For several decades now, Apple and many other major manufacturers have assumed that a basic model of manufacturing in China would endure forever: the Chinese would allow virtually unlimited import of Japanese parts for assembly into products destined for both the Chinese market and the world. The Apple iPhone, according to one study, consists of 34 percent Japanese content (mostly from Toshiba), followed by German and Korean content. Chinese labor and American design are relatively minor elements in the overall value of the product.
But the military buildup that is occurring between China and Japan–although clearly years away from any real conflict–is a matter of concern to manufacturers who need to make multi-year decisions about where to manufacture and how to procure parts. What happens if the Chinese start turning the screws on the Japanese to bring military and economic pressure to bear against them? We’ve seen some relatively minor points of economic conflict emerge such as anti-Japanese riots and the flap over China’s limits on the exports of rare earths.
What if it gets worse? That seems likely. Neither side shows any sign of wishing to back down from strong rhetorical and nationalistic positions. What if the Chinese start imposing duties on the import of Japanese components into China? What if shipments start getting held up on the docks for mysterious reasons?
Those scenarios, which would have been unthinkable three or four years, are now thinkable. CEOs of any company that assembles products in China using Japanese components must now plan scenarios and alternatives. That’s the only responsible path to take.
Of all companies, Apple is arguably the most exposed because it has Taiwanese companies running the plants in China that make almost all its products. Apple has said it will spend $100 million to relocate or locate a manufacturing line in the United States, but so far nothing has happened.
It won’t be easy for Apple or anyone else. Entire supply chains of vendors exist in East Asia. They don’t have presences in North America. But it’s time to get serious about planning alternatives to making things in China with Japanese parts.