Apple’s holiday iPhone shortage is a symptom of a much larger problem

Apple is a bit like Superman. Wait, wait, hear me out. Sure, it only gets a chunk of its power from the yellow sun (thanks, solar), and maybe not even its rumored smart glasses could disguise it as Clark Kent, but the company certainly isn’t short on superpowers: selling hundreds of millions of dollars worth of products, commanding a prominent position in multiple technology markets, able to leap tall buildings in a single bound, etc.

But just as Superman has his kryptonite, Apple too has one large weakness that can bring the company to its knees: its overreliance on China. Yes, the region provides a big chunk of the company’s sales, but even more to the point, it’s the epicenter of Apple’s global manufacturing and assembly. And when that’s threatened–by political issues, supply chain problems, or COVID-related conundrums–it can put a serious dent in the company’s bottom line.

You need look no further than the recent communique from Cupertino, explaining that its most expensive (and presumably most profitable) iPhone models would take a sales hit due to a pandemic-related factory shutdown. Recently, though, Apple has started to move to correct this reliance on China, looking to bring manufacturing to a number of other places. It’s a good long-term decision, but it won’t happen fast, and there are going to be plenty of challenges along the way.

Chipping away at the problem

One critical piece of Apple’s manufacturing supply chain is processors. In switching from Intel to its own custom silicon in the past few years, Apple has been able to exert more control over its hardware, bringing significant performance improvements and the ability to unlock new features. But that overarching control comes with risks as well. The A- and M-series chips that underlie Apple’s devices are currently produced exclusively by TSMC, a semiconductor firm based in Taiwan.

Apple’s relationship with China hovers over this business, both in terms of the country’s long and complicated political relationship with Taiwan, which Apple has to navigate (and hasn’t always done well–see the removal of the Taiwanese flag emoji in China) as well as increasing geopolitical tensions in the region. Apple is not alone in this: in a recent company meeting, reported by Bloomberg, CEO Tim Cook said that 60 percent of the world’s processors come from Taiwan.

In that same meeting, Cook said that Apple would be moving to source some of its processors from a new plant TSMC is building in Arizona, though that facility is still years away from coming online and probably won’t immediately produce chips for the company’s newest devices. Moreover, the capacity for that plant is said to be around 20,000 chips per month, a drop in the bucket compared to the hundreds of millions of devices Apple ships in a quarter.

India, Inc.

Apple’s reliance on manufacturing in China has also had an impact on the company’s ability to reach into other markets, most significantly India. As the world’s second most populous country, it presents a huge potential market for Apple to grow its customer base. But those opportunities have been limited by restrictions on selling products not made in India, which is one reason that Apple first started manufacturing its older iPhone models there: those lower-cost devices were better positioned for a price-conscious market.

Henry Burrell / Foundry

This year, the company has also started ramping up production of its flagship iPhone models in India as well. While that’s good for Apple sales within India, it’s also promising in the overall picture, as the company plans to export some of those units as well.

While estimates are that only about 5 percent of those phones will be made in India, that’s a not insignificant chunk that could grow in the future, and take the pressure off manufacturing in China. But, like diversifying chip production beyond Taiwan, it’s a process that will take some time to have an effect.

Around the world

Apple’s also been investigating manufacturing and assembly in other places as well, such as Vietnam and Brazil, but so far, those remain small chunks of its overall capacity.

And this is where Apple’s weakness comes in. At the scale that the company makes products, it’s simply difficult to find places that can hit the requisite numbers. China has, for better or worse, invested in the supply chain and businesses that can produce at these volumes, which has ended up with Apple handcuffed to the country. That continues to make Apple vulnerable, by forcing them to make questionable moves–such as the recent feature change to limit the availability of Apple’s AirDrop feature, which was reportedly being used to organize protests in China.

To harken back to our Man of Steel comparison, it’s like being under the effect of low-grade kryptonite exposure constantly. It’s not that Apple’s in danger of a fatal blow, so much as everything the company tries to do is a little bit harder: it’s reduced from superhero status to being a mere mortal like the rest of us. That relationship with China is slowly chipping away at Apple, and these diversification moves will hopefully get to the point where it’s able to jam that kryptonite into a lead box and get its powers back.