They had been staff from Foxconn Technology Group—the world’s largest electronics producer—who had been fleeing the corporate compound. Some scaled barbed-wire fences to flee; others walked 25 miles to get residence. 

Just a few days after the mass exodus, China locked down the commercial park the place Foxconn’s Zhengzhou services are situated, often called “iPhone City.” That additional remoted the services’ 200,000 staff, who had been beforehand requested to work inside a “closed loop” system due to a COVID outbreak, during which they sleep, dwell, and work inside a chosen space remoted from the surface world. The closed loop system left Foxconn’s staff uncovered to the virus and lacking primary requirements, which drove them to flee. 

This isn’t the primary lockdown at a Foxconn manufacturing facility. Foxconn services throughout China suffered manufacturing hits a number of instances this yr owing to government-enforced lockdowns and closed-loop systems. As a results of the latest disruptions in Zhengzhou, together with each the lockdown itself and earlier employee escapes, manufacturing at Apple’s favourite iPhone manufacturing facility has slipped to “significantly reduced capacity,” the Cupertino-based firm acknowledged in a be aware final week.

For practically three years, firms like Apple have operated with the uncertainty of not realizing when and the place the following lockdown will strike—and for a way lengthy—owing to Beijing’s strict zero-COVID playbook, underscoring the dangers of being overdependent on Chinese factories. 

Those lockdown uncertainties, mixed with rising Sino-U.S. commerce tensions, has led Apple to speed up its seek for new manufacturing hubs. And India has emerged as one clear winner, with some analysts betting that the world’s third-largest economic system is on a quick monitor to turning into one in all Apple’s favored suppliers.

Unpredictability 

Beijing’s dogged pursuit of zero-COVID has locked folks in purchasing malls and workplace buildings, on factory floors, and even in Disneyland. China’s virus containment measures, a number of the harshest on this planet, have fueled nervousness, despair, and psychological trauma. 

For world companies working in China, the federal government’s virus containment technique has translated into main manufacturing and gross sales disruptions. 

Shanghai’s grueling 60-day spring lockdown prompted Starbucks’ China gross sales to plunge 40% in that quarter; Tesla delivered 18% fewer cars in the identical interval, in contrast with the earlier quarter. Over the spring and summer season, Apple lost $4 billion in anticipated iPad and Mac gross sales alone. As a results of China’s virus containment measures—which show no end in sight—enterprise sentiment has tanked. Only 55% of companies surveyed by Shanghai’s American Chamber of Commerce in October stated they had been optimistic about their five-year enterprise outlook in China. It was the bottom studying within the survey’s 23-year historical past.

China’s adherence to zero-COVID, alongside rising Sino-U.S. commerce tensions, has made it more and more tough for companies to “solely rely on Chinese suppliers for product,” Patrick Penfield, professor of supply-chain observe at Syracuse University, instructed Fortune.

“Many multinationals in China are struggling to maintain production, receive supplies, and meet demand,” he stated. 

Foxconn’s mass employee escape and subsequent lockdown in Zhengzhou solely reinforces the “severity” of China’s virus containment technique, Edith Terry, managing director at consultancy Cotton Tree Advisors, which focuses on enterprise and public affairs in East Asia, instructed Fortune. 

The penalties of China’s zero-COVID coverage is an “absolute gut punch for Apple in its most important holiday quarter,” Dan Ives, managing director at funding agency Wedbush Securities, tweeted final week. “We estimate this negatively impacting roughly 3% of iPhone sales this quarter based on…China production [and] supply issues. The albatross continues in China,” he stated. 

Zhengzhou is an important web site for Apple’s iPhone manufacturing, significantly its latest fashions. iPhone manufacturing may sluggish as much as 30% due to the latest occasions—unwelcome information for the electronics big forward of the vacation season. Apple stated on Sunday that it’ll make fewer iPhones and shipments might be delayed. Unpredictability in Chinese provide chains has created obtrusive uncertainties for corporations like Apple that “rely on a stable supply of goods from China,” Chris Tang, distinguished professor in enterprise administration at UCLA, instructed Fortune. 

“For this reason, Apple now has no choice [but] to diversify its supply base.”

And that base, he added, is shifting to rising markets like India and Southeast Asian nations.

Once-in-a-lifetime alternative 

In latest years, India has courted multinationals with the goal of turning into the world’s high electronics and smartphone manufacturing hub. In June 2020, it introduced a $6.6 billion incentive scheme to draw world corporations to provide their electronics in India. 

