Worker at small parts manufacturing factory in China

The Take: Technology Companies Reassess Manufacturing in China

What’s News

U.S. technology companies, beginning with smartphone manufacturers, are considering diversifying their manufacturing operations away from China.

Apple and Google, which are respectively launching new versions of their iPhone and Pixel handsets shortly, have said they are exploring other countries for manufacturing. Apple is expected to produce some of its latest iPhones — unveiled this week — in India, while Google will reportedly manufacture some of its latest Pixel handsets in Vietnam.

SAP’s Take

Many U.S. and European tech companies began to reassess their Chinese manufacturing operations during the Trump administration trade war with China and some said they would shift at least part of their operations to other offshore manufacturing centers including Vietnam and Mexico.

Those initiatives have gained momentum in the wake of the pandemic and China’s zero-tolerance COVID-19 policy, which has resulted in the repeated shutdown of manufacturing centers in the country causing sever supply chain disruption.

At the same time, China’s domestic economy has shown signs of slowing and potentially falling into recession, potentially reducing local demand for consumer electronics.

The Chinese economy grew by a modest 0.4% in the 2022 second quarter and is unlikely to reach its economic growth target of 5.5% this year.

China’s shifting economic outlook was reflected in a leaked memo penned recently by Huawei Founder Ren Zhengfei, who warned that the pandemic, the Ukraine war and ongoing trade tensions between the U.S. and China will lead to a “very painful historical period,” over the next decade.

Amar Sindhwad, industry lead in SAP’s internal analyst group, CMI, said that several issues are causing tech companies to reconsider their manufacturing presence in China. “There are a couple of systemic challenges facing China,” he says. They include lockdowns, power shortages and costs, rising inflation and a partial collapse of its real estate sector.

Increased geopolitical tensions between the U.S. and China over Taiwan have also exacerbated concerns. While there are no signs yet of a mass exodus, analysts believe Western technology companies are likely to continue to slowly scale down their reliance on Chinese manufacturing facilities.

“These moves clearly indicate a problem for China and foreign companies operating there,” says Sindhhwad. “Many foreign companies are deliberating alternate strategies in their board discussions and for some, relatively, it’s an easy exit owing to the nature of their operations and manufacturing. It’s a gradual, deliberate and a systematic exit plan for companies that decide to do so.”


Contact:
Ilaina Jonas, Senior Director of Global Public Relations, SAP
+1 (646) 923-2834, ilaina.jonas@sap.com