Designed in California, Manufactured/Assembled in U.S.A.?

Since several years ago, almost all the Apple products sold were manufactured overseas, for example, iPhone, which says “designed by Apple in California, assembled in China” on the back of the product. However, maybe soon, iPhone will be manufactured and assembled in the U.S.

Photo by Doug Mills/The New York Times
  1. Concern

Apple buys components from more than 200 suppliers around the world and then sells them to one of its contract manufacturers based in China, Foxconn. [1] Foxconn, known as the largest Chinese supplier and assembling factory for Apple, manufactures computer components, display screens, and consumer electronics. Chinese government offered large incentive packages worth billions of dollars to Foxconn, to support Foxconn’s factory in Zhengzhou, China, which is central to the production of Apple’s best-selling and most profitable product, iPhone. The local government provided resources to help Foxconn build factory and nearby housing for employees. It also helped to build the infrastructure near the factory such as paving the roads and building power plants. The government even pays a bonus to Foxconn for meeting its target for exports. Foxconn enjoys tax benefit and many other compensations. [2] With the rise of isolationism and protectionism, and President Trump’s promise of bring manufacturing jobs back to the U.S., Foxconn is opening its U.S. factory in Wisconsin. Foxconn will invest $10 billion to create up to 13,000 jobs at the plant, that will be up and running by 2020, in exchange for the $3 billion incentive package. [3] However, failing to provide the minimum required number of jobs and wages will result in significant financial penalty for Foxconn and its parent company, Hon Hai Precision Industry Co. and Chairman Mr. Gou’s private company. [4] Put aside the government incentives, the problem for Foxconn is that can production level in the U.S. match the levels in China? Can Foxconn deliver its customer promise as efficiently as it does in its factories in China?

  1. Management’s action

Foxconn is still in trend of globalization. It is keep expanding its global strategic footprint and building “a global supply chain through cross-border strategic investments in the past years.” [5] The company’s goal is to “move closer to our customers and help them achieve faster time to market to create a win-win scenario.” [6] For Foxconn, setting up a factory in the U.S. is helping the company to stay close to some of the customers. The Wisconsin factory will be used to build liquid-crystal display technology, or LCD screens. However, it is likely that the other consumer electronic components such as metal casing for the new iPhone model will continue to be manufactured in China. There is also rising demand for consumer electronics in emerging markets in Asia, which will continue to be served by Foxconn’s factories in Asia in the short term and medium term. Even if Foxconn is now close to customers, can production level and yield match the levels in China?

  1. Recommendation

In the past, “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…Within 96 hours, the plant was producing over 10,000 iPhones a day. ’The speed and flexibility is breathtaking,’ the [Apple] executive said. ‘There’s no American plant that can match that.’” [7] Will the Wisconsin facility be able to deliver similar level of speed and flexibility? I have some doubt about that. Meanwhile, I would suggest that that workforce in Wisconsin to not be unionized.

Foxconn is trapped in this contract with the U.S. government. It has to manufacture LCD screens in the Wisconsin facility. Foxconn likely has three options in its future supply chain management. First is to continue manufacture other components in China and shipped them to the U.S. to be assembled together, then shipped the final products to customers worldwide. Second is to ship the LCD screens back to China to be assembled with other components then ship to customers worldwide. In both of these two scenarios, Foxconn will incur large costs from shipping back and forth. I prefer the third option, which is to bring other manufacture jobs to the Wisconsin factory. However, I’d need to do more analysis on the cost of labor and cost of shipping for Foxconn’s products in the long term. Foxconn can also try to negotiate better terms with customers (very unlikely to happen with Apple) and hope that there will be better margin for the products produced in the U.S. if the production yield is well-controlled and product mix is favorable.

  1. Questions

Will the Wisconsin factory be sustainable? Will it continue to provide job opportunities for American people? Are there ways other than isolationism that President Trump can do to create more jobs for American people?

 

(751 words)

 

[1] David Barboza, “An iPhone’s Journey, From the Factory Floor to the Retail Store,” Technology, The New York Times, December 29, 2016, https://www.nytimes.com/2016/12/29/technology/iphone-china-apple-stores.html, accessed November 2017.

[2] David Barboza, “How China built ‘iPhone city’ with billions in perks for Apple’s Partner,” Technology, The New York Times, December 29, 2016, https://nyti.ms/2iHpVtX, accessed November 2017.

