Iphone Case 621-0056-1

621-0056-1
BENJAMIN YEN
MINYI HUANG
iPHONE’S SUPPLY CHAIN UNDER THREAT

What started as a supply-side crisis has evolved into a global demand-side
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problem. Nationwide lockdowns and rising unemployment have reduced
consumer confidence and reprioritized spending towards essential goods,
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directly impacting the uptake of smartphones in the short term. On the brighter
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side, 5G is expected to be [a] catalyst throughout the forecast period, which
will play a vital role in worldwide smartphone market recovery in 2021.
- Sangeetika Srivastava, Senior Research Analyst, IDC1
The outbreak of COVID-19 (coronavirus disease, 2019) posed unprecedented challenges to the
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global supply chains. Apple’s existing supply chain, a proud achievement of CEO Tom Cook,
Copyright encoded A76HM-JUJ9K-PJMN9I
was put in the spotlight.
Steve Jobs, founder and former CEO of Apple, was a fan of Dell’s supply chain. In 1998, he
brought in Tim Cook as the Senior Vice President of Worldwide Operations to help Apple
reduce inventory and develop a leaner and more agile supply chain. Cook had been Apple’s
Chief Operations Officer since 2005, before he became the CEO in 2011.
Though Apple’s supply chain experienced natural disasters, such as earthquakes, fires, floods,
and SARS, the risks and challenges brought by the outbreak of COVID-19 were more
unpredictable and complicated. Unlike the symptoms of SARS whose patients experienced high
fevers, the symptoms of COVID-19 varied; some patients had no symptoms at all, which made
it difficult to identify them. Therefore, it was difficult, if not impossible, to predict where the
next epicenter would be and what measures the government might take to prevent the further
spread of the virus. Planning for the supply chain became very difficult. Since social distancing
was effective, the measures used for social distancing slowed the manufacturing process. When
the governments had to implement tightened measures, such as lockdowns and border controls,
manufacturing workers could not return to work, and it took longer to move goods around.
1 IDC, “IDC expects worldwide smartphone shipments to plummet 11.9% in 2020 fueled by ongoing COVID-19 challenges,” 3
June 2020, https://www.idc.com/getdoc.jsp?containerId=prUS46466720, accessed 4 June 2020.
Dr. Minyi Huang prepared this case under the supervision of Professor Benjamin Yen for class discussion. This case is not intended
to show effective or ineffective handling of decision or business processes. The authors might have disguised certain information
to protect confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations, people,
places or fact mentioned in the case no longer occur, exist or apply.
© 2021 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 20/680C
Last edited: 16 February 2021

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621-0056-1
20/680C iPhone’s Supply Chain Under Threat
From Apple’s perspective, what risks and challenges did COVID-19 pose for its supply chain?
How should Cook manage them?
Mobile Manufacturing Industry

Overview
Smartphones, which first appeared in the late 1990s, had better computing capabilities and
connectivity than conventional mobile handsets. They did not gain popularity until 2007 when
Apple introduced the iPhone with its proprietary IOS operating system and user-friendly
features including a virtual keyboard and a touchscreen interface. In late 2008, the first batch
of smartphones using the operating system Android entered the market. About 44.9% of the
world’s total population owned a smartphone by the end of 2020, and it was estimated that
global smartphone shipments would reach roughly 1.48 billion units in 2023 [see EXHIBIT 1].
2
In terms of global market share in August 2020, Samsung (31.04%) was the largest player in

the smartphone market in terms of units sold. It was followed by Apple (25.15%), Huawei

(10.73%), Xiaomi (8.9%), and Oppo (4.69%).3 In China, the world’s largest smartphone market,
Apple had strong brand recognition, and its market share was usually around 20%, compared
to Samsung’s market share at below 1% [see EXHIBIT 2].
Industry Supply Chain

Raw material extraction, component manufacturing, and assembly were the three major steps
in the mobile manufacturing industry.
Modern engineering materials are much more complex than they were in the
past. A typical smartphone typically uses between 60 and 70 among those 80
elements from the periodic table of elements.
- Dr. Roderick Eggert, Deputy Director of Critical Materials Institute 4
Raw Materials
Mobile phones’ basic components were made from raw materials, especially minerals. The
roughly 30 minerals used to make smartphones included some conflict minerals and rare earth
minerals. These included neodymium to make magnets for iPhone speakers, europium to
produce red color on the displays, and cerium used during the manufacturing process to polish
the phones.
Conflict minerals, including tantalum, tin, tungsten, and gold, were subject to US, EU, and
Chinese regulations, because their supply might be linked to armed conflicts in the Democratic
Republic of Congo. They were regulated in order to stop the financing of armed groups in
Congo and neighbouring countries using the generated profits.
China was the predominant exporter of rare earth elements. With many countries ramping up
their mining of raw rare earth materials to reduce their dependence on China’s production,
China’s share of global mining production dropped from 97.7% in 2010 to 62.9% in 2019; the
2 S. O'Dea, “Smartphones – Statistics & Facts,”, Statista, 26 June 2020, https://www.statista.com/topics/840/smartphones/,

