Apple’s Chinese Suppliers in Dilemma as Apple Curbs Reliance on China

People wearing face masks are pictured at an Apple Store on the day the new Apple iPhone 13 series goes on sale, in Beijing, China, on Sept. 24, 2021. Carlos Garcia Rawlins/Reuters

News Analysis

The net profit of one of the leading Apple suppliers has fallen sharply compared to last year. AAC Acoustic Technologies Holdings Inc. (AAC), a top Apple supplier in China, released its third-quarter (Q3) profit forecast for 2021, showing its Q3 consolidated net profit is expected to fall by 51 to 61 percent. AAC was once one of the most profitable companies in Apple’s supply chain with profit margins second only to Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip foundry.

AAC Technologies manufactures a broad range of miniaturized acoustic components for Apple’s iPhones and is often regarded as a supply chain leader due to its high profitability. However, according to Hou Anyang, the chairman of Frontsea Asset Management, a Beijing investment firm, investors consider the recent fall in AAC’s profitability “distressingly bad.”

In addition to AAC Technologies, many Apple suppliers also showed a reduced year-on-year profit growth. For example, Luxshare Precision Industry Co. Ltd., a China-based electronic component manufacturing company, showed a net profit growth of 21.73 percent year-on-year in its 2021 semi-annual report, compared with last year’s 69.01 percent. Luxshare Precision’s net profit growth rate has slowed down significantly and has put pressure on the company as a member of the Apple supply chain. The company’s semi-annual report of 2021 described its risks and countermeasures. One of the risks indicated was “lack of diverse customers,” referring to its revenue being heavily dependent on Apple, one of its biggest customers.

Apple launched iPhone 13 on Sept. 15. The same month, CCTV, a Chinese state-controlled media, called on Chinese companies to “get rid of their dependence on Apple,” in its finance program called “Apple Supply Chain Observation.”

The program also mentioned that OFILM Group Co. Ltd., a China-based camera modules maker, suffered significant profit loss after being terminated by Apple this March. The company’s operating income for the first half of 2021 saw a year-on-year decline of 49.96 percent and a year-on-year decline of 93.25 percent on its net profit. Orders from Apple accounted for 30 percent of OFILM’s revenue, but Apple’s termination with OFILM appeared to cost the company more than just Apple’s business.

OFILM cited two reasons for the sharp decline in its revenue and profit. First, the company’s product shipments related to “specific customers” have declined year on year due to the termination of the purchase relationship by specific overseas customers, referring to Apple. Second, significant changes in the international trade environment such as limited chip supply.

Why Was OFILM Dropped by Apple?

Apple terminated OFILM from its supply chain due to the sanctions by the United States in 2020 over China’s human rights issues in Xinjiang.

According to a report issued on Mar. 1, 2020, by the Australian Strategic Policy Institute (ASPI), Apple CEO Tim Cook’s visited OFILM’s factory in Guangzhou in December 2017 and posted on a Chinese social media platform, Weibo, praising OFILM’s “remarkable [and] precision work” in the production of the selfie camera of the iPhone 8 and iPhone X.

However, between Apr. 28 and May 1, 2017, the Chinese authorities reportedly transferred 700 Uyghurs from Luopu County in Xinjiang’s Hotan region to work at an OFILM factory in Nanchang, Jiangxi Province. ASPI reported that according to a local Xinjiang newspaper, the Uyghur workers were expected to “gradually alter their ideology” and turn into “modern, capable youth” who “understand the Party’s blessing, feel gratitude toward the Party, and contribute to stability.”

On Feb. 1, Xinjiang officials held their third press conference on Xinjiang-related issues. At the conference, an Associated Press reporter suggested that the OFILM factory in Nanchang did not allow Uyghur workers to pray or leave the factory during his visit in 2019, citing the International Labor Organization’s regulations on severe violation of labor rights and the manifestation of forced labor.

In response, the Chinese Communist Party and OFILM have repeatedly denied the allegation of the U.S. Department of Commerce on its coercive use of Uygurs as labor. But Apple still cut off its partnership with OFILM. According to an announcement issued by OFILM on Mar. 24, it has sold its “camera-producing assets related to specific overseas customers,” suggesting an end in the partnership with Apple.