Apple: a homecoming from abroad?

Growing trade isolationism in the U.S. is putting pressure on Apple to bring outsourced jobs back to American soil.

In an increasingly globalized world, uncertainty about the future of employment has contributed to growing fear and anger in communities across the U.S. The loss and outsourcing of manufacturing jobs have reignited calls for protectionist trade policies. U.S. tech companies have been unwillingly forced to the forefront of this conversation, and Apple is no exception. Currently dependent upon offshore manufacturing, Apple is receiving pressure to reshore outsourced jobs from abroad.

President Donald Trump has publicly called upon Apple CEO Tim Cook to reshore jobs from China, supporting his campaign promise to revitalize U.S. manufacturing [2] [3]. These calls have contributed to a politicized debate about the role of tech companies in a shifting era of trade economics. Though economic theory suggests that offshoring increases global productivity, visible job loss across the U.S. has led to calls for more immediate solutions [4].

The growing trend toward trade isolationism poses a number of threats to Apple. By some estimates, a decision to move iPhone manufacturing back to the U.S. could cost the company over $4 billion [5]. However, if Apple doesn’t act, it risks furthering the sentiment that the company is no longer working in the best interests of American citizens. This narrative has already drawn unwanted media attention, including President Trump’s public declaration to impose stricter regulations on tech companies.  Trump’s promise to return to an era of “America First” have manifested in a move to more tightly regulate the H-1B visa program, which provides work visas to 65,000 foreigners a year [6]. Apple is one of numerous companies that relies upon this program to fill jobs.

Apple’s management team has not sat idly by in response to these allegations. In May of this year, CEO Tim Cook announced a $1 billion fund to invest in advanced manufacturing [7]. Cook stated that the fund is intended to foster American job creation, with a focus on better equipping Americans to take on manufacturing roles in quickly changing industries. The company also announced plans to invest in education to teach Americans coding skills, though it remains vague on specific plans to enact these programs [8]. The announcements were accompanied by a marketing campaign focused on the positive economic impact Apple has had in the U.S., with the company showcasing its domestic job creation metrics with a fresh web page [9].

In a longer-term bet, Cook is also bartering with the Trump administration in the hopes that Apple’s public signal of commitment to American job creation will be met with favorable tax policies. The administration’s recent tax reform proposal would lead to tax breaks on over $230 billion in corporate profits being held offshore [10]. In essence, Apple is negotiating its concession of job reshoring for more favorable long-term economic policies.

To further combat these challenges, Apple’s management should double down on investment in digital education and software development skills to prepare the next generation of workers. The National Association of Manufacturers estimates that over the next decade, nearly 3½ million manufacturing jobs will likely be needed, and 2 million are expected to go unfilled due to the skills gap [11]. By preparing children and young professionals with programming skills now, Apple can help to increase the number of workers hired domestically in the future. The company currently operates its “Hour of Code” program, which supplies free online content to allow anyone to teach coding basics in one hour, but deeper investment is needed [12].  Apple should partner with trade schools and community colleges to institutionalize curriculum that will better prepare students for software development and advanced manufacturing roles. These actions will also work to support the brand narrative that Apple is good for American workers.

In executing this strategy, Apple faces two major risks: 1) a perception that its actions are ingenuine, and 2) the potential to be seen as bending too far to government demands. However, these risks are worth taking on, as a strengthening narrative of the company as un-American and anti-competitive would be far more damaging to its ability to operate as an unrestricted entity in the future.

As Apple strives to balance its goals for long-term growth with growing calls for isolationist trade policies, it must tackle a number of unanswered questions:

  • Should reshoring jobs to the U.S. be incorporated into the company’s long-term strategy, or is it simply a solution to a short-term political trend?
  • How can Apple maintain its status as one of the most innovative brands in America while simultaneously conceding to demands that may make it less efficient?