[3] Julia Horowitz, “Foxconn’s Deal to Create 13,000 Jobs in Wisconsin: Where It Stands.” CNNMoney, Cable News Network, 21 Aug. 2017, money.cnn.com/2017/08/21/news/foxconn-wisconsin-deal-updates/index.html, accessed November 2017.

[4] Jason Stein, “Foxconn and chairman Terry Gou guarantee up to $500M for job creation at Wisconsin plant,” Journal Sentinel, November 8 2017, https://jsonl.in/2Am8fNh, accessed November 2017.

[5] Hon Hai Precision Industry 2016 annual report, p. 1, http://www.foxconn.com/Files/annual_rpt_e/2016_annual_rpt_e.pdf, accessed November 2017.

[6] Hon Hai Precision Industry 2016 annual report, p. 1, http://www.foxconn.com/Files/annual_rpt_e/2016_annual_rpt_e.pdf, accessed November 2017.

[7] Charles Duhigg and Keith Bradsher, “How the U.S. Lost Out on iPhone Work,” Business Day, The New York Times, January 21, 2012, https://nyti.ms/yGdOk7, accessed November 2017

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10 thoughts on “Designed in California, Manufactured/Assembled in U.S.A.?

  1. This was fascinating to read!
    I loved the questions raised throughout the essay and they made me think of even more.

    Although I understand the president’s urge to create job opportunities for American people, I could not help thinking about the devoted employees in China who came to work at midnight to fix the iPhone screens. Is this a culture Foxconn can apply to the US? is this a culture they even want to have in the US? How will moving Foxconn to the US effect the supply chain, especially when taking employee training time in consideration? How long untill both factories will reach the same efficiency? It may be closer geographically but will the outputs really be better? Does Apple have a say? If so, what is it and is this a risk Apple is wiling to take?

  2. This painted a very clear picture of the dilemma facing Foxconn and the pros and cons of producing the entire product in Wisconsin versus shipping components to the factors in Zhengzhou for final assembly. Of the options you listed, I actually prefer the first option (manufacturing components in China to be sent to the plant in Wisconsin to be assembled together.) Efficiency standards, according to your research, are lower in Wisconsin and I ultimately would presume that the decrease in efficiency would out-weight the cost-savings from shipping. By continuing to manufacture some of the more variable components in China, you can continue to utilize the workforce that can turn product around more efficiently.

  3. Interesting article!
    For me, one of the main concerns about isolationism and protectionism is to what point it really generates more jobs in the long term. As you pointed out, it is very unlikely that customers will be willing to negotiate better margins. On the other hand, all the alternatives proposed will likely increase production costs. I’m afraid that If Foxxconn gets pressured by a significant increase in their costs, they will probably have no alternative other than firing some of the employees to reduce overhead or investing in a automation to increase productivity. This second solution will also lead to reduction in the workforce.

  4. With rising wages in China, we’re already seeing many manufacturing jobs come back to the states, while others move to less developed countries in south east ASIA. It might make economic sense sometime down the road to manufacture iphones in the U.S., but there is no clear market advantage to doing so at this point in time. I think a better way to approach the issue of labor is to understand the macro economic and technological trends. In the future, it’s not only manufacturing jobs that will steadily be phased out by digitization and automation. Other jobs that require minimum creativity and human interface such as accountants will be replaced as well. Rather than focusing on bringing back old jobs that are already on the way out the door, the primary focus is to help create business environment that helps foster the development of new job segments.

  5. I agree that the core question for Foxconn and for their customers is whether they can match production levels in China with their new Wisconsin plant — or at least get close enough that the cost of lower efficiency is covered by the $3B incentive package provided by the government (US Taxpayers). However, I assume that Foxconn has done that analysis and has decided that the incentive along with the positive PR and any other externality-effects make the deal worthwhile.

    As someone without a strong opinion on isolationism politics, what is more interesting to me is whether this sort of proposal brings long-term benefit to Wisconsin or the US. If Foxconn decides that operating the US plant is less profitable than operating a plant elsewhere, will they simply pull out of the US at the end of the contract with the government? And if so, what will be the effect on Wisconsin? Presumably, if “iPhone city” is developed in Wisconsin, it will be a dominant employer in the region — what are the risks to US workers if those jobs disappear at the end of the contract? Are subsidies like this incentive package likely to continue? Faced with the threat of Foxconn pulling out of Wisconsin and laying off tens of thousands of US workers, will the taxpayers again be asked to subsidize extending their contract by offering more incentives?

