Dave Gilbert here, Editor of Smart Money.
Designed by Apple in California. Assembled in China.
If you’ve bought any Apple Inc. (AAPL) products through the years – and chances are you have based on the iPhone now claiming 50% of U.S. market share – you’ve probably seen that language printed on the box.
It pretty much summed up the production process. Apple designed its products and then outsourced the manufacturing to China, which provided cheaper labor and resources.
Apple, of course, was not alone. China has been a manufacturing powerhouse, leading the world in total production value for 11 consecutive years. China makes up nearly 30% of the global manufacturing industry. Based on how often Made in China appears on products we purchase, it seems it would be even higher than that.
But this well-established trend is at least slowing if not reversing.
Assembled in China appears on fewer Apple products now than it used to, and more of the company’s manufacturing is expected to shift to other countries.
This is more than just interesting. It has implications for investors…
Change Is in the Air
Apple confirmed yesterday that it is manufacturing the new iPhone 14 in India as it moves some production out of China. The company has been assembling older iPhones in India since 2017, so production there isn’t completely new. What’s new is assembling the current flagship model in India.
To be clear, most iPhone production continues to take place in China. But the shift is real. According to JPMorgan, Apple will make 5% of its iPhone 14 units in India by the end of this year.
There are a couple of reasons for Apple’s shift. One is simply to sell more phones in India. Even though India is the second-largest smartphone market in the world, Apple held just 3.8% of the market last year, losing out to lower-cost phone makers, including Samsung. iPhones do lead the “ultra-premium” smartphone market, which some analysts say is just beginning to grow in India.
The second reason for the shift is to reduce reliance on China. Overreliance on anything is a risk for companies, but China’s lockdowns and aggressive response to COVID have disrupted production and created supply-chain issues around the world. Apple would clearly like to lessen some of that risk.
Eric Fry was way ahead of the game when he clearly identified this shift exactly two years ago in the September 2020 issue of Fry’s Investment Report…
… there’s no mistaking the direction the political winds are blowing. And these winds are stirring up a powerful new investment trend that I’ve been calling “NMIC” – Not Made in China…
In the wake of the coronavirus crisis, we Americans have become more alert to the vulnerability of foreign supply chains, especially those that originate in places like Russia and China…
To Eric, the pandemic laid bare the dangers of overdependence on China and other foreign supply chains. Everything from a war to a global health crisis to the changing whims of a nation’s leaders could choke off sources of critical goods and ingredients. He followed up his initial analysis earlier this year…
“Made in China” is becoming both a political and supply-chain risk for numerous companies in the United States and elsewhere… [A] growing number of Western companies are moving to eliminate or reduce Chinese production from their supply chains, if they can do so responsibly and cost-effectively.
A shift to “Made in America” would be the optimal outcome for many of these companies, but the first order of business is simply to establish production that is “Not Made in China.”
Prior to the COVID pandemic, America’s growing reliance on China-based production of numerous goods seemed mildly galling, but convenient.
Although we certainly didn’t like exporting manufacturing jobs overseas, we didn’t mind buying China-made goods for a fraction of what the U.S.-made equivalent would cost.
Then came COVID.
Suddenly, our conveniently low-priced supply of China-made goods seemed much less convenient. Costume jewelry, cat toys, and action figures from China continued to flood Walmart shelves, but many basic, and/or essential China-made products like facemasks, syringes and antibiotics were nowhere to be found.
Suddenly, we Americans discovered that we had become overly reliant on China for various products. Because of this realization, ramping up U.S. production of key raw materials and products became “priority #1” in boardrooms across America.
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Opportunities for Both Companies and Investors
Two years after Eric first shared his analysis, we continue to see this diversification of production. In fact, it has accelerated because of the war in Ukraine and Russia’s growing status as a global pariah that nobody wants to do business with.
Eric tells me it has even given rise to new terminology. We’re all familiar with “offshoring,” which is sending manufacturing overseas to take advantage of cheaper costs.
Now, you may hear more about “onshoring” or “reshoring,” which both mean bring offshore manufacturing and jobs back home.
And now there is also “nearshoring.” That means bringing production closer to home, thereby reducing supply-chain risk and transportation costs.
So there you have it. If we’re inventing words to describe the phenomenon, there must be something to it.
Energy is probably at the top of the priority list. Europe continues to face an oil and gas crisis because it has been so highly dependent on Russia for energy resources. Things could get scary this winter when demand for heat peaks, and officials are already talking about rolling blackouts and shutting down factories. Residents are already stocking up on firewood.
Manufacturing is a massive global industry. Research firm Interact Analysis projects worldwide manufacturing production will reach $44.5 trillion in 2022. When even a small portion of that is disrupted, you’re talking about big numbers. And that can mean opportunities for both companies and investors.
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.