Mary Shacklett considers the issue of Apple's overseas manufacturing operations, which recently came up in a Presidential debate.
It was recently, in the second Presidential debate, where the fact that all iPhones are manufactured in China was again brought up by CNN moderator Candy Crowley. The argument most of us hear is that the cost of labor is so much lower in China than in the U.S. that it just makes sense to manufacture there — but it's not stopping other companies like Lenovo from opening manufacturing plants in the U.S. — and there is still a contingent of Americans out there who either remember or watch enough Turner Classic Movies to know that there was a time during World War II when companies worked together and invested in the U.S. for the war effort, because they felt it was an obligation to the country that had given them their starts, their profits, and their opportunities.
Of course, there is more to it than that now. If you're a C-level executive in a publicly traded company today, you're assessed every quarter on your financial results by your stakeholders. Stakeholders look at the bottom line, and a favorable bottom line is attained with great revenues and low costs. "I wanted to manufacture my goods in the U.S. because I wanted to feel I was making a difference by providing new jobs," one frustrated CEO told me several years ago. "But when we looked at our costs, which were one-third of what they would be in the U.S. if we manufactured in China, and the ultimate price for the finished product that the market would bear, we couldn't afford U.S. manufacturing." Add to this the market opportunities themselves, which corporate executives are loyal to. In iPhone's case, there are some who believe that China will become its largest market.
There are also questions about flexible manufacturing and engineering options. Taiwan-owned Foxconn employs around one million people throughout China and performs work for many high tech companies, including Microsoft, Nokia, Apple and others. It was Foxconn employees who performed the assembly work on the iPhone5.
Foxconn doesn't only have inexpensive manufacturing and assembly labor. It has a labor pool that is ready, willing, and able to scale out to any level of manufacturing activity dictated by a surging market demand-and to scale down just as quickly. This isn't only "grunt" labor, either. Skilled engineers are available at virtually no cost. They were quickly dispensed to work on the non-scratchable iPhone glass screen that Apple wanted. Asian supply chains were able to quickly bring together all of the components for these devices with minimal delay, including rarer metals, which were available from local sources. Then there were the materials themselves for iPhone5, which were uniquely engineered to make the device 20 percent lighter and 18 percent thinner.
Ultimately, all iPhone users benefit from this. The fit, form and function of the device are improved. The company's ability to keep up with demand assures that we can get an iPhone right away. Just as importantly, the cost of the iPhone5 doesn't change from what an initially introduced iPhone4 or iPhone 4S costed.
Nonetheless, there is also a cogent argument for doing some investing here.
Last month, labor riots erupted in Taiyuan, the Chinese city where the iPhone5 was manufactured. Eighty thousand people took to the streets, and daily activities were disrupted.
Disruptions like this create risk for manufacturers and their supply chains. There is sound business sense in considering alternate manufacturing sites so that one of these disasters doesn't upset product plans-and the U.S. offers the stability and a large and proximate consumer market that could offset these risks. Investing here in production isn't a bad thought, either — not even for the most hardened financial professionals. If there is a major disruption to your primary offshore production facility, be it geological, meteorological, social or other, at least you don't have all of your production, engineering, and innovation eggs in one basket. We all understand that the loudest sound that most executives listen to is the ring of the cash registers as consumers flock into stores for iPhone5s and iPads — but Apple would likely gain some brand benefit for making a "Made in USA" effort with its latest technology.