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OM in the News: Coronavirus Tests Apple’s China Dependency

February 9, 2020

Coronavirus has given new meaning to something Apple executives have been saying for years: Apple needs another China. The rapid spread of the virus and the disruption it has caused is the latest test of Apple’s dependency on China as its manufacturing base for most of the iPhones, iPads and Macs sold world-wide.

To curtail the virus’s spread, local governments have asked people to stay away from work. Shipments of parts and components to the Apple assembly plants are curtailed, and workers who went home to celebrate the Lunar New Year may not return, out of caution. Foxconn, Apple’s main manufacturer, is contending with a strict quarantine in Zhengzhou city, home to its largest iPhone plant.

Apple has successfully weathered a number of challenges involving China in recent years, writes The Wall Street Journal (Feb. 8, 2020). But it is among the foreign companies most vulnerable to the outbreak because it hasn’t diversified its manufacturing. Though it looked at assembling iPhones outside China, it found the costs of facilities and training too high and opted to keep exporting from China. Apple’s leaders have long considered its reliance on China-based manufacturers as both a strength and a vulnerability. Apple worried more about a disruption in exports from the country than loss of sales inside Greater China, a market that accounts for 1/5 of revenue.

Samsung, the world’s largest smartphone maker, wound down production in China last year as part of a years-old strategy of diversifying its manufacturing base by shifting production to India, Vietnam and elsewhere.

Apple is known for its operational prowess and has a record of navigating supply-chain challenges. After an earthquake triggered the Fukushima nuclear crisis in Japan in 2011, Apple quickly created a new factory to maintain production of optical drives it needed for its devices. When monsoons flooded factories in Thailand later that year, Apple turned to the Thai Navy to load boats with the heavy equipment necessary for production. But those events only affected a sliver of Apple’s supply chain. Coronavirus affects the very heart of it.

Classroom discussion questions:

  1. Referring to Supplement 11 in your Heizer/Render/Munson text, draw a decision tree for Apple’s disaster risk.
  2.  What can Apple do at this point if it thinks the virus will have a 6-month impact on supply chains?
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