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Why Apple Should Consider Building Its Own Assembly Supply Chain

Apple, Inc. (NASDAQ: AAPL) last week warned of a $4 billion to $8 billion impact from the China COVID-19 lockdowns.

Benzinga · 05/01/2022 14:00

Apple, Inc. (NASDAQ:AAPL) last week warned of a $4 billion to $8 billion impact from the China COVID-19 lockdowns. Apple could do well to build its own assembly supply chain, according to Bloomberg's Mark Gurman.

Apple Heavily Reliant On China: Despite Apple's assertion that its supply chain is global, the company is "tremendously" reliant on China for manufacturing, Gurman said. Apple already gets many of its components, including those going into the iPhone, iPad, Mac and other products, from the U.S., India, Vietnam, Japan and other parts of the world, the Apple writer noted. The real issue is with the assembly process – known as final assembly, test and pack, or FATP, which is predominantly done in China, he said.

This model, according to Gurman, was pioneered by Apple CEO Tim Cook himself, as the company wanted to tap into lower labor costs and supportive government policies prevalent in the country. It also helped the company sell its products in China, he added.

Related Link: Apple Analyst Sees Limited Upside/Downside In Stock Until This Happens

Cook Defends China Strategy: Despite the COVID lockdowns in China hurting the output of Apple devices, leading to less inventory and fewer sales in recent weeks, Cook steadfastly defended his China production strategy on the earnings call, Gurman noted.

Cook may not be wrong, as Apple did generate about $80 billion from hardware sales in the second quarter, ahead of the $62 billion expected by analysts, the Apple specialist noted.

Way Out: Apple has to shift away from handling all of its final assembly in China, Gurman said. He noted that while portions of the 2019 Mac Pro assembly are done in the U.S., certain configurations of the new Mac Studio are being assembled in Malaysia, some iMacs are made in Ireland and Thailand, and a few recent AirPods are assembled in Vietnam.

Apple, however, makes its highest-profile devices such as the iPhone, iPad and Apple Watch, primarily in China, Gurman said. The company had tried to expand its iPhone assembly operations in Brazil, and it has been making some units in India for the last several years, he added.

Related Link: Apple Analysts See Production Issues As Transitory, Recommend Buying On Weakness Following Q2 Results

The number of iPhones built outside of China, however, isn't material yet, the Apple specialist noted. The company should work with it manufacturing partners or find new ones to set up more plants in India, Thailand, Ireland, Brazil, Vietnam, Malaysia and even the U.S. to diversify final assembly of its products, he added.

The move out of China may hurt profits, but having its assembly process concentrated in the country will also mean the company may have to face continued disruptions, Gurman said.

"With a cash hoard of nearly $200 billion and seemingly limitless profits, perhaps Apple should explore building its own assembly supply chain as well," the analyst said.

Apple closed Friday's session down 3.66% at $157.65, according to Benzinga Pro.

Photo: Courtesy of apple.com