accessed 2 September 2020.
3 Statcounter, “Mobile vendor market share worldwide,” 15 September 2020, https://gs.statcounter.com/vendor-market-
share/mobile.
4 Lucy Shaw, “Ponsot and De Villaine Testify in Kurniawan Trial,” The Drinks Business, 13 December 2013,
https://www.thedrinksbusiness.com/2013/12/ponsot-and-de-villaine-testify-in-kurniawan-trial/, accessed 25 September 2019.
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share of global reserves dropped from 50% to 36.7%. 5 Up to 80% of a mobile phone was
recyclable, because mobile phones contained metals, plastics, and some valuable components
that could be extracted and reused.6 Apple, for example, used 100% recycled tin. 7
Manufacturing
A mobile phone normally consisted of an integrated circuit (IC), an antenna, a liquid crystal
display (LCD), a microphone, a speaker, a battery, and a camera. The company that provided
ICs played the most critical role in the smartphone supply chain. IC companies developed and
manufactured the chips or SoCs8 that determined the timing and the kinds of new features a
smartphone could offer. IC companies normally released new chips and SoCs a couple of times
a year. Once a new SoC was released, a better performance mobile model would drive down
the costs of the previous models and lead the evolution of smartphone development.
Assembly
The components were sourced from manufacturers and then taken to factories for assembly.
Foxconn was the largest company in China assembling electronics. iPhone was made at its

facilities in China, mainly in Zhengzhou, Henan Province, and in Shenzhen, Guangdong

Province. Assembly took about 400 steps, relying on 94 production lines for the iPhone.
Company Background
What is Apple, after all? Apple is about people who think “outside the box,”
people who want to use computers to help them change the world, to help them
create things that make a difference, and not just to get a job done.
- Steve Jobs, Apple cofounder, former CEO, and Chairman 9
Apple Computers, Inc., was established by Steve Jobs and Steve Wozniak on 1 April 1976.
They wanted to change how people viewed computers by making computers user friendly and
small enough to use at home and in their offices. Apple computers soon became popular and
reached their peak in 1990 but started losing market share until Jobs returned to Apple in 1997.
Upon his return, Jobs partnered with Microsoft to make a Mac version of the Ms Office software
suite. He then decided to introduce the iBook (a personal laptop), iPod (a MP3 player), and
iTunes (media player software), all of which were well received in the market. In 2007, Apple
released the iPhone. iPhones became the best-selling and most profitable product among
Apple’s product offerings [see EXHIBIT 3].
In 2020, Apple was famous for designing, manufacturing, and marketing smartphones
(iPhones), personal computers (Mac), tablets (iPad), wearables and accessories (AirPods, Apple
Watch, Apple TV, Apple Touch, etc.), its proprietary operating system iOS, and a wide range
of related services [see EXHIBIT 4 for its financial statements]. Its products were sold through
its own websites, flagship stores, and its licensed partners.
5 Centre for Strategic and International Studies (CSIS), "Does China Pose a Threat to Global Rare Earth Supply Chains?" China
Power, 17 July 2020, https://chinapower.csis.org/china-rare-earths/, accessed 16 September 2020.
6 Recycle Now, “What to do with mobile phones,” https://www.recyclenow.com/what-to-do-with/mobile-phones-0, accessed 20
September 2020.
7 Magdalena Petrova and Jeniece Pettit, “We traced what it takes to make an iPhone, from its initial design to the components
and raw materials needed to make it a reality,” CNBC, 14 December 2018, https://www.cnbc.com/2018/12/13/inside-apple-
iphone-where-parts-and-materials-come-from.html, accessed 4 June 2020.
8 System on a Chip (SoC) helped to save space and improve performance by grouping all the key components, including a
processor, the graphics chipset, and the RAM, on a mobile in a very small area.
9 Mark Milian, “The spiritual side of Steve Jobs,” CNN, 7 October 2011,
https://edition.cnn.com/2011/10/05/tech/innovation/steve-jobs-philosophy/index.html, accessed 24 September 2020.
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Apple’s organizational structure was centred around Tim Cook, the CEO, with senior vice
presidents responsible for different business functions [see EXHIBIT 5]. This hierarchical
structure supported Cook’s top management decision making, thereby ensuring that the entire
company implemented strategic decisions quickly and consistently.
iPhone’s Supply Chain

We care about every worker in our worldwide supply chain . . . What we will
not do—and never have done—is stand still or turn a blind eye to problems in
our supply chain. On this you have my word.
- Tim Cook, Apple CEO10
Apple’s supply chain to make iPhones was complicated, and included smelters, refiners,
manufacturing of components, assembly of the final products, and recyclers as well [see
EXHIBIT 6 for Apple’s supply chain]. There were also service providers to support their
business operations, including the logistics partners to deliver iPhones to destinations around

the world and the janitorial teams to clean the flagship stores.

