose of bringing about 10x the improvement in public services or basic infrastructure. Apple’s choice to dispute these taxes (instead of just pay them) is perhaps most telling, because it is subjected to the Foreign Corrupt Practices Act as an American company.

Having worked in many facets of America’s democracy -- political campaigns, federal government -- perhaps I’m extra sensitive to the model’s strengths and foibles. As Churchill wisely said “...democracy is the worst form of Government except for all those other forms…”

I’m definitely not suggesting that China’s system is perfect. It’s not even close. This is a classic dilemma between the devil you know versus the devil you don’t.

Pipe Dream To Leave China?

No, as long as you know what you are giving up, and you are giving up a lot. Apple knows what it’s giving up by leaving China, and has decided not to. Samsung did leave, and has gone to India and Vietnam, but it was not done to diversify its supply chain, but because it could no longer compete in China’s domestic smartphone market.

Regardless of where China fits, and where the often-mentioned alternatives: India, Vietnam, Thailand, etc. fit in your supply chain operations, it’s unlikely that any company can completely replace China, though complementing it with more locations to add redundancy is always a good idea. Building up the level of capacity, competency, engineering skills, and operational processes that Chinese manufacturing currently has will take longer than the time it will take to deal with COVID-19.

Thus, rushing to leave the China supply chain because of COVID-19 is a fool’s errand.

If you like what you've read, please SUBSCRIBE to the Interconnected email list. New posts will be delivered to your inbox (twice per week). Follow and interact with me on: Twitter, LinkedIn.


Chinese Version Below

离开中国供应链是天方夜谭吗?

由于冠状病毒(COVID-19)对全球经济的影响越来越大,许多金融媒体和分析师圈里开始呼吁科技公司离开中国的供应链,或将其供应链多元化,不要过多依赖中国。这种呼声越拉越大,矛头常常指向苹果。

就像生活中的大多数事情一样,说起来容易做起来难。

硅谷科技媒体 The Information 最近出版了一篇文章,很细致的报道了苹果此前试图将供应链从中国转移到印度的背后故事。可以说是困难重重。这不是随便一个小国家,而是有着世界上人口最多的民主体制,每年培养STEM毕业生数量位居全球第二的印度。

那我们看看把印度与中国大环境对比一下,为什么转移供应链如此困难?

(我将在这篇文章中经常引用The Information的这篇报道,因为报道里的研究充分,质量很高。)

看你有多拼

苹果之所以在印度的供应链迷宫尚未成功的原因之一,是“印度供应商不愿意改善工厂,以满足苹果的要求…因为苹果给的订单太少。” 这里的“太少”显然是“每月几千个。”

【印度的】供应商不愿意改善印度的工厂以满足苹果的要求,是因为它的订单量很小。– The Information

这个信息告诉我的是,印度制造商更关心短期利益,而不是长期学习和提高自己技能、流程和能力的机会。与苹果这样的顶级公司合作所到来的好处远远超出每个单子赚不赚钱。The Information中提到的这些印度制造商显然对这种长期没兴趣。

中国制造业的态度截然不同。作为硬件制造中心的深圳,总有工厂接来自美国和欧洲毫无名气的小公司的小额订单,要不生产测试原型、要不小批量生产或按订单生产。这些小单子大多是赔钱的,顶多保本。对于这些中国制造商来说,做做这些赔钱生意是OK的,因为只要有单子做就可以保持员工有事做,流程常规继续优化,也会让这些厂商一直接触到欧美市场最新的产品设计和趋势走向。(有些人会将这种行为视为“盗版”;至于这种说法成不成立,我们以后再聊。)

尽管深圳现在全球制造业里已占主导地位,但它“不做就死”的竞争动力并没有消失。当COVID-19危机结束后,这种动力只会变得更强,因为它将努力从冠状病毒阴影中尽快恢复过来。全中国都会这样。

印度虽然潜力巨大,但似乎并不像中国那么拼。

成本与质量的权衡

这几年在中国做制造已经不是最便宜的选择了。这是众所周知的。

最近苹果CEO Tim Cook在接受采访时有被问到是否因为COVID-19疫情而考虑离开中国供应链。Cook的回答是:苹果在供应链地域选择,不仅考虑降低成本,也很注重质量、产品进入市的时间以及整体工程师团队的技术能力。他还表示,如果苹果要改变其供应链运营,这些改变会是“一些小调整,而不是大规模根本性的改变。”

