China's Goertek, one of Apple's key contract manufacturers, this summer will likely begin testing the resilience of its manufacturing processes for the newest generation of AirPods at the company's audio factory in northern Vietnam, two sources with knowledge of the plan said.

 

This is likely to mark the first production of the wireless earbuds - which came to market in 2016 - outside of the world's second-largest economy. They are Apple's swiftest growing product, racking up 35 million shipments last year against 20 million in 2017.

 

Apple has written to components suppliers, asking them to support Goertek's efforts regardless of initially very small volumes, according to a communication seen by the Nikkei Asian Review. 'Suppliers are requested to keep the pricing unchanged for the trial production stage, but this can be reviewed once volumes are increased,' said one of the sources with direct knowledge of the communication.

 

'The initial output will be limited, but it is easy to increase capacity once all the manufacturing procedures are running smoothly,' the person said. Goertek didn't respond to Nikkei's request for comments. Apple has long sourced its traditional EarPods - connected to the iPhone with wires - in Vietnam. But, until now, AirPods have been made in China by suppliers Inventec, Luxshare-ICT and Goertek. Apple resisted to comment on production plans for AirPods.

 

However, the move to start trial manufacture, often a precursor to mass production, in Vietnam comes as Apple explores with suppliers the outcomes of sourcing 15% to 30% of its output other than China, where cost and manpower advantages have begun to vanish. Nikkei Asian Review reported last month that the California tech giant had asked suppliers to examine the costs of such diversification.

 

AirPods are the world's best selling wireless earbuds, with 60% of the market, and opened a new consumer electronics category when they were launched in late 2016. Samsung, Huawei and some other traditional audio brands for instance Jabra and Bose have all competed to introduce equal wireless earphones. Global shipments of all wireless earbuds are forecast to surge from 48 million pairs in 2018 to 129 million pairs by 2020, according to Counterpoint.

 

The strong growth momentum brings Apple the chance to accelerate diversification of production outside of China without the need of actually reducing volumes there. 'It’s very likely that Apple will adopt the 'China plus one' strategy when it comes to diversification efforts,' said Chiu Shih-fang, a supply chain analyst at Taiwan Institute of Economic Research. That suggested the company would improve production in countries outside China without limiting Chinese volume greatly at the start.

 

'Reducing significant volumes inside China is too sensitive now for Apple, as well as for its suppliers,' said Chiu. Moreover, initial diversification would involve 'shipping some half-finished goods to the new destination and then assembling all these together. It will not build all the things from the beginning to the end.'

 

Apple is sensitive to any concept that it might not be as committed to the country which has been a pillar of its success over recent decades. China has firmly backed Apple's manufacturing base, offering generous support for factories, infrastructure and energy and manpower costs. During the last two decades the company's presence has helped to create a high quality and deeply connected supply chain in a position to mobilizing hundreds of thousands of skilled workers and components at short notice.

 

But, China's low birthrate, ascending labor costs and the protracted trade tensions between Washington and Beijing have triggered Apple to review its reliance on Chinese factories, the Nikkei Asian Review first reported last month. Vietnam has appeared as a powerful alternative, thanks to the geographical proximity to China that benefits logistics, and to its lower cost, but tremendously skilled labor.

 

However, with just 95 million people - roughly one-fifteenth the Chinese population - Vietnam's workforce is constrained, and there are currently evidences of possible labor lacks and rising wage costs as many companies move there to get away from the fallout from U.S.-China trade tensions. President Donald Trump's threat to impose tariffs on Vietnam ahead of last month's Group of 20 summit has triggered concern among those looking to diversify to the Southeast Asian country. 'Many tech players are relocating or increasing production [in Vietnam] to avoid tariffs, given that it is close to China, and has a relatively complete supply chain compared with other Southeast Asian countries,' said Karen Ma, an analyst specializing in emerging markets at Hsinchu-based Industrial Technology Research Institute. 'However, everyone is now worried that Vietnam could become overheated and might soon suffer labor shortages, as well as increased production costs.'

 

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