At Apple, the manufacturing of smartphones relied on the existing global supply and
manufacturing networks, which had been built on substantial investments, hard-earned
industrial experiences, and supplier-vendor relationships over the years. In the past, it served
Apple very well. The global supply chain enabled just-in-time manufacturing, and the “asset
light” approach allowed companies to focus on their core competences and outsource the rest
at low costs. But the well-functioning global supply chain was based on the assumption that
there were few natural disasters, global economies were stable, and international trade barriers
were limited. When Japan suffered from an earthquake, a tsunami, and a nuclear accident in
2011, Apple encountered a blockage in its iPod supply chain owing to the lack of lithium-ion
batteries manufactured in Japan. Similarly, the outbreak of COVID-19 and the US-China trade
war posed new threats to the supply network, requiring supply chains to be more resilient to
unexpected disruption, more adaptable to a changing environment, and more capable of
capturing new sources of competitive advantage.11
Sourcing
The iPhone was designed in California, and the materials used to make iPhones came from
suppliers based all over the world. Apple often used more than one supplier for the same part
on the same model. For example, iPhone XS’s RAM was manufactured by SK Hynix in the US
or Canada, by Samsung in the US or Canada, or by Micron in China.
When Cook was first put in charge of Apple’s supply chain, he reduced the number of
components suppliers from 100 to 24. In this way, each supplier could have a larger order from
Apple, which forced suppliers to compete for its business. Apple could also develop strong
relationships with its suppliers, and their large production capacity gave the company the
flexibility to meet the changing demand. Though the total number of suppliers increased with
Apple’s business expansion, its suppliers were still highly concentrated. Apple’s supplier list
was published each year, and 98% of Apple’s procurement was met by the top 200 suppliers
on the list. 12 Strategic partnerships with these suppliers allowed Apple to set a high standard,
which ensured the quality of Apple’s products to be reliable and long-lasting.
10 Steven Musil, “Tim Cook: Apple cares about ‘every worker’ in its supply chain,” CNET, 26 January 2012,
https://www.cnet.com/news/tim-cook-apple-cares-about-every-worker-in-its-supply-chain/, accessed 24 September 2020.
11 Bridget McCrea, “Can We Make Our Global Supply Chains More Resilient?” Source Today, 10 September 2020.
12 Laura Ross, “How the Apple supply chain stays top ranked in the world,” https://www.thomasnet.com/insights/apple-supply-
chain/, 30 June 2020, accessed 1 September 2020.
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Apple also provided educational and up-skill programs for its suppliers to ensure their
competitiveness in the fast-moving market.
Apple had a subject-matter expert (SME) program in which Apple experts visited supplier
facilities to suggest tailor-made capability-building plans. The SME expert team had more than
30 people with professional knowledge and expertise to help suppliers solve management and
technical challenges. They conducted one-on-one support and provided online learning
materials. In 2019, 86 supplier facilities received these capability-building plans. 13
Apple also provided a platform named SupplierCare to give the most updated information on
its supply chain and to offer training courses to suppliers. Suppliers could use the platform to
approach Apple experts to solve their problems. Apple conducted periodic assessments of its
suppliers, and SupplierCare allowed suppliers to track assessment results and develop
corrective action plans, access to industry best practices, and monitor their progress in making
improvements. In 2019, SupplierCare provided digital training materials, including up-to-date
topics such as greenhouse gas management, to more than 950 suppliers. 14

Manufacturing

After purchasing components and raw materials from suppliers, Apple shipped to the
assembling factories in China.
In 2018, there were six facilities in China that performed final assembly of iPhone. 15 Foxconn
was the largest iPhone contract manufacturer. Estimates indicated that 80% of the production
of iPhone12 were handled by Foxconn, mainly in its manufacturing facilities in Zhengzhou and
Shenzhen. In Zhengzhou, for example, Foxconn occupied 2.2 square miles. It operated as the
final assembly, testing, and packaging (FATP) for iPhone. In 2016, it had about 94 production
lines, and each iPhone required about 400 steps to assemble. About 500,000 iPhones were
produced daily in this facility, and they were boxed, wrapped, palletized, and made ready for
shipment. 16 They were shipped to a large customs facility a few hundred yards from the factory
gate. This customs operation was set up by the Chinese government.
In 2019, Foxconn produced more than 60% of the smartphone exports in Henan, a province
that accounted for a quarter of China’s smartphone exports.17
The customs facility allowed Foxconn to sell the iPhones to Apple and allowed Apple to resell
them to the world. For those iPhones shipped to the China market, customs officials just
electronically stamped the iPhones that Foxconn sold to Apple as “exports,” then restamped
them as “imports” from Apple while collecting a 17% value-added tax based on the imported
price. Afterward, the iPhones could be shipped to different destinations in China. Normally,
they traveled by truck for 590 miles to reach Shanghai, Apple’s national distribution center. It
took an average of two days after leaving the Foxconn factory in Zhengzhou to Shanghai. 18
Those iPhones bound for the US and the rest of the world left customs by truck and were loaded
aboard planes at the Zhengzhou Airport, just three miles from the customs facility. Smartphones
were small enough to be shipped by air in large quantities. US-bound iPhones were shipped by
UPS, FedEx, and other carriers to the logistics hubs in the US and from there to distributors. It
13 Apple, “Supplier Responsibility Report,” 2020, https://www.apple.com/supplier-

responsibility/pdf/Apple_SR_2020_Progress_Report.pdf, accessed 3 June 2020.
14 Ibid.
15 Ibid.
16 David Barboza, “An iPhone’s journey, from the factory floor to the retail store,” New York Times, 29 December 2016.
17 Mark Gurman and Debby Wu, “Apple supply chain braces for disruption from coronavirus,” Bloomberg, 28 January 2020.
18 David Barboza, “An iPhone’s journey, from the factory floor to the retail store.”
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normally took three days after leaving the Foxconn factory in Zhengzhou to reach a store in
San Francisco, around 6,300 miles away. 19
Warehousing
Inventory is fundamentally evil. You kind of want to manage it like you’re in
the dairy business. If it gets past its freshness date, you have a problem.
- Tim Cook, Apple CEO20
Apple considered a lean, streamlined inventory management system as very important because
new technology could quickly eliminate consumers’ interest in older generations. By keeping
the inventory level as low as possible, Apple had the agility to upgrade its products faster and
had a smaller loss on the value of its inventory when an innovative product was released by its
competitors. 21
Moreover, Apple only focused on its key products and limited the number of SKUs22 to reduce
the inventory requirements. This also helped to make more accurate forecasts. More accurate