    Separately I’m intrigued by the analysis that must have taken place forecasting the growth of demand around the world. As you mention, demand is increasing in emerging markets in Asia — at what point will it make more sense to be closer to those customers?

  6. Very interesting post!! It’s fascinating to think about the balance between lower cost outsourced production and the necessity of being in good standing with the company’s end customer country’s government and people. Foxconn’s move to produce a bit in the US reminds me of the times when Toyota was taking hold of the US car market and needed to build production facilities in the US to appease lawmakers’ and customers’ concerns about another country creating a superior product. I’m not quite sure how Trump’s ideas of isolationism will play out in the future.

  7. Interesting take on a somewhat controversial, but relevant, supply chain issue.
    A couple points I’d like to add
    1) I agree that shipping and transportation costs will likely have some part to play here. However, I would venture to say that because of the high value-density of iPhones, labor may be a more relevant cost.
    2) How can Foxconn create a business and supply chain that is resilient to future changes in administration?
    3) You state: “Meanwhile, I would suggest that that workforce in Wisconsin to not be unionized.” I would say it is generally best practice from what we have learned in TOM to have as much flexibility as possible if it does not come at additional cost. However, in the case of non-unionized workers, there is a cost. The cost is the power that works have, which is not directly borne by the company. I would challenge others to ask, that if there is no union, how will the workers push back on what are likely to be increasingly strong demands to, for example, wake up in the middle of the night and make iPhones?

  8. I was interested to read about the three business model options that you laid out for Foxconn: 1) continue to manufacture components in China, 2) begin shipping LCD screens back to China to be assembled with other components and then shipped to customers worldwide, or 3) bring other manufacturing jobs to the Wisconsin factory. Given that labor costs are materially cheaper in China than in the US, my intuition is that Foxconn should keep the processes that are most labor-intensive in China. In particular, I imagine that final assembly would require much more direct labor than manufacturing processes that are easier to automate with machinery. If this assumption holds, I would prefer the second option because it would help minimize labor costs. As we observed in our discussion about the Fuyao Glass case [1], when a large volume of small items (such as LCD screens) are shipped together, the cost can be distributed such that shipping costs are only a few cents per item.

    That said, one counterpoint to consider is that shipping costs will be more expensive for finished packaged goods (which would need to be shipped back from China to the US) than for components such as LCD screens. Ultimately, one would need to analyze whether round trip shipping costs exceed the labor rate differential between the US and China.

    [1] Shih, Willy. “Fuyao Glass: Americas Sourcing Decision.” Harvard Business School Case 618-007, August 2017. (Revised November 2017.)

  9. A couple questions have been posed in the comments to this article: Will the US factory survive long term, without government incentives? Can Foxconn keep labor-intensive activities in China while performing other activities in the US?

    Foxconn may be able to apply research and development to modify its products and processes in accordance with the comparative advantage of the United States. [1] We often see this phenomenon as technologies are transferred from one country into another. For example, a Chinese company importing a manufacturing process that originated in the United States could apply R&D to adapt that processes in a labor-using fashion (e.g. more workers, fewer machines to produce the same output). Or, as the price of materials increases relative to the price of value-added inputs such as capital and labor, a company may apply R&D to ascend the value chain and use fewer materials.

    Therefore, Foxconn may be able to succeed in the United States by applying R&D to innovate its products and processes in accordance with the comparative advantage of the United States. To do this it will need to conduct detailed pricing and productivity analysis of its factors of production in both the US and China.

    [1] Atkinson, A. B., & Stiglitz, J. E. (1969). A New View of Technological Change. The Economic Journal , 79 (315), 573-578.

  10. This has been an interesting story to watch unfold. In terms of the long-term sustainability of Foxconn’s U.S. operations, a couple additional risks I would raise:
    – Foreign companies operating in the U.S. are likely to not fair well if Trump’s tax plan passes (which is looking more likely by the minute) as a key tenet of the plan are excise and base-erosion taxes. This would at least partially offset the $3 billion incentive that Foxconn has been promised.
    – As more and more Americans are employed by a Chinese employer, the U.S. government and American citizens will likely start to raise questions about what the company does with the profits produced from its employees activities. As outlined in a recent WSJ article, a number of China’s tech giants have been criticized for helping Beijing “spy on its people.” [1] It will create a big challenge if Foxconn gets labeled by Americans / Wisconites as a company that helps the Chinese government suppress political dissent, facilitate surveilling its people, etc.

    [1] https://www.wsj.com/articles/chinas-tech-giants-have-a-second-job-helping-the-government-see-everything-1512056284

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