Why Apple Makes iPhones In China And Why The US Is Screwed

(Editor's Note: A friend sent me this and I thought it was something others should see and understand. It says a lot about globalization, and why America can't compete anymore. One of the things it stresses is the nimbleness and adaptability of Chinese business, and how they can build plants quickly. Read this and the companion article that has a link at the end, and then think about what it would take just to permit a plant — especially here in Washington — like the Chinese can build seemingly almost overnight.)
 
From LinkedIn Insider

By Henry Blodget
The manufacturing processes of Apple and other electronics companies have come into sharp focus of late, with the revelation of more details about what life is like for the Chinese workers who make the world’s gadgets.

When one reads about these working conditions — 12-16 hour shifts, pay of ~$1 per hour or less, dormitories with 15 beds in 12x12 rooms — the obvious assumption is that it’s all about money:

Greedy manufacturers want to make bigger profits, so they make their products in places with labor practices that would be illegal in America.
And money is certainly part of it.

But an amazing new article by Charles Duhigg and Keith Bradsher of the New York Times reveals that there’s a lot more to it than that.

The article illustrates just how big a challenge the U.S. faces in trying stop the “hollowing out” process that has sent middle-class jobs overseas — and, with it, the extreme inequality that has developed in recent years.

The reason Apple makes iPhones and iPads in China, the article shows, is not just about money.

Manufacturing an iPhone in the United States would cost about $65 more than manufacturing it in China, where it costs an estimated $8. This additional $65 would dent the profit Apple makes on each iPhone, but it wouldn’t eliminate it. (The iPhone average selling price is about $600, and Apple’s average gross margin is about 40%. So Apple’s gross profit on each iPhone is probably in the neighborhood of $250.)

The real reasons Apple makes iPhones in China, therefore, are as follows:

Most of the components of iPhones and iPads — the supply chain — are now manufactured in China, so assembling the phones half-a-world away would create huge logistical challenges. It would also reduce flexibility — the ability to switch easily from one component supplier or manufacturer to another.

China’s factories are now far bigger and more nimble than those in the United States. They can hire (and fire) tens of thousands of workers practically overnight. Because so many of the workers live on-site, they can also press them into service at a moment’s notice. And they can change production practices and speeds extremely rapidly.

China now has a far bigger supply of appropriately-qualified engineers than the U.S. does — folks with the technical skills necessary to build complex gadgets but not so credentialed that they cost too much. And, lastly, China’s workforce is much hungrier and more frugal than many of their counterparts in the United States.

On this last point, Duhigg and Bradsher tell the story of Eric Saragoza, an engineer who began working in an Apple factory near Sacramento in 1995. The plant made Macs, and for a few years, Saragoza did well, earning $50,000 a year, getting married and having kids, and buying a house with a pool.

Soon, however, Apple started shipping jobs overseas, because the costs of manufacturing in Asia were so much lower. Importantly, these reduced costs weren’t just about wages — they were about being closer to the supply chain and the willingness of the workforce to put in over-time.

Saragoza was soon asked to work 12-hour days and come in on Saturdays. But, understandably, he wanted to watch his kids play soccer on the weekends.

Saragoza’s salary was too high for him to take an unskilled job. And he didn’t have the experience and credentials necessary to move into senior management. In 2002, his job was eliminated. Apple, meanwhile, turned the Elk Grove plant into an AppleCare facility, with call-center employees making $12 an hour.

Recently, desperate for work, Saragoza took a job at an electronics temp firm. Assigned to the AppleCare plant, he was paid $10 an hour to test repaired iPads before they were sent back to customers. That job paid so little (and was presumably so depressing) that the now 48-year-old Saragoza quit and is looking for work again.

Meanwhile, in Shenzhen, a young project manager named Lina Lin coordinates the manufacture of Apple accessories for a company in the Apple ecosystem. She makes a bit less than Saragoza made a decade ago as an Apple engineer. She lives in an 1,100-square foot apartment with her husband, their in-laws, and their son. They save a quarter of their salaries every month.

There are lots of jobs in Shenzhen, Lin says.

So, yes, money is part of why all of our gadgets are built in China. But what started a couple of decades ago as a reach for efficiency has now resulted in the entire electronics-manufacturing ecosystem being lifted up and transferred to China.

Apple doesn’t build iPhones in the United States, in other words, because there is no longer an ecosystem here to support that manufacturing. There’s no supply chain, there aren’t enough super-low-cost workers, and there are not enough mid-level engineers. And many Americans looking for work are still hoping for a return to jobs, salaries, and lifestyles that have simply disappeared.

This is a complex problem, and there’s no easy solution. But it’s a problem this country is going to have to fix. Or the massive middle class that once drove America’s prosperity will just cease to exist.

Now go read Duhigg and Bradsher...