forecasting of the demand allowed Apple to negotiate lower prices with suppliers through long-

term orders. By ordering products before its competitors, Apple laid claim to a percentage of
its suppliers’ manufacturing capacity, which became unavailable to its competitors. This also
helped to limit imitations.
Apple’s supply chain had ranked high in Gartner’s Supply Chain Top 25 list since 2013. Cook
believed that technology inventory depreciated quickly, losing 1%–2% of its value every week.
Apple’s annual inventory peaked in 2017, with a value of USD4.8bn. In 2018, the company
reduced this number by 18.52%. The lowest point was in September 2018, when Apple’
inventory was down to only six days, on average. Its inventory was USD3.8bn in 2019, a 3.79%
increase over the previous year.23
Distribution Channels
Apple sold iPhones through many channels, including high-street stores, online shops,
authorized retailers, and telecom carriers. Depending on customs tariffs and local taxes, the
prices of an iPhone varied across countries.
Return and Recycle

Once a product was sold, Apple did not allow consumers to return the product unless it proved
to be defective. At the end of its product life, consumers could return the product to any Apple
store or Apple’s recycling facilities so it could be recycled.
Apple had different initiatives to improve sustainability along its supply chain, which gave its
consumers confidence about its corporate social responsibility. The company reduced its
reliance on raw materials. The MacBook Air, for instance, was made from 100% recyclable
aluminum. In 2019, Apple used some recycled content in the iPhone, iPad, Mac, and Apple
Watches devices released, and the iPhone Taptic Engine 24 used 100% recycled rare earth
19 Ibid..
20 Clara Lu, “Apple supply chain – the best supply chain in the world,” 15 April 2020, https://www.tradegecko.com/blog/supply-
chain-management/apple-the-best-supply-chain-in-the-world, accessed 4 June 2020.
21 Laura Ross, “How the Apple supply chain stays top ranked in the world.”
22 Stock Keeping Unit (SKU) is an accounting term used for inventory management. It is the product code specifying the product
size, color, and style, which can be used to search, identify, and manage stock on hand.
23 Clara Lu, “Apple supply chain – the best supply chain in the world.”
24 The Taptic Engine is iPhone’s vibration motor, which provides different levels of vibration power and sensations. It can
provide tactile feedback to the user when performing actions. [Source: Malcolm Owen, “Apple upgrading Taptic Engine in
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elements, the first among all smartphone brands. “Dave” was the robot developed by Apple to
dissemble the Taptic Engine from iPhones to recover rare earth magnets and other key materials.
In 2017, Apple announced the objective of a closed-loop supply chain. 25 By 2030, all its
products would be made from recyclable or renewable materials. Apple also invested in clean
energy technologies, including solar and wind, and provided an online Clean Energy Portal for
its suppliers to identify renewable sources across the globe. 26
Challenges of COVID-19 Outbreak

COVID-19 was a special kind of coronavirus causing viral pneumonia that had occurred since
December 2019. Wuhan, Hubei Province, was the first epicenter. The symptoms of COVID-19
varied and usually included fever and a cough. Some people might have a high fever and a
cough; some might have a low fever at first and then develop breathing difficulty later; some
did not develop any noticeable symptoms. The virus could easily spread through the air when
people were physically close and the affected person breathed, coughed, sneezed, talked, or

sang, and it could also be transmitted through contaminated surfaces.

On 10 January 2020, the World Health Organization (WHO) published a series of reports about
managing a new disease outbreak and announced the situation as a public health emergency of
international concern (PHEIC), the highest level of alarm, on 30 January 2020, and a pandemic
on 11 March 2020.
Before the outbreak of COVID-19 in December 2019, Apple had been increasing its iPhone
production to meet higher-than-expected demand. In December 2019, Apple sold about 3.2
million phones in China, compared with 2.7 million sold in December 2018.27 But the epidemic
posed a range of different challenges to Apple.
Suppliers
Supply chain disruption is a worry if employees across Foxconn and other

component manufacturing hubs in China are restricted.
- Dan Ives, Wedbush Securities Inc. 28
The first challenge facing suppliers was the shortage of manufacturing workers. Apple’s
suppliers employed a few million workers to manufacture components and assemble the
iPhones, iPads, Apple Watches, and other products in China. The outbreak of COVID-19
occurred just before the Spring Festival, which a traditional time for family gatherings in China.
In 2020, the official holidays for the Spring Festival were between 24 January and 2 February.
All the factories in China were normally closed for about 10 days while the workers went back
to their hometowns to spend the festive season with their families. Their hometowns were
usually located in remote rural areas, far away from the cities where the factories were.
2019 ‘iPhone 11’ for Haptic Touch,”2019, https://appleinsider.com/articles/19/07/23/apple-upgrading-taptic-engine-in-2019-

iphone-11-for-haptic-touch, accessed 16 January 2021.]
25 A closed-loop supply chain is “all forward logistics in the chain (like procurement of materials, production, and distribution)
as well as the reverse logistics to collect and process returned (used or unused) products and/or parts of products in order to
ensure a socioeconomically and ecologically sustainable recovery.” [Source: N. R. Kumar ad R. M. S. Kumar, “Closed loop
supply chain management and reverse logistics – a literature review,” International Journal of Engineering Research and
Technology 6, no. 4 (2013: 455–468.]
26 Laura Ross, “How the Apple supply chain stays top ranked in the world.”
27 Josh Horwitz, “Apple’s iPhone sales in China up 18% in December: government data,” Reuters, 9 January 2020,
https://www.reuters.com/article/us-apple-china-idUSKBN1Z81CP, accessed 11 October 2020.

