Trump’s demand that Apple must make iPhones in the US isn’t actually that crazy
When American companies moved manufacturing to China, it was all about cost. China’s wages were among the lowest in the world, and its government subsidized and turned a blind eye to labor abuses and environmental destruction. Things have changed. Labor, real estate, and energy costs in China have risen to the point of being comparable to parts of the United States. Subsidies are more difficult to obtain and the Chinese workforce does not tolerate the abuses it once suffered. China is now a more expensive place to manufacture than Indonesia, Thailand, Mexico and India according to the Boston Consulting Group.
Add to that the Chinese government’s efforts to spur local innovation – by forcing foreign companies to reveal their intellectual property and use local suppliers – and you have a strong incentive to outsource manufacturing.
But Apple is in no way looking to leave China, its second market. He just announced a $1 billion investment in Uber rival Didi Chuxing. He clearly saw a big market opportunity and a way to appease the Chinese government.
However, technology is changing the labor cost equation even further and China is becoming unpredictable due to its faltering economy. It may be wise for Apple to locate some of its manufacturing closer to other markets just to hedge against this uncertainty.
What changes the work situation is robotics. Robots can now perform the same manufacturing tasks as humans – for a fraction of the cost. A new generation, from companies such as Boston’s Rethink Robotics, Switzerland’s ABB and Denmark’s Universal Robots, are skilled enough to thread a needle and nimble enough to work alongside humans. They can do repetitive and boring circuit board assemblies and packaging boxes. These robots cost less than $40,000 (about Rs. 27 lakhs) to buy and as little as a dollar per hour to operate. And unlike human workers, they will work around the clock without complaining.
The barrier to offshoring manufacturing for any company like Apple is the link to the supply chain of the electronic components of its products. So the key question is: how dependent is Apple on its supply chain in China?
In 2015, the supply chain for Apple products consisted of 198 global companies with 759 subsidiaries – so it’s quite complex. Seamus Grimes of the National University of Ireland and Yutao Sun of Dalian University in China studied each of these subsidiaries and interviewed leaders of those located in China. The goal of their research was to advise China on how it could move up the value chain and entice foreign companies to cede more of their intellectual property to it. The article they published, however, gives another interesting insight: how few of Apple’s technology suppliers are actually Chinese.
The authors studied each of the 759 subsidiaries and categorized electronic components into core, non-essential, and assembly-related components, with expensive and intellectual property-dependent technologies designated as essential. They learned that 336, or 44.2%, of these subsidiaries were manufacturing in China; 115 were in Taiwan; and 84 in Europe or the United States.
When the researchers looked at the ownership of subsidiaries that manufactured in China, they found that only 3.95% were Chinese. And only 2.2% of major component suppliers were Chinese. The largest proportion, 32.7%, was Japanese; 28.5% were American; 19.0% were Taiwanese; and 6.5% were European.
Simply put, more than half of the components in Apple products are imported into China, and virtually none of the important core technologies are made by Chinese companies. Foreign companies don’t trust China, and almost all the intellectual property in Apple products comes from outside.
This means that value chains could be shifted over time. This begs the question: how much would it cost to move manufacturing to the United States?
For that, it may be best to look at what Apple’s manufacturing partner, Foxconn, is doing in India. The Economic Times reports that Foxconn is finalizing negotiations to build a $10 billion (about Rs 66,955 crore) factory to manufacture iPhones in India. The report predicts that it will take 18 months for this to be operational.
India has a labor cost advantage over the United States, but robots could wipe it out. Similar manufacturing facilities could be set up in the United States on a product-by-product basis.
Of course, it will not be easy and the risks are many. But it’s certainly possible for Apple to bring manufacturing back to the United States. If Apple can do it, most other companies can too. their value chains are much less complex than Apple’s.
So it may be that for once, Donald Trump’s rant is not so crazy.
© 2016 The Washington Post