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NY Times Sunday: Why Aren’t iPhones Manufactured in the U.S.?

January 22, 2012

Today’s New York Times explains what the U.S. faces in order to compete for midwage jobs in high-technology manufacturing. The article profiles the history of iPhone manufacturing to make its point. In short

For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

This statement is important for two reasons. First, it completely counters the conventional wisdom that U.S. corporations move high-technology manufacturing overseas solely because of cheaper labor costs. The article makes the point, in at least three places, that labor costs in the U.S. versus China are not a significant factor for companies in locating their manufacturing. The article estimates that, of the hundreds of dollars in profit that Apple makes on the sale of each iPhone, the labor costs to locate manufacturing and assembly of the product in the U.S. would only be an additional $65.

The second important point is the key role supply chains play in manufacturing. This point is illustrated by explaining what happened when, a little over a month before the iPhone was to be shipped to stores, then-CEO Steve Jobs decided that the screen should be made of glass, rather than plastic.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

“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.”

Within 8 days of new glass being shipped to the Chinese facility, the plant was producing over 10,000 iPhones per day. According to one executive, “‘The speed and flexibility is breathtaking. There’s no American plant that can match that.'”

The iPhone is assembled in Foxconn City, a complex with 230,000 Chinese workers. Foxconn has dozens of facilities in Asia and Eastern Europe, and it assembles an estimated 40% of the world’s consumer electronics.

This blog has commented before on the issue of Globalization and the Labor Market. Just as corporations sell their products globally and compete globally with other corporations, they also hire workers from a global talent pool. This is especially true in high-skilled positions, which create U.S. jobs. However, with respect to high-technology manufacturing, China far outpaces the U.S. in terms of the scale of what it can offer corporations in global supply chains.

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