Virendra Pandit
New Delhi: California-based Apple Inc., the world’s biggest technology company by market capitalization and revenues of USD 394.3 billion in 2022, is not the only multinational migrating 18 percent of its production from China to India by FY25. More global companies are on their way to the South Asian country.
According to a Bank of America (BofA) report, Apple is set to shift around a fifth of its production in the next two years to India whose share in iPhone manufacturing may even go higher if the company’s vendors expand here, the media reported on Wednesday.
For this seismic shift in supply chains, Apple may take advantage of India’s Production-Linked Scheme (PLI). In the pre-PLI FY23, India’s share in global iPhone production was a negligible 7 percent. In October 2022, India approved the entry of Foxconn Hon Hai, Wistron, and Pegatron, all of which are Apple’s contract manufacturers in India.
“Apple’s share may expand further if it incentivizes its large-scale vendors to also expand in India. Apple could also see share gains (4 percent now) within India’s mobile phone market by improving the affordability of locally made iPhones and shifting in favor of premium products. We see India contributing over 5 percent of Apple’s global iPhone sales by CY25 and register 21 percent CAGR over CY22-25,” the BofA report said.
Currently, Apple has 14 vendors in India, vis-à-vis 151 in China, mostly located closer to the contract manufacturers, Foxconn and Pegatron (Tamil Nadu), and Wistron (Karnataka).
Within two years of the PLI scheme, iPhone exports from India zoomed to Rs 40,000 crores in FY23 from just Rs 11,000 crores a year before. This might accelerate further as it has already reached a run-rate of USD 1 billion (Rs. 8,300 crores) in monthly exports since February 2023.
The BofA report said that the Rs 38,000-crore PLI scheme has helped improve the export mix in local production from 16 percent to 25 percent. It can enable India to emerge as a “credible global supply chain alternative” for mobile phones and electronics.
Also, Apple’s decision to manufacture its latest iPhones in the South Asian nation shows its growing confidence in India’s potential as a large manufacturing destination, as the behemoth aims to diversify manufacturing outside of China, it said.
Mobile phones are 21.5 percent of India’s domestic electronics demand and are growing at 15 percent compounded annually. “Since FY17, mobile phone production/exports are up 3.9x/65x, while imports are down to a third,” the report said.
The BofA report suggested that 70 percent of a mobile phone’s cost, which includes the display, memory, and semiconductors, is hard to localize in the near term since it requires large capital expenditure (capex) and high-end technology.
According to Morgan Stanley, the top American multinational investment bank and financial services company, post-pandemic, India is emerging as a major beneficiary of supply chain migration from China.
“More global companies are taking supply chain diversification seriously. Companies increasingly highlight the benefits of ‘friend-shoring’ their supply chains to better insulate from geopolitical challenges.
“We see India, Mexico, and Southeast Asia as best positioned for this transition. India and Mexico are two economies that stand to benefit from increased local supply chains,” the media quoted Morgan Stanley as saying in a report.
“In India, we see a tripling of the manufacturing base by 2031 with its share of GDP rising from about 16 percent to 21 percent over the same time horizon. In Mexico, we estimate a potential net gain of approximately 30 percent in exports to the US over a period of five years; this trend appears to be well underway as Mexico-US trade is now level with China-US trade.
“The associated rise in investment and manufacturing could help raise Mexico’s potential GDP from 1.9 percent to 2.4 percent, over the next five years, according to our models,” the report said.
Supply chain de-risking will be a necessary but difficult and expensive process, taking a decade or longer, and featuring more protectionist policies.
While many companies might still keep a large installed base and presence in China, key net beneficiaries would be India and Mexico.
It said corporates have largely avoided making any specific geopolitical distinctions, and some of the giant companies have been strategically rewiring their supply chain investments. Apple’s manufacturing partner Foxconn is investing USD 700 million in a new plant in India to diversify some of the risks arising from US-China tensions. After completion, the production site is expected to bring in 100,000 new jobs compared with the current 200,000 in the Zhengzhou plant in China.
More companies are now adopting a “China+1” or even “China+N” strategy to expand their production footprints to Southeast Asia, Mexico, and India, and to re-shore where production is particularly capital-intensive or can be automated, the report said.
“China entering the global economy is a historic event that cannot be replicated because neither India, Indonesia, the Philippines, nor any other emerging market economy has the same gap to close from a value or volume standpoint that China made up between 1990 and 2010,” the report said.
The de-risking process from China will progress slowly, and most technology hardware production that leaves China will flow to Southeast Asia and India, not North America.
At present, China accounts for USD 4.9 trillion (34 percent) in manufacturing GDP out of a total of USD 14.2 trillion worth of its overall economy.
Based on a potential loss of international production and exports, an estimated USD 846 billion of manufacturing output could be seen to be at risk, the equivalent of 6.0 percent of the global total.
“Some countries would see significant growth gains. In principle, we believe that the countries making ‘share gains’ would be the US, India (doubling from 3.1 percent to 6.2 percent), and SE Asia—while Europe, the Middle East, and Africa (EMEA), and Japan maintain their existing share of global manufacturing output. In simple terms, we have divided up the ‘decoupled USD 846 billion’ of China output and attributed it to different countries based on these shares (e.g., India now taking 6 percent of the USD 846 billion,” the report said.
On the potential uplift to other countries, in the event that these flows were to be resettled overnight, from a low base, India would see an 11.8 percent expansion in its manufacturing base (in one year), it added.