28 Mark Gurman and Debby Wu, “Apple supply chain braces for disruption from coronavirus.”
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To prevent the virus from spreading, Chinese authorities imposed severe travel restrictions and
quarantined Wuhan, a city of more than 11 million people, for 76 days from 23 January to 7
April. Though Wuhan was located hundreds of miles away from Zhengzhou and Shenzhen
where Foxconn’s facilities were located, Wuhan was one of China’s largest industrial hubs and
an important transport hub in central China. Wuhan’s major industries included optical-
electronics, automobile, steel, and iron manufacturing.
As a result, factories had to be closed for a long period of time, and workers had to delay their
return to work. Foxconn’s factories returned to full-scale production on 10 February 2020, but
only about 10% of its workers, 16,000 in Zhengzhou and some 20,000 in Shenzhen, had
returned to the factory by that time. Those who returned to work were required to wear masks,
undergo temperature checks, and follow a special dining arrangement. Foxconn and Apple
designated employee safety as their top priority. To meet the mask demand for its hundreds and
thousands of employees, Foxconn also built production lines to make masks, 2 million every
day.29 In March, Foxconn commented that the number of employees who had returned to work
“exceeded our expectation and imagination,” without giving an exact number, and supplies of
components were also back to normal. 30

The challenge to a multinational company like Apple was not limited to China. When the
situation in China eased, the coronavirus situation started unfolding in Korea and Italy where
Apple had suppliers and businesses. By March 2020, WHO considered Europe to be the
epicenter of the pandemic. Italy overtook China as the country with the most deaths on 19
March 2020, and later the United States exceeded Italy on 26 March [see EXHIBIT 7 for a list
of countries with the most cases].

Logistics Companies
I can’t imagine a scenario where the supply chain isn’t disrupted. If there’s
one major hiccup in the raw materials, fabrication, assembly, test, and
shipping, it will be a disruption.
- Patrick Moorhead, Moor Insights & Strategy 31
Logistics companies were negatively affected by COVID-19 due to economy lockdowns. For
example, air freight companies saw cargo demand outstrip capacity supply because of the
growing shipping demands for personal protection equipment, medical supplies, and e-
commerce shipments. In Hong Kong, the airfreight rates in May 2020 were two to three times
higher than the normal rates due to increased demand. After the middle of June, the demand
stabilized, and the rates were reduced, but they were still 1.4 times higher than during the same
period in 2019. 32
Some countries had imposed curfews and 14-day quarantines for cross-border traveling to
control the virus. At the same time, this had an impact on both domestic and international
traveling arrangements of logistics companies and their clients. The cabin crew was also
required to be quarantined in some countries.
In addition to logistics companies, travel restrictions also had an impact on companies like
Apple. Every year Apple spent USD35mn to allow its employees, especially research and
29 Yimou Lee, “Apple’s main iPhone maker Foxconn to resume some Chinese production,” Reuters, 10 February 2020,
https://www.reuters.com/article/us-china-health-foxconn-idUSKBN20403Q, accessed 4 October 2020.
30 BBC, “Apple’s China stores reopen after a month,” 13 March 2020, https://www.bbc.com/news/technology-51870725,
accessed 2 October 2020.

32 The Chartered Institute of Logistics and Transport, “Impact of COVID-19 on Hong Kong’s Logistics Industry,” July 2020.
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development staff, to travel regularly between San Francisco and Shanghai on United Airlines,
which included 50 business-class seats every day. 33
Retailing
Overall, the global smartphone market was estimated by the International Data Corporation
(IDC) Worldwide Quarterly Mobile Phone Tracker to decline by 11.9% in 2020. 34
The most difficult challenge from COVID-19 for smartphone brands is the
negative impact on consumer confidence or purchasing power after the
pandemic outbreak, resulting in consumers preferring to choose lower
price/spec models or to stop purchasing smartphones. We cut 2Q20 iPhone
shipment estimation by 30% to 35–37 million units due to negative impacts
from COVID-19. But it may have further downside risk.
- Ming-Chi Kuo, analyst from TF Securities35
The economy lockdown was an effective measure to control the virus, but it hurt economic

development and caused supply chain disruption. The Chinese government, for example,

allowed factories to resume operations and eased the travel and logistics restrictions once the
situation was under control. The economy rebounded quickly, but IDC estimated that China’s
domestic market in 2020 would see a single-digit decline. 36 As a whole, the global economy
was negatively affected by COVID-19; for example, Japan, the United States, and the United
Kingdom were already in a recession.
Apple’s Reactions
We’ve worked through earthquakes, tornadoes, fires, floods, tsunamis, SARS,
so we’ve had a long list of things, and the operational team is very deep at
working through these. So the question for us after we get to the other side,
was the resilience there or not and will we need to make some changes? It will
take some time, but by and large, I think this is a temporary condition, not a
long-term thing.
-Tim Cook, CEO of Apple37
In a corporate virtual meeting on 16 April, Cook described the pandemic as an “uncertain and
stressful moment,” but he was confident of bringing the company back from the crisis. In his
words, Apple was “not immune to worldwide economic trends” but was fortunate to enter the
pandemic with a healthy balance sheet. Apple tweaked its vacation policy but kept paying its
employees when the stores were closed. Staff were required to attend online training and virtual
meetings in preparation for store reopenings.
Apple had 42 retail stores across China, though it did not have one in Wuhan. In China, Apple
had about 10,000 employees in its stores and offices. When the Chinese government extended
34 IDC, “IDC expects worldwide smartphone shipments to plummet 11.9% in 2020 fueled by ongoing COVID-19 challenges,” 3
June 2020, https://www.idc.com/getdoc.jsp?containerId=prUS46466720, accessed 4 June 2020.
35 Kif Leswing, “Orders for Apple’s iPhone SE better than expected, but iPhone shipments to drop 20-25% this quarter, top
analyst says,” CNBC, 21 April 2020, https://www.cnbc.com/2020/04/21/kuo-iphone-se-sales-better-than-expected-but-iphone-