(750 words)

 

Sources

1. Bureau of Labor Statistics, “U.S. manufacturing jobs rapidly declined since 2000”, CNN, (March 29, 2016), http://money.cnn.com/2016/03/29/news/economy/us-manufacturing-jobs/index.html

2. “Donald Trump’s New York Times Interview: Full Transcript,” The New York Times, (Nov. 23, 2016), https://www.nytimes.com/2016/11/23/us/politics/trump-new-york-times-interview-transcript.html

3. Black, T., Clough, R., and M. Niquette, “How Trump Plans to Keep Jobs in America: Pressure and Promises,” Bloomberg, (Dec. 1, 2016), https://www.bloomberg.com/news/articles/2016-12-01/america-s-jawboner-in-chief-uses-carrier-ford-to-send-a-message

4. Blinder, A., “Offshoring: The Next Industrial Revolution?” Foreign Affairs, vol. 85, no. 2 (2006): pp. 113–128.

5. Worstall, T, “If Apple Brought iPhone Manufacturing To The US It Would Cost Them $4.2 billion,” Forbes, (Sep. 25, 2013), https://www.forbes.com/sites/timworstall/2013/09/25/if-apple-brought-iphone-manufacturing-to-the-us-it-would-cost-them-4-2-billion/#74ab7cb8115f

6. Goel, V, “How Trump’s ‘Hire American’ Order May Affect Tech Worker Visas,” The New York Times, (April 18, 2017),https://www.nytimes.com/2017/04/18/technology/h1b-visa-facts-tech-worker.html?_r=1

7. Benner, K., and Schwartz, N., “Apple Announces $1 Billion Fund to Create U.S. Jobs in Manufacturing,” The New York Times, (May 3, 2017), https://www.nytimes.com/2017/05/03/technology/apple-jobs.html?login=email

8. Nellis, S., “Apple to create $1 billion U.S. advanced manufacturing fund,” Reuters, (May 3, 2017), https://www.reuters.com/article/us-apple-fund/apple-to-create-1-billion-u-s-advanced-manufacturing-fund-idUSKBN17Z2PI

9.  Apple public website. (Accessed Nov.13, 2017), https://www.apple.com/job-creation/

10.  Gibson, G.,  “U.S. companies push hard for lower tax rate on offshore profits,” Reuters, (May 15, 2017), https://www.reuters.com/article/us-usa-tax-repatriation/u-s-companies-push-hard-for-lower-tax-rate-on-offshore-profits-idUSKCN18B13Q

11. National Association of Manufacturers, “Top 20 Facts About Manufacturing,” (Accessed Nov.13, 2017), http://www.nam.org/Newsroom/Top-20-Facts-About-Manufacturing

12.  Apple public website. (Accessed Nov.13, 2017), https://www.apple.com/retail/code

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8 thoughts on “Apple: a homecoming from abroad?

  1. Great write up on a complicated and interesting topic! I recently read an interesting WSJ journal where Apple is quoted saying “It isn’t just that workers are cheaper abroad. The vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products”. Based on this quote, my understanding is that the amount of capital investment Apple would have to make in order for manufacturing to be feasible in the US seems to be insurmountable. Therefore, I would urge Apple to think of adding manufacturing jobs in the US as a long-term strategy rather than a short-term one as the level of CAPEX would not make sense for a short-term project. Also, instead of manufacturing jobs, I would urge them to think about longer term, sustainable jobs in the US such as engineering, customer service, and retail where the skills of the US population would allow workers to operate at the top of their license.

    In terms of maintaining their reputation for R&D and innovation, I believe that unless the government can provide Apple with tax breaks for this investment, Apple will need to raise their prices. Currently they are making about a 35-40% margin on iPhone sales, which now cost almost $1000. In order to maintain this margin, Apple would need to raise prices even further. In my opinion, the iPhone is now such a commodity product that I think demand is relatively inelastic and would absorb another price increase. However, I believe an argument can be made then that Apple is pricing so high that it is discriminating against the majority of the US population. Therefore, is Apple’s social mission canceling itself out? If it is providing jobs that provide Americans with more income, but then they cannot use that income to purchase one of the products they want, is that ok? To answer this, Apple needs to define if it is truly making products for all people.