简而言之:苹果近期不会离开中国。原因也很简单:高质量的制造能力非常有价值,不会轻易被低成本所替代。

正如苹果最近发布的2020年第一季度盈利报告所披露的,苹果硬件产品的利润率为34.2%。为了保持或扩大硬件利润,它必须能保持产品的价格和品牌效应。所以在成本与质量的权衡中,高质量绝对优先。

当然,并不是所有手机厂商都靠硬件设备本身赚钱。更多的厂商是以所谓的“生态”赚软件和服务的前,手机本身要薄利多销,扩大用户群。从这种商业模式来开,努力离开中国或许是有意义的。小米和三星都已经在印度大批量生产智能手机,而且在印度本土卖。这两家的手机本身基本不赚钱,因此必须降低生产成本,放弃些质量要求,再在印度这个庞大但消费能力较低的市场里推广。

小米和三星并非特例。除了苹果以外,几乎所有的智能手机厂商都在采用“廉价设备加生态”的商业模式。但将供应链转移到印度、越南和泰国等成本较低的国家是否有助于这一战略,目前尚无定论。我个人也有些怀疑。在一个国家还没有一个庞大且快速增长的中产阶级之前,买便宜手机的消费者也不会在应用程序、广告或服务上花什么钱。(印度的中产阶级只有中国的20%左右。)

民主体制令人困惑

在分析全球供应链是,一个常被低估的方面是与一个中低收入民主国家合作背后的困难和复杂。

先别着急骂我。我并不是说与非民主国家做生意是一件容易的事。但这些挑战已经有很多分析和记载,大家对和非民主国家合作的挑战应该比较清楚了。

人们往往对民主国家的态度没有那么警觉,那么苛刻。 但现实情况却复杂得多。

民主体制往往更加稳定和公平,因为各大府机构的独立性和多党选举本应调节淡化极端主义的情绪,但并非总是如此。围绕印度最近修改公民法的争议、抗议和暴力就是一个很好的例子。

民主体制往往更自由和对外更开放,但并非总是如此。印度一直有针对进口手机充电器、零售盒和PCB-As(已经安装芯片的印刷电路板)的关税。

民主体制往往更清廉和而不那么官僚,但也并非总是如此。苹果与印度政府各机构欠税的争执就是一个例子。根据The Information的报道,“2019年,苹果与印度多家机构有7500万美元的税收纠纷,高于2016年的770万美元。” 三年时间涨了10倍的税!

在一个腐败、缺乏有力的竞选财务监管的民主国家里,“税收”往往是政府官员个人贿赂的来源。可惜这就是印度的现状。在Transparency International,一个国际反腐非政府组织的Corruption Perceptions Index中,印度在180个国家中排名第80,仅得40分,满分100分。(中国的排名和得分与印度完全相同。)

从2016年到2019年,苹果在印度的商业活动增长了10倍?印度的整体税收增长了10倍?印度的公共服务和基础设施进步了10倍?可能性不大。

苹果选择挑战这些税收(它完全可以付掉,不和政府纠缠)也许最说明问题,因为它作为一家美国公司受到美国“外国腐败行为法”的管制。

也许是我个人在美国民主体制的各个角落做过很多工作,包括总统大选团队和联邦政府,所以我对民主的优缺点格外敏感。正如丘吉尔的名言所说,“…民主是除了所有其他形式之外最糟糕的政府形式…”

我不是说中国的体制是完美的。离完美差的还很远。但许多的现实选择都是在这是你熟悉的魔鬼和你不熟悉的魔鬼之间。

能离开中国产业链吗?

能,但要想清楚你放弃了什么。苹果知道如果离开中国必须放弃什么,最后决定不走。三星离开了中国,去了印度和越南,但并不是为了供应链的多样化,而是因为它的产品已经在中国国内市场没有竞争力了。

在一个全球化的产业链里,不管你去印度、越南、泰国,或其他选择,都很难完全取代中国。当然,多几个地点补充以增加产业链的冗余性也是应该的。超越中国制造业多年累积的技术,运营和操作能力所需要的时间,会远远超过最终解决COVID-19疫情的时间。

因此,因为COVID-19而匆忙离开中国产业链是一件蠢事。

如果您喜欢所读的内容,请用email订阅加入“互联”。新文章将会直接送到您的收箱(每周两次)。请在TwitterLinkedIn上给个follow,跟我互动交流!