shipments-down.html, accessed 4 June 2020.
36 IDC, “IDC expects worldwide smartphone shipments to plummet 11.9% in 2020 fueled by ongoing COVID-19 challenges.”
37 Mark Gurman, “Apple’s Time Cook sees minor supply chain changes in wake of virus,” Bloomberg, 28 February 2020,
https://www.bloombergquint.com/business/apple-s-cook-sees-minor-supply-chain-changes-in-wake-of-virus, accessed 4 June

2020.
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the Spring Festival holidays as a way to control the spread of COVID-19, Apple first decided
to shorten the stores’ opening hours and later decided to temporarily close its 42 retail stores
and offices in China from 1 to 15 February 2020. As a result, the number of iPhones sold in
February 2020 was 494,000, compared to 1.27 million in February 2019. 38
Apple closed all retail stores outside Greater China on 13 March 2020 and started reopening
most stores in the US in the middle of May with additional safety procedures and a social
distancing protocol. As the situation was getting worse in the US, Apple reclosed the US stores.
Depending on the case numbers, positivity rates, hospital usage, and other factors, Apple made
the decision on store closures. About half of Apple’s stores in the US were closed in mid-July,
and only five stores remained closed by the end of September.
Support to Suppliers
We’re talking about adjusting some knobs, not some sort of wholesale,
fundamental change.
- Tim Cook, CEO of Apple39

In response to the US-China trade war that had flared in 2018 and had been escalating since,

some of Apple’s suppliers planned to move part of their manufacturing facilities out of China.
Foxconn had production facilities in India and Vietnam to assemble iPhones. Due to the virus-
related supply interruption, Cook mentioned in late February 2020 that Apple did not plan to
make a quick move out of China.
Our teams have partnered with suppliers to redesign and reconfigure factory
floor plans where needed and to implement flexible working hours—including

staggered work shifts—to maximize interpersonal space.
- Sabih Khan, Senior Vice President of Operations of Apple 40
Apple helped its suppliers limit the spread of COVID-19 by including health screenings, deep
cleaning, face-mask distribution, hand sanitizer deployment, and work area rearrangements to
limit the density. Apple developed health and safety protocols with the help of leading medical
experts and implemented best practices throughout its supply chain. Based on the circumstances
in individual countries, Apple worked out a range of health protection measures suited for each
supplier to ensure strict adherence to social distancing in the workplace, such as flexible
working hours and work shifts.
Product Release
China’s recovery has been impressive to say the least, especially given the
initial impact of COVID-19 on the country. There’s no question that challenges
lie ahead for the smartphone industry and we believe the economic downturn
is going to cause some fluctuation in the vendor and price-tier landscape. The
surge in consumer spending around devices that are less mobile than
smartphones (PCs, monitors, video game consoles, etc.) will undoubtedly take
a share of the consumer wallet that would have been put forward smartphone
upgrades and 5G. We believe this will result in even more aggressively priced
5G smartphones than expected prior to the pandemic.
- Ryan Reith, Vice President, IDC Worldwide Mobile Device Trackers41
38 BBC, “Apple’s China stores reopen after a month,” 13 March 2020, https://www.bbc.com/news/technology-51870725,
accessed 2 October 2020.
39 Mark Gurman, “Apple’s Time Cook sees minor supply chain changes in wake of virus.”
40 Apple, Supplier Responsibility 2020 Progress Report, 2020.
41 IDC, “IDC expects worldwide smartphone shipments to plummet 11.9% in 2020 fueled by ongoing COVID-19 challenges.”
10
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Apple released the second generation of iPhone SE online with a price tag starting at USD399
in April 2020, about one month later than originally scheduled. This iPhone SE model’s design,
size, camera, and other components were similar to iPhone 8 and used the most advanced A13
Bionic processer similar to the iPhone 11. Pricewise, this iPhone SE model was the most cost-
effective option for consumers. The cost of making an iPhone SE model was 54% of the lowest
selling price, which was higher than 38% of iPhone 8 and 48% of iPhone 11.42
After the 2008 financial crisis, Apple introduced the first iPad in 2010. Likewise, as a way to
recover from the COVID-19 pandemic, Apple decided to release iPhone 12, including up to
four redesigned iPhones with 5G networking, by the end of 2020 and a virtual-reality headset
in 2021 or 2022. Additionally, the pandemic elevated the importance of health products, Apple
planned to add more functions to its Apple Watch, including an electrocardiogram feature.43
Compared to the first-generation iPhone SE, Apple actually lowered the lowest price of the
second generation by USD50, making it more affordable. At the same time, its major
competitors were bringing out their expensive phones because the market was booming in 2019;
for example, Samsung’s S20 cost between USD999 and 1,499. Some analysts believed that

iPhone SE aimed to lure those lower-income owners of old iPhones, such as the iPhone 5 and

6, to upgrade their phones. Then they would use more Apple products, including Apple TV+,
because older iPhones would struggle on the existing LTE44 networks. 45
The announcement of Apple’s new iPhone 12 model was also delayed to mid-October. Apple
had a signature release in early September event every year, but Apple disclosed only its Apple
Watch and the mid-range, low-cost iPad Air.

