China in Apple’s global value chains

Apple in China

Foreign investment by Apple and other multinational enterprises (MNEs) from advanced countries has enabled China to become a key participant in global value chains (GVCs) for the ICT sector, especially for PCs, laptops, tablet computers and smartphones.

China's share of global ICT exports thus rose from 2.1% in 1996 to 30% in 2012, making it the world's leading exporter of ICT products. Despite these impressive statistics, China’s contribution to these exports has only been relatively minor, as it typically specializes in the low-value-added assembly phase of production.

In 2015, Apple’s China GVC comprised 198 companies and 759 subsidiaries, 336 (44.2%) of which were located in China. Only three countries of origin accounted for 80.2% of the 759 supplier subsidiaries: 32.7% were Japanese, 28.5% were US, and 19.0% were Taiwanese. Only 14 of the 198 companies, and 29 of the 759 subsidiaries were actually Chinese.

Since much of the intellectual property for Apple’s products originates in Japan, the US and Taiwan, much of the value-added from these products benefits these same three countries. And although China plays a central role in the ICT GVC as a production centre, China remains considerably dependent on external sources of technology and intellectual property.

China’s attractiveness as the principal location for much of Apple’s final assembly derives mainly from the scale, flexibility and responsiveness of key supplier companies like its major contract manufacturer Foxconn and also its major chip manufacturer TSCM, both of which are Taiwanese companies.

Benefits of participation in GVCs

China’s participation in the low-value-added end of the GVC can however ignite a positive longer term dynamic. As MNEs hire locals as staff members and subcontract to local companies, knowledge and technology transfer can improve local capabilities. Thus, over time local firms which carry out these lower value-added functions seek to move up the value chain by developing their own brands and marketing expertise.

But climbing the GVC to higher value-added activities is not as easy as all that.

Fragmentation of GVCs has been facilitated by the modularisation of technology products. This typically facilitates the outsourcing/offshoring of non-core activities to companies in low-cost countries like China. However, core functions like semiconductors are usually retained in the MNEs’ home country.

For example, Apple exercises control over R&D intensive activities at one end of the GVC, and marketing and brand activities at the other, while outsourcing manufacturing, assembly and testing. Lead companies like Apple set performance criteria in areas of price, quality, speed of response and delivery standards for their suppliers, and exercise considerable control in coordinating the GVC.

In this context, a subservient relationship can develop between the leading company like Apple which holds the core technology, and the supplier/assembler companies. The latter companies can thus get locked into lower value-added activities like assembly, and fail to climb the GVC. Such relationships can also prevent supplier companies from becoming more innovative and independent.

How much is China benefiting from Apple’s GVCs

How is China doing? Has it been able to "upgrade" its involvement in Apple's GVC? In particular, have Chinese companies been taking the place of non-Chinese suppliers, and have they been taking on more core activities, reflecting a process of upgrading of local capabilities?

According to research by Seamus Grimes and Yutao Sun, Apple has been reluctant to involve many Chinese companies in its GVC. Chinese supplier companies have thus not made significant inroads as suppliers of key components or as major assemblers of Apple products. The majority of Apple’s suppliers, even many of those located in China itself, are foreign companies, principally from US, Japan, Taiwan and Korea.

Apple’s choice of supplier companies reflects their ability to deliver the highest quality in good time and at the negotiated price. But Grimes and Sun argue that it may also reflect questions of trust related to business culture. Protection of intellectual property is notoriously weak in China.

In short, despite its high profile as an exporter of ICT products, China remains highly dependent on foreign sources of technology and intellectual property through the outsourcing arrangements of MNEs.

At the same time, it is also true that China is in the midst of an impressive process of technology catch-up. A small number of Chinese companies like Huawei, Xiaomi, Lenovo and ZTE are developing international brands. Although they are still basically “copycat companies”, this development may augur well for future developments over the longer term.

The Chinese government is also employing a policy of “indigenous innovation”. In practical terms, this means that MNEs are forced to share intellectual property with Chinese companies as a quid pro quo for having market access. The growing size of China’s vast market provides ample leverage for doing this. It remains to be seen how effective this strategy will be. Earlier efforts to obtain intellectual property through obligatory joint ventures did not yield great results.