Friday, February 3, 2012

Apple and Manufacturing

When one considers the closing of domestic factories and the moving of production to Asia, thought usually turns to labor rates and how difficult it is to compete with the cheaper labor available there. Several recent articles have focused on Apple and its overseas manufacturing. When it comes to consumer electronics, the picture presented is much more complex, and much more disturbing.

An article in The Economist provides us with this fiscal breakdown of iPad manufacturing.

"iPads are assembled in Chinese factories owned by Foxconn, a Taiwanese firm, largely from parts produced outside China. According to a study by the Personal Computing Industry Centre, each iPad sold in America adds $275, the total production cost, to America’s trade deficit with China, yet the value of the actual work performed in China accounts for only $10."

So the actual labor intensive-assembly costs are about 2% of the total—negligible compared to Apple’s incredible 30% profit margin. Would assembly costs in the US be so much greater than in China that the offshoring was required? Or is something else in play here?

Two fascinating articles in the New York Times provide us insight into Apple’s motives and methods: How U.S. Lost Out on iPhone Work by Charles Duhigg and Keith Bradsher, and In China, Human Costs Are Built Into an iPad by Charles Duhigg and David Barboza. The first article is focused on Apple’s economic motives and desires, the second concentrates on how Apple’s methods impact the Chinese workers who provide its products.

To evaluate the importance of labor costs in assembly of products, consider this quote detailing the experience of an Apple employee who had worked in a US Apple facility.

"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."

Those numbers, in themselves, would not justify shutting a facility and moving everything to China. Then comes this remark from Mr. Sargoza which provides the key.

"‘We were told we would have to do 12-hour days, and come in on Saturdays,’ Mr. Saragoza said. ‘I had a family. I wanted to see my kids play soccer’."

Apple’s goal was not to just become more efficient in its final assembly process, it wanted to create greater efficiency in its entire component supply chain. It apparently concluded that while it could increase productivity by driving domestic workers harder, there were regulations against what they wanted to do, and the workers would not stand for it. They also wanted to be able to extract these same "efficiencies" throughout their supply chain, but domestic suppliers would also run into the same problems. Walmart and others had already demonstrated that enormous profits could be made by taking advantage of both cheaper Asian labor and the ability to bypass the human decency regulations that have accumulated in developed economies. Another bonus was the option of ignoring environmental regulations.

So Apple moved to China with the intent of making their entire manufacturing process cheaper and more efficient. What has this meant for Apple and the Chinese people?

Much of Apple’s assembly is performed at what is referred to as Foxconn City.

"The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. ‘The scale is unimaginable,’ he said.

"Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks."

The article provides an example of the benefits that accrue to Apple from this type of regimentation.

"Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight."

"A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day."

 If one wishes to build on this scale, then one must be able to supply on this scale.

"’The entire supply chain is in China now,’ said another former high-ranking Apple executive. ‘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’."

Apple learned from Walmart how to use its power. Once you make a supplier dependent upon your business, then you own that supplier. You use your power to control costs. If the supplier meets your specifications then you come back and demand even lower costs. Eventually, the supplier must exceed work rules, cut back on safety, and abuse environmental laws in order to continue to meet demands. This non-virtuous cycle is only limited when injuries, sicknesses and deaths become noticed by Chinese officials and US consumers.

These events occur at facilities working for Apple. Foxconn was in the news recently due to a distressing rise in suicides among its workers. Riots and work stoppages are common occurrences in China. While companies like Gap, Nike, and even Walmart have responded to public criticism by their consumers, there is little pressure on Apple to change its ways.

"Given Apple’s prominence and leadership in global manufacturing, if the company were to radically change its ways, it could overhaul how business is done. ‘Every company wants to be Apple,’ said Sasha Lezhnev at the Enough Project, a group focused on corporate accountability. ‘If they committed to building a conflict-free iPhone, it would transform technology’."

Walmart had the power to transform the retail industry. It forced lower prices and lower wages on the world. It has suffered criticism for its methods and its impact on society. Some think Apple wields the same influence. It has been granted a free ride.

"But ultimately, say former Apple executives, there are few real outside pressures for change. Apple is one of the most admired brands. In a national survey conducted by The New York Times in November, 56 percent of respondents said they couldn’t think of anything negative about Apple. Fourteen percent said the worst thing about the company was that its products were too expensive. Just 2 percent mentioned overseas labor practices."

Apple is said to be sitting on almost $100 billion in unused profits. People are beginning to wonder what they could possibly do with all that cash. Walmart at least had the decency to share some of its massive profits with its customers in the form of lower prices. It would seem that Apple has no such intentions. Why should they?

Some see another dark side to Apple’s success, leading to an additional non-virtuous cycle.

"In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in America, much of the employment has occurred abroad. Companies have closed major facilities in the United States to reopen in China. By way of explanation, executives say they are competing with Apple for shareholders. If they cannot rival Apple’s growth and profit margins, they won’t survive."

Why worry about the hollowing out of our economy and suffering in far-off China when one is experiencing the joy of yet another gadget that he suddenly discovered that he could not live without?

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