Looking Forward
Apple’s second quarter of 2020 delivered record business results in all of Apple’s geographic
segments and across all major product categories. Apple increased the earnings per share
(EPS) by 18% and its revenue reached USD16.3bn, both of which achieved a record high in
Apple’s financial performance in the June quarter. 46
Apple’s record June quarter was driven by double-digit growth in both

Products and Services and growth in each of our geographic segments. In
uncertain times, this performance was a testament to the important role our
products play in our customers’ lives and to Apple’s relentless innovation. This
is a challenging moment for our communities, and, from Apple’s new $100
million Racial Equity and Justice Initiative to a new commitment to be carbon
neutral by 2030, we’re living the principle that what we make and do should
create opportunity and leave the world better than we found it.
42 Huang Zhengxuan, “The cost of new iPhone SE is 20% lower than 8 but the profits are lower than 8 and 11,” HK01, 8 May
2020.
43 Mark Gurman, “Return to work plan at company-wide meeting,” Bloomberg, 17 April 2020,
https://www.bloombergquint.com/technology/apple-ceo-sees-company-emerging-strongly-from-COVID-19-crisis, accessed 4
June 2020.
44 LTE (long-term evolution) is a wireless broadband communication standard for mobile devices and data terminals using
relatively new technologies, which increases the network’s capacity and speed.
45 Sascha Segan, “The new iPhone SE is the ideal phone for the COVID-19 year,” PC Magazine, 15 April 2020.
46 Apple, “Apple Reports Third Quarter Results,” Press Release, 30 July 2020.
47 Ibid.
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The world was full of uncertainties. COVID-19 brought challenges as well as opportunities to
Apple. The social distancing protocols associated with COVID-19 brought changes to the way
that people lived their lives and used their mobile devices. They used social apps to connect
with friends and families, education apps to study, and business collaboration apps to work
remotely. E-commerce apps, such as food and grocery delivery apps, were booming, while
brick-and-mortar businesses saw a sharp decline. To survive, many brick-and-mortar
businesses turned to mobile commerce. 48
We have shown the consistent ability to meet and manage temporary supply
challenges like those caused by COVID-19.
Apple had a leading and innovative supply chain, but it was facing unprecedented challenges.
Apple did not make any significant changes to its existing supply chain, except some minor
adjustments. The WHO expected that COVID-19 and its impacts would last for a few years.
Could Apple’s supply chain adapt to the challenge?

48 Apple, “Apple’s App Store ecosystem facilitated over half a trillion dollars in commerce in 2019,” Press Release, 15 June
2020.
49 Anna Akins, “Supply chain back on track but COVID-19 risks remain in fiscal Q3 – Apple execs,” S&P Global, 30 April
2020, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/supply-chain-back-on-track-but-
COVID-19-risks-remain-in-fiscal-q3-8211-apple-execs-58394276, accessed 3 June 2020.
12
20/680C
13
in 2020 fuelled by ongoing COVID-19 challenges,” 3 June 2020,
https://www.idc.com/getdoc.jsp?containerId=prUS46466720, accessed 4 June 2020.
EXHIBIT 1: WORLDWIDE SMARTPHONE FORECAST COMPARISON BY IDC
Source: Adopted from IDC, “IDC expects worldwide smartphone shipments to plummet 11.9%
iPhone’s Supply Chain Under Threat
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EXHIBIT 2: SMARTPHONE VENDOR MARKET SHARE IN CHINA, 2019–2020
APPLE HUAWEI OPPO XIAOMI VIVO
2019 2Q 6.7% 37% 18.6% 11.9% 18.7%
2019 3Q 5.1% 41.5% 16.4% 9.8% 18.1%
2019 4Q 14.4% 38.5% 16.3% 9.3% 16.4%
2020 1Q 7.6% 42.6% 17.8% 10.6% 18.1%
2020 2Q 8.3% 45.2% 16% 10.4% 17.1%
Source: Statista, “Vendors’ market share of smartphone shipments in China from 1st quarter
2014 to 2nd quarter 2020,” https://www.statista.com/statistics/430749/china-smartphone-shipments-

vendor-market-share/, accessed 15 September 2020.

EXHIBIT 3: APPLE’S NET SALES BY PRODUCT
(USD in millions)
2019 CHANGE 2018 CHANGE 2017
iPHONE 142,381 (14)% 164,888 18% 139,337

MAC 25,740 2% 25,198 (1)% 25,569
iPAD 21,280 16% 18,380 (2)% 18,802
WEARABLES, HOME, 24,482 41% 17,381 36% 12,826
AND ACCESSORIES
SERVICES 46,291 16% 39,748 33% 32,700
TOTAL NET SALES 260,174 (2)% 265,595 16% 229,234
Source: Apple 2019 Annual Report.
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EXHIBIT 4: APPLE CONSOLIDATED STATEMENTS OF OPERATIONS

(IN USD MILLIONS)
Years Ended
28 September 2019 29 September 2018 30 September 2017
Net sales
Products 213,883 225,847 196,534
Services 46,291 39,748 32,700
Total net sales 260,174 265,595 229,234
Cost of sales
Products 144,996 148,164 126,337
Services 16,786 15,592 14,711
Total cost of sales 161,782 163,756 141,048
Gross margin 98,392 101,839 88,186
Operating expenses
Research and development 16,217 14,236 11,581

