This weekend’s article in the New York Times about why Apple doesn’t manufacture its products in this country has generated a huge amount of discussion. The not so subtle message expressed in the article is that Apple would make iPhones and iPads in this country if Americans weren’t so inept at manufacturing things. My favorite quote from an Apple executive in the article is “We shouldn’t be criticized for using Chinese workers. The U.S. has stopped producing people with the skills we need.” This quote begs the question, what skills are needed by Apple’s contractor Foxconn to produce iPhones, iPads and other Apple products? The answer might surprise you.
If you are like me, I figured that Apple actually hired contractors like Foxconn to manufacture its products in China. If that was the case, the statement by the former high-ranking Apple executive quoted in the Times article would make sense; “The entire supply chain is in China now. You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.” That situation would be really handy if Foxconn actually made Apple’s iPhones and iPads from scratch in China. But actually they don’t. In fact, Chinese workers simply put together parts and components manufactured outside the glorious People’s Republic, contributing only about $9.00 of labor cost to each iPhone, about 3.6% of the total manufacturing cost. But hey, if a former high-ranking Apple executive says the entire Apple supply chain is in China now, it must be true right? Aren’t reporters supposed to check those kind of claims?
The “skills”mentioned by the former Apple executive seem to be (1) a willingness to routinely work 70 hours a week, (2) a willingness to stand for 8 hours at a time, and (3) a willingness to do mind numbingly repetitive tasks. Those “skills” are available in China at a very low hourly cost because there is a huge labor force that is desperate for work. But those “skills” are also available here, but you would have to pay people a lot more to do that kind of work. Yet people do that kind of work in this country. They are called electrical and electronic equipment assemblers and they make about $13.00 an hour. If Apple hired a subcontractor in this country to assemble iPads and iPhones in this country, these American electrical and electronic assemblers would cheerfully assemble Apple’s products. And according to the Times article, “various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.” In a previous post, I estimated that manufacturing iPads in this country and selling them for the same price as those produced by Foxconn in China would cut Apple’s profit margin from 55% to 39%. Gee, a 39% markup. I wonder if Apple could survive? You know, I kinda think they would.
But according to the writers of the Times piece, “building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies.” Man, that is a lot to have to do to make cell phones in this country. Have you tried transforming the national and global economies? I did last weekend and my back is still killing me. In all seriousness, the reason these economies would need to be transformed is because Apple and their ilk made a business decision to have its products assembled by contractors like Foxconn in Asia because it was cheaper; “A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85.”
Now Apple is in the business of making money and they made a business decision to move their production facilities from California where Mr. Saragoza worked to Foxconn’s facilities in China. While we can debate whether that decision was a good one, a patriotic one or a moral one, it was clearly a logical one from a business standpoint. And it has worked out really well for Apple’s bottom line. What bothers me about the Times article is the suggestion that Apple made its decision to move overseas because America is simply not up to the task of producing things anymore, rather than because Apple reasonably determined that they could make a higher profit margin by doing so. American manufacturers produce a lot of products that a far more complex than iPhones and they do so at a profit. If Apple wants to make more money by hiring a firm like Foxconn to produce its products abroad, so be it. But to argue that American manufacturers and American workers are simply not up the “challenge” of spending 9 hours assembling disparate subassemblies into an iPhone is silly.