Tim Culpan

Xi’s Covid Zero Is Killing China’s iPhone Advantage

The scenes out of Henan province look dramatic. Workers walking down highways, clutching plastic bags filled with belongings in what was described as a mass exodus from Foxconn Technology Group’s iPhone factory in Zhengzhou. Fearful of catching Covid-19, and fed-up with being kept on campus, hundreds of staff just upped and left.

Forced to adhere to the government’s tough stance on the virus, Foxconn banned dining at central cafeterias and some workers were given only basic meals such as bread and instant noodles. With nationwide cases surging to the most in 80 days on Sunday, many may have been legitimately concerned about getting stuck inside a factory amid deteriorating conditions. A hasty exit seemed the best move, with Reuters reporting that output at the facility may drop by as much as 30% in November as a result.

It doesn’t reflect well on Foxconn or its key client Apple Inc. In recent industrial history, no customer-supplier relationship has faced more scrutiny than the world’s largest company by market capitalization, and the Taiwanese firm that manufactures most of its products. But on this occasion, the real critique should be reserved for the policies that pushed the facility employing 200,000 people to breaking point, and the chief architect of that strategy 500 miles away in Beijing.

Foxconn “is ensuring the health and safety of colleagues working on the production lines, in line with epidemic prevention and safety production standards,” it said in a statement to Bloomberg Opinion. It declined to comment on reported capacity cuts.

For more than two years, China largely escaped the direct health impacts of the virus that originated on its shores. Initial lockdowns to prevent the spread gave way to innovative solutions to keep the nation’s industrial heart beating. Closed-loop systems seemed like an acceptable, albeit harsh, middle ground. Factories could maintain operations if workers stayed inside, isolating from the rest of the population to avoid cross infection.

Companies, from local names such as Huawei Technologies Co., BYD Co. and Contemporary Amperex Technology Co. to international brands including Tesla Inc. and General Motors Co., benefited as workers slept on factory floors and ate ramen noodles to ensure production kept ticking along.

But then the rest of the world, benefiting from cheap, effective vaccines and a sense that life must go on, decided normality must return.

Chinese leader Xi Jinping sees it differently, calling his government’s approach “the people’s war to stop the spread of virus.” He’s doubled down on his Covid-Zero strategy, and even rewarded the architect of harsh lockdowns in Shanghai that led to rare public demonstrations: local party chief Li Qiang is set to become premier.

Blue-collar workers streaming out of factories in protest and desperation is the visual embodiment of the risky bet Xi is making, and the even harsher reality that even if he were to end Covid Zero tomorrow the damage is already done. Videos posted on social media of people, purportedly Foxconn workers, stomping through fields and along highways couldn’t be immediately verified as being connected to the factory.

Global companies such as Foxconn and Apple were already cognizant of the need to deleverage from China well before the pandemic. For the past decade, the Cupertino-based company has had an unhealthy focus on the nation on two fronts: it offered the promise of extraordinary revenue growth, and it’s the source of almost all Apple-device manufacturing.

Rising nationalism, solid competitors, and attacks on factories mean that Apple has not extracted from China the level of sales it may have expected. From 25.1% of revenue in fiscal 2015, Greater China accounted for only 18.8% last year. And its contribution to incremental growth over the past decade is third behind Europe and The Americas.

China’s role in manufacturing is also diminishing. India, Brazil, Vietnam, Indonesia and the Czech Republic are among the nations showing up on Apple’s supplier list. China is now, and will remain for a while, Foxconn’s industrial base and by default that of Apple’s. But publicly and privately, the Taiwanese companies that collectively have a near stranglehold on electronic-device manufacturing — including Pegatron Corp., Quanta Computer Inc. and Wistron Corp. — are shifting resources elsewhere.

For 30 years, the key reasons for sticking with China were its plentiful supply of labor, low wages and stable environment. The first two advantages were lost a decade ago as locals decided working a production line was not an attractive career option, and salaries rose commensurate with an economy that’s shifting from primary and secondary production to tertiary industries such as software and services.

At least stability remained, and that kept the entire ecosystem wedded to China. Rules and regulations are well-known and easily navigated, infrastructure, including water, electricity and logistics are reliable, and workers rarely revolt. The past year has tested each of those beliefs. Severe drought led to power outages, pandemic-prevention measures brought domestic and international transport to a standstill, and the people who staff the factories are burnt out from extended lockdowns.

China’s position at the center of global manufacturing isn’t disappearing anytime soon, and Covid-19 won’t be the cause of the nation losing its role as the world’s factory. But the government’s handling of the pandemic removes any doubts about the need to ship out. And as more capacity is added overseas, Beijing’s leverage over suppliers and their clients starts to diminish.

A decade from now, iPhones will still be made in China. But don’t expect the world’s leading brand, and the companies that serve it, to continue hitching their wagon to a nation that no longer offers the benefits they once enjoyed.