The Modi authorities has acknowledged the present second as a “once-in-a-lifetime opportunity” to sway world firms as China’s zero-COVID technique rattles their provide chains, Akshobh Giridharadas, adviser at enterprise advocacy group U.S.-India Strategic Partnership Forum, instructed Fortune. “India has limited time—and [Narendra Modi] realizes that. The government is fast-tracking policies that will give India an advantage as companies increasingly diversify their supply chains,” he stated.

India’s sturdy state help for smartphone manufacturing, coupled with its massive labor power of expert and younger professionals, is incentivizing the world’s mobile-phone makers to ramp up manufacturing within the nation, Tarun Pathak, analysis director at smartphone-focused consultancy Counterpoint Research, instructed Fortune. And one key promoting level that differentiates India from different rising markets is its huge market measurement. 

“Foxconn moving production to India from China is also about getting closer to a high-growth market, rather than, say, following U.S. policy signaling to contain China,” Terry stated. Apple additionally needs to dominate India’s fast-growing high-end smartphone market, which is predicted to hit 10% subsequent yr from 7%, Pathak stated.

Now, consultants say, India is shortly turning into a well-liked manufacturing facility hub of Apple’s at China’s expense. 

In September of this yr, Apple started manufacturing iPhone 14s at a manufacturing facility outdoors the town of Chennai—the primary time ever that the Cupertino-based firm has primarily based manufacturing of its latest smartphones in India, marking a serious shift in its manufacturing technique. 

After the most recent Zhengzhou lockdown, Apple requested a second provider—Taiwan’s Pegatron—to begin cranking out its newest iPhone mannequin in Tamil Nadu, in line with a Bloomberg report. Foxconn now plans to quadruple its India workforce within the subsequent two years to 70,000, says a Reuters report.

Analysts now count on an even bigger and quicker-than-expected iPhone manufacturing shift to India. In September, JPMorgan analysts predicted that India may produce 5% of Apple’s iPhone 14 stock and 25% in three years. Ming-Chi Kuo, an Apple-focused tech analyst at Hong Kong–primarily based TF International Securities, said last week that the Zhengzhou lockdown prompted Foxconn and Apple to speed up iPhone manufacturing in India. Kuo expects iPhones made in India—nonetheless by Foxconn—to develop by not less than 150% subsequent yr. 

“Foxconn’s medium- to long-term goal is to ship 40% to 45% of iPhones from India, versus the current 2% to 4%, meaning Foxconn’s iPhone production capacity in India will increase rapidly in the next few years,” Kuo suggests.

Pathak believes that Apple “can scale in India” with iPhone manufacturing within the nation prone to double subsequent yr. But he argues that India contributing half of all iPhone meeting worldwide is an “ambitious” objective owing to China’s still-outsize position within the iPhone provide chain and stiff competitors from different rising markets.

Apple isn’t alone in diversifying its manufacturing to India. Rivals like Samsung, Xiaomi, and Google (which makes the Pixel smartphone), are additionally shifting manufacturing to India. From 2021 to 2022, India’s smartphone manufacturing surged 126%, making the nation the world’s second-biggest smartphone producer behind China.

Companies like “Apple, Abbott, Boeing-Tata, Flex, Pratt & Whitney…are just the start of this wave” of multinationals shifting to India, Gunjan Bagla, India managing director at enterprise consultancy Amritt and enterprise professor at Arizona State University, instructed Fortune.

Still, India must construct out the infrastructure and expertise that these firms want. China nonetheless gives environment friendly and high-value manufacturing networks that Apple—and different multinationals—will discover tough to interchange in India, Paul Hong, distinguished professor of world supply-chain administration on the University of Toledo, instructed Fortune. India imports the majority of iPhone elements from China. “For Apple, completely decoupling from China [is] not realistic in the short run,” Hong stated. Rather, firms at the moment are pursuing a “China plus one” technique that sees them retaining operations in China, however diversifying provide chains to India and competing economies like Vietnam and Mexico, Bagla stated.

The Chinese authorities have now lifted the lockdown in Zhengzhou, however the Foxconn compound remains underneath a strict closed-loop system, with firm and authorities officers offering no indication of when it’s going to finish.

And India will proceed in its mission to make the most of China’s zero-COVID ache, Giridharadas argues. 

“India is only getting started.”