  2. I really enjoyed reading about this issue! To respond to your two questions, I believe that reshoring jobs to the U.S. should ultimately be incorporated into the company’s long term strategy given the scale of costs involved, but the broader question is, what kind of jobs? I agree with Brooke’s point that certain aspects of manufacturing might be lost to the U.S. given the gains overseas, but if we were to disaggregate the manufacturing process, there might be areas where American expertise or even where more sophisticated machines and the operators required to use said machines might play a larger role (for example, producing more intricate parts or combining all the parts of an Apple product). This could not only benefit Apple politically, but also drive efficiency in their supply chain.

    With regards to your second question, I think oftentimes companies are most innovative in the midst of inefficiency, and so an argument could be made that this increased inefficiency would drive further innovation. Beyond that, my view is that Apple’s critical task as an organization is rooted in innovation and R&D, so they would be more likely to pass the increased costs from inefficiency on to the customer (given their dominant position in the market) or would eat the costs as they know improving their products is the only way they maintain their status in the market. I also believe that given Apple’s importance and their symbolic significance, the cost to reshore would not be as high as anticipated, as they would probably be able to negotiate significant tax benefits.

  3. Great article Maddy! The timing couldn’t have been better either, as only a week after posting a report from the FT surfaced Foxconn, the largest Apple product manufacturer in China, for having employed students in illegal working conditions to meet demand for the end of year demand surge. (http://fortune.com/2017/11/22/apple-iphone-x-foxconn-china-labor/) This definitely adds even more complexity to an already pretty controversial debate.

    However, I will respectfully disagree with some of the points of view stated above. At this point I don’t think of Apple as an American company, but a global company. Where they are headquartered should not drive by any means the place where they manufacture or where they set up their engineering or customer support facilities.

    In order to be able to pass on the cost benefit for the customers, Apple has the internal responsibility to find the places in the world where it is most cost effective to do all these things. Not the cheapest place, but the place that has the right mix of cost and quality.

    All in all, it is my particular perspective that it is not Apple’s responsibility to create jobs. It’s Apple’s responsibility to innovate in technology and to bring the future closer. On the other hand it’s the government’s role to foster job creation, but not at the expense of corporate freedom. If the current administration wants Apple to bring back all those jobs it should put in place the financial incentives for that to happen, and not threaten to place tariffs on imports that would only hurt the end consumer in the end.

    This is a very fine line to tiptoe, one which a lot of other large manufacturers are facing (hello car manufacturers!), thanks Maddy for opening up the debate!

  4. This is a great piece, and I find my thoughts strongly aligned with JJFG.

    When a sense of isolationism takes over, the role of corporations often gets cloudy. Apple’s contribution to the US economy is, at the end of the day, in the form of the taxes it pays (or doesn’t !).

    A number of national governments around the world have tried wooing Apple to manufacture in their respective countries, and each time Apple has taken a measured view of whether the opportunity is financially attractive or not. Invariably, the proposal has been rejected. Similarly, politics should not cloud Apple’s judgement when it comes to the US.

    Political leaders and movements are short-lived compared to the lives of large corporations and conceding to illogical demands should not even be on the table. Instead Apple must use its size and influence to a) contribute to American society through skilling, training and leading the development of revolutionary technology b) to lobby in Washington to ensure that no politically motivated move threatens the firm’s success – be it in the short term or longer.

  5. I think it really depends on what types of jobs Apple target to bring domestic. The assembly line in my hometown Zhengzhou back in China adds less than $15 in the whole supply chain. Therefore, although it seems to help create jobs in China, it may not be the case in US since the hourly wage is so low that US workers will not find it attractive at all. More importantly, the job is so repetitive and boring that I doubt even when the financial compensation is competitive, millennial in the US are willing to take the job.