Selling, general, and 18,245 16,705 15,261
administrative
Total operating expenses 34,462 30.941 26,842
Operating income 63,930 70,898 61,344

Other income (expense) 1,807 2,005 2,745
Income before provision 65,737 72,903 64,089

Provision for income taxes 10,481 13,372 15,738

Net income 55,256 59,531 48,351
Source: Apple 2019 Annual Report.
15
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EXHIBIT 5: APPLE LEADERSHIP
Tim Cook, CEO

Katherine Adams, Senior Vice President and General Counsel
Eddy Cue, Senior Vice President, Internet Software and Services
Craig Federighi, Senior Vice President, Software Engineering
John Giannandrea, Senior Vice President, Machine Learning and AI Strategy
Sabrih Khan, Senior Vice President, Operations

Luca Maestri, Senior Vice President and Chief Financial Officer
Deirdre O'Brien, Senior Vice President, Retail + People
Dan Riccio, Senior Vice President, Hardware Engineering

Philip W. Schiller, Senior Vice President, Worldwide Marketing
Johny Srouji, Senior Vice President, Hardware Technologies
Jeff Williams, Chief Operating Officer
Lisa Jackson, Vice President, Environment, Policy and Social Initiatives
Isabel Ge Mahe, Vice President and Managing Director of Greater China
Tor Myhren, Vice President, Marketing Communications
Adrian Perica, Vice President, Corporate Development
Source: Apple company website, accessed 22 September 2020.
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EXHIBIT 6: SUPPLY CHAIN AT APPLE

Source: Apple, “Supplier Responsibility Report,” 2020, https://www.apple.com/supplier-

responsibility/pdf/Apple_SR_2020_Progress_Report.pdf, accessed 3 June 2020.
EXHIBIT 7: TOP AFFECTED COUNTRIES BY 9 OCTOBER 2020
Cases – Cases – Deaths – Deaths – Transmission

cumulative newly cumulative newly Classification
total reported in total reported in
last 24 last 24
hours hours
Global 36,754,395 383,359 1,064,838 8,575
United 7,525,920 54,232 211,311 973 Community
States transmission
India 6,979,423 73,272 107,416 926 Clusters of
cases
Brazil 5,028,444 27,750 148,957 729 Community
transmission
Russian 1,285,084 12,846 22,454 197 Clusters of
Federation cases
Colombia 886,179 8,496 27,331 151 Community
transmission
Spain 861,112 12,788 32,929 241 Community
transmission
Source: WHO, “WHO Coronavirus Disease (COVID-19) Dashboard,”

http://COVID19.who.int/table, 9 October 2020, accessed on 11 October 2020.
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iPHONE’S SUPPLY CHAIN UNDER THREAT

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was put in the spotlight.

Last edited: 16 February 2021

Mobile Manufacturing Industry

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Industry Supply Chain

in the mobile manufacturing industry.

2 S. O'Dea, “Smartphones – Statistics & Facts,”, Statista, 26 June 2020, https://www.statista.com/topics/840/smartphones/,

https://www.thedrinksbusiness.com/2013/12/ponsot-and-de-villaine-testify-in-kurniawan-trial/, accessed 25 September 2019.

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https://edition.cnn.com/2011/10/05/tech/innovation/steve-jobs-philosophy/index.html, accessed 24 September 2020.

iPhone’s Supply Chain

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chain/, 30 June 2020, accessed 1 September 2020.

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13 Apple, “Supplier Responsibility Report,” 2020, https://www.apple.com/supplier-

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Return and Recycle

Challenges of COVID-19 Outbreak

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Supply chain disruption is a worry if employees across Foxconn and other

2019 ‘iPhone 11’ for Haptic Touch,”2019, https://appleinsider.com/articles/19/07/23/apple-upgrading-taptic-engine-in-2019-

https://www.reuters.com/article/us-apple-china-idUSKBN1Z81CP, accessed 11 October 2020.

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of countries with the most cases].

accessed 2 October 2020.

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analyst says,” CNBC, 21 April 2020, https://www.cnbc.com/2020/04/21/kuo-iphone-se-sales-better-than-expected-but-iphone-

https://www.bloombergquint.com/business/apple-s-cook-sees-minor-supply-chain-changes-in-wake-of-virus, accessed 4 June

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floor plans where needed and to implement flexible working hours—including

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Watch and the mid-range, low-cost iPad Air.

Apple’s record June quarter was driven by double-digit growth in both

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EXHIBIT 2: SMARTPHONE VENDOR MARKET SHARE IN CHINA, 2019–2020

APPLE HUAWEI OPPO XIAOMI VIVO

2019 2Q 6.7% 37% 18.6% 11.9% 18.7%

2019 3Q 5.1% 41.5% 16.4% 9.8% 18.1%

2019 4Q 14.4% 38.5% 16.3% 9.3% 16.4%

2020 1Q 7.6% 42.6% 17.8% 10.6% 18.1%

2020 2Q 8.3% 45.2% 16% 10.4% 17.1%

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2019 CHANGE 2018 CHANGE 2017

iPHONE 142,381 (14)% 164,888 18% 139,337

Source: Apple 2019 Annual Report.

EXHIBIT 4: APPLE CONSOLIDATED STATEMENTS OF OPERATIONS

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Operating income 63,930 70,898 61,344

Income before provision 65,737 72,903 64,089

Provision for income taxes 10,481 13,372 15,738