Apple and the folly of outsourced manufacturing
Exporting jobs ... workers at a Foxconn factory in the township of Longhua in China's southern Guangdong province. Photo: Reuters
The electronics giant assembles its gadgets in China. But, according to new research, if it moved its production home, it would still be hugely profitable and create thousands of jobs.
An old rule states that you are only six degrees of separation from anyone else on the planet. For some people, however, the world is even smaller. So let me propose an amendment: you are only one relative, friend or acquaintance away from one of the late Steve Jobs's creations.
You may be browsing this on an iPad, one of the 30 million Apple sold last year. Or perhaps you're viewing it on an iPhone. Maybe your children are reluctantly putting away their iPods, of which Apple sells 5 million worldwide every three months (a remarkable figure, but half of the 10 million Jobs and his colleagues were shifting each quarter in 2008 and 2009).
And if you've really never done any of those things, rest assured your prime minister has. "The cool thing is that I now control my iMac from the iPad, to play out through the speaker," Britain's David Cameron boasted a few months after moving into Downing Street. It was one of those canny-to-the-point-of-irritating references he used to specialise in; a flash of his real-world accreditation.
As Cameron knows, Apple is a byword of everyday sleekness. Yet there is another way of viewing the company. Focus instead on the way it does business, and all those iPhones, iPods and iPads aren't just exemplars of design and user-friendliness: they are devices that destroy western jobs. And they do so needlessly, because if the California-based giant manufactured its goods in America rather than China, it could still make profits that would be the envy of every other US business.
This is, I know, an unorthodox position. When journalists or politicians discuss the way that western companies make goods in China, or anywhere else in Asia, they almost always start from the premise that this is how business is now done. This is the accepted logic of globalisation, which lets companies keep costs down, which allows the ordinary westerner to spend less money shopping, and which offers poorer nations in the east a means to develop their economies. Expensive shirts might still be made in Italy; high-end kitchens might be assembled in Germany - but the future of mass production lies in China.
Apple has made and benefited from that argument. In January, the New York Times ran a lengthy investigation of the technology firm's manufacturing processes, which began by disclosing a conversation in 2011 between Jobs and Barack Obama. The President asked why Apple products could not be made in the US. The most admired man in Silicon Valley was reportedly blunt: "Those jobs aren't coming back."
Very few people argued with that assessment. In other ways excellent, the New York Times piece had an elegiac tone, conveyed by the headline How the US Lost Out on iPhone Work. And the commentary went on in this it's-not-you-it's-me vein. It wasn't Apple's fault it didn't hire Americans to make its goods: it was America's. US workers weren't skilled enough; not enough of them were trained in engineering.
Such national self-abasement has the merit of at least feeling like a policy; but it's debatable whether on its own it really will pull in big employers. Apple, after all, used to base its manufacturing in the US. Jobs used to boast about how the Mac was "a machine that is made in America". And according to new research by the Centre for Research on Socio-Cultural Change (Cresc), it's clear that it would not only be affordable for Apple still to make its goods in America, it would remain hugely profitable.
Using a mix of Apple's own financial filings and industry data, the academics broke down the cost of making one product in particular: the 4G iPhone. Assembled in China, the cost of putting together one phone was $US178.45 ($173.47). Compare that with a sale price (including downloads) of $US630 and Apple makes $US452 on each phone: a whacking gross margin of 72 per cent.
Chinese labour accounts for a tiny proportion of the company's costs: $US7.10 for each phone, which accounts for about eight hours of assembly. So what would it cost to make the same iPhone in America? The Cresc team took the average wage in the US electronics industry of $US21 per hour and calculated that the total production cost would increase to $US337.01. That is a big jump - but it still leaves Apple with a gross margin of 46.5 per cent on each iPhone - a level that Cresc's Sukhdev Johal estimates would probably still make it the most profitable phone in the world.
So: two models of making one of Apple's most popular products, and two models for distributing the profits. The made-in-America model still leaves the California giant with a profit margin that most companies can only dream of, but would create hundreds of thousands of manufacturing jobs in the US to boot. That may strike you as laughably naive, but it's more akin to enlightened self-interest: just think of the way Henry Ford raised wages so Ford workers could buy his cars.
The made-in-China model, on the other hand, has carried no such social benefits, either in Apple's home country or in the People's Republic. Last year, Apple built up cash reserves of $US100 billion - more than the US government. Indeed, it was so much money that the company was stumped how to dispose of it. Tim Cook, who is now CEO of Apple, announced a few weeks ago that he would begin buying back shares and paying dividends to investors. Among other people who benefited from this arrangement was Cook himself, who was awarded $US376.3 million in Apple stock when he took over last year. That pile of shares is now valued at about $US634 million. The people who win from the made-in-China model are big investors and top executives.
In the case of Apple, outsourcing manufacturing is not about keeping costs to customers down - they are still paying huge prices for the latest handset or tablet computer. Nor is it about the company's survival: it would still do tremendously well were it to bring those factories back home. No, in the case of Apple, moving jobs offshore has become a way of directing ever more money to those at the top of American society.
This is not just my conclusion, or that of the Cresc team; it is backed up by the Asian Development Bank. In a 2010 study of an earlier model of the iPhone, ADB researchers concluded: "It is the profit maximisation behaviour of Apple rather than competition that pushes Apple to have all iPhones assembled in the PRC."
This division of labour has certainly not helped China very much. Foxconn, which makes those iPhones, has to work to an incredibly tough contract with Apple that forces it to keep all costs to a minimum. This surely helps account for why Foxconn, whose client list is almost a Who's Who of the smartphone sector, has had repeated troubles with its workforce, including at least 18 suicide attempts by workers in 2010 alone. After that, and the terrible publicity that followed, Apple put pressure on its subcontractor to raise workers' pay and improve conditions. But it didn't take the most obvious route of doing so, which would be: pay more to Foxconn, and direct it to use that surplus to increase wages.
The reason for concentrating on Apple in this fashion is not because it's a terrible company, but because it's an exemplary one. It has become the business success story of our age: the firm others want to emulate, and prime ministers want to name check. And yet there is a paradox here. For all the stylishness and sleekness of its products, the Apple business model is an unattractive and, over the long term, possibly an unsustainable one. It subcontracts work that offers the Chinese little prospect of economic development, while at the same time selling to Americans and others products they want but increasingly don't have the jobs or incomes to buy so readily.
Apple's rise to first among equals in the business world has coincided with a wider social trend: a general anxiety about the decline of the west. Some of the reasons for why America, Britain and others are on the slide are large and abstract. But some of the factors are smaller and closer to hand, like the iPhone in your pocket or the Mac waiting for you at home.
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