    In addition, since Apple sources lots of components from Taiwan, Korea and Japan, the geographical proximity also plays an important role. My hometown is 3 hours’ flight from Korea and 4 hours’ flight from Japan and Taiwan. Therefore, the components can be shipped by air directly from suppliers, assembled in the factory just next to the airport and then the finished goods can be shipped by air again to Hong Kong where finished goods are shipped all over the world. Thus, considering the logistics and transportation costs involved, it may not make sense economically in both long & short term for Apple to relocate the assembly jobs back onshore.

  6. Thanks for the article, Maddy! Both your write-up and the comments above have provided some valuable perspective on the topic.

    Ultimately, I do not think it is in Apple’s best interest to bring manufacturing back to the United States, as part of a long-term strategy. As you mentioned, the financial implications of such a move would be enormous. Beyond that, as one of the country’s largest and most visible corporations, Apple may be one of the few companies that can withstand pressure from the federal government (as previously seen in 2016 (1)). Accordingly, I was surprised when Apple announced its $1B fund to invest in “advanced manufacturing.”

    Ultimately, I think this short-term reaction will eventually be seen as a savvy move. First and foremost, Cook lessened the governmental pressures on Apple. Additionally, I would speculate that Apple’s fund also served (at least) two ulterior motives. First, acquiescing to the governmental pressures may open the door a future tax holiday or reductions in the corporate tax rate. Second, in your NYT article, “advanced manufacturing” is described as involving high-value added in sectors like technology, automobiles, etc. Accordingly, it is possible that this fund is investing in Apple’s business (e.g., driverless cars) as they would have normally done, even without governmental interference. Only time will tell!

    (1) https://www.nytimes.com/interactive/2016/03/03/technology/apple-iphone-fbi-fight-explained.html

  7. This is a tough one. I agree with Anton in the sense it’s not easy to break up the individual component manufacturers for the iPhone. Logistically, it’ll be a nightmare for Apple. Additionally, shifting a portion of the supplier base to the U.S. could create negative PR in the Asian countries, thereby (potentially) deterring Asian consumers from purchasing Apple products. Apple has to be prepared to manage this reaction. In a time where local companies are being favored by consumers over American companies (Didi for Uber, Alibaba for Amazon, Samsung for Apple), Apple needs to proceed with caution. Countries like China are not just an important part of the Apple supply chain, they are a critical part of the demand story. To put things in perspective, Smartphone penetration in China is ~50% vs. ~70% in the US. All in all, this is a complicated balancing act for Apple – it’ll be interesting to see how things play out.

  8. Maddy, thank you for writing this piece! It was a great read. It’s a complex and politically-charged topic, but an important one, so I appreciate hearing your thoughts on the issue.

    I agree with much of what you said, but I don’t think that Apple’s actions will necessarily be viewed as disingenuous or pandering to political pressure. At the end of the day, Apple is a major corporation that will last beyond presidential terms, and making decisions based on current political trends is risky as legislation may change as presidencies come and go.

    I do believe, however, that creating U.S. jobs should be incorporated into Apple’s long-term strategy. This not only helps them strengthen their brand in the U.S., but it also is good for business. As you correctly mentioned, there is a dearth of technological talent and as Apple continues to innovate, it will need to have the right people in its organization. Therefore, investing in technological education and training will help the company’s future. Some jobs do not need to be reshored. There are some jobs in manufacturing that may be better off overseas because of shipping and logistics. Overall, there is no one-size-fits-all solution and each job type will need to be evaluated on a case-by-case basis.

    Because investing in education and training is mutually beneficial for Apple and for U.S. citizens, I don’t believe that Apple is conceding to demands that will make it less efficient. Rather, I see this as an investment for the long-term, and investments usually require substantial upfront cost.

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