Who is making your next iPhone?

With the rising protectionism in the world, where is Apple manufacturing its next iPhone? Would Apple be forced to price this already high-end device even more expensive? Or robots will help reduce the cost?

Protectionism swept across continents, from the election of Donald Trump in US to Brexit in UK. Potential policy changes, such as increasing cross border tariff, restriction of imported goods and immigration, will have big impact on today’s global supply chain. And China’s isolation on strict control of information technology has already been affecting many companies, especially in the technology industry.

Apple, long named one of the best supply chain companies in the world, benefits significantly from an integrated global supply chain. An iPhone is a product of the world – designed in US with components from Japan, Taiwan, china and Korea, finally assembled by Foxconn’s factory based in China. Any changes affecting cross border trading could create a ripple effect along the supply chain.

Best place to manufacture the next iPhone

Apple is famous for its lean supply chain management. An iPhone is produced and shipped directly from the assembly line in China to a customer anywhere in the world. With only one warehouse in California to supply all retail stores in the world, Apple achieves an inventory turnaround of 3.2 days. [1] A potential high import tariff suggested by Donald Trump or restriction of foreign produced goods means that this model would no longer work. To avoid the risk, manufacturing in US could be an option. However, four times higher labor cost and lack of supplier ecosystem in US does not make it feasible any time soon. Otherwise, Apple has to increase iPhone price by at least $60. [3] Brazil is such a case. High import tariffs forced Apple, Foxconn to manufacture iPhones in São Paulo. The phones retail for 50% higher than the Chinese made iPhone in US as indicated in the figure below. In the face of higher wage costs, and lower productivity, Foxconn has invested heavily in automation. [4] In December 2016, Foxconn announced a plan of a non-human operating factory. [5] Apple also announced, in May 2017, an advanced manufacturing fund of $1 billion including research of automation. [6] In other words, even if Apple brings its manufacturing back to the United States, the phone you have in your hands won’t be Made in America, it’ll be Assembled in America.

Considering the high labor cost in developed countries, does that mean iPhone is still going to be “Assembled in China”? In 2016, China’s information protective government suspended iTune and iBook. Google powered Android phones have long been banned in the country. Encryption is potentially a big issue for Apple in the future. Additionally, rising labor cost makes China no longer the most attractive manufacturing center in the world.

As a result, finding an alternative manufacturing location is going to be critical for Apple in the long run. In May 2017, Apple announced its plan of opening an assembly plant in India. [7] This is a well weighted decision to avoid potential instability from rising protectionism.

Supply chain management even more complex

A bigger concern for Apple would be how to keep its lean supply chain model efficient, arguably the secret source of Apple’s profitability. Since Tim Cook became COO in 1998, he outsourced manufacturing, cut down in-house warehouse to 1, and reduced number of suppliers to 154. [8] To sustain the model, quality of suppliers is critical. Apple sole-sources certain components as technological advantage, operating scale and efficiency outweigh supplier concentration risk. For example, iPhone 7 application processor is sole-sourced from Semiconductor Manufacturing (TSMC) due to the battery performance. TSMC’s successful throughput execution becomes essential to prevent disruption to, production scheduling, periodic new product introductions, and Apple’s inventory management.

Now, if Apple has to manage four manufacturing centers – China, India, Brazil and US – which would likely require different local supply chain networks with additional suppliers, it would significantly increase Apple’s supply chain complexity. Difficulty of controlling suppliers’ quality, and not being able to leverage central planning would increase the risk of reducing supply chain efficiency.

Moving forward: are isolationists ready to build the supply chain ecosystem

Protectionism is used as a mean to “bring manufacturing industry back”. A big question is whether you can truly achieve the objective by isolation. To bring back manufacturing, a rather self-sustained supply chain ecosystem needs to be established domestically. My concerns are whether the required level of skilled labors can be available in time, and whether there would be enough resources from the government to compensate the inefficiency during the transition. For example, Japanese auto producer, Nissan, has threatened the British government to help develop the local supply chain. If politicians are serious about rebuilding local industry, then tax breaks, subsidiaries and other policy incentives at the scale of hundreds of million dollars need to be in place.

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Reference

[1] Clara Lu, “Apple Supply Chain – The Best Supply Chain in the World”, Tradegecko, April 3, 2014, https://www.tradegecko.com/blog/apple-had-the-best-supply-chain-in-the-world-for-the-last-four-years-here-is-what-you-can-learn-from-it, accessed November 2017

[2] Justin Solomon, “White House to announce Apple-supplier Foxconn manufacturing plant in Wisconsin on Wednesday”, CNBC, July 26, 2017, https://www.cnbc.com/2017/07/26/trump-scott-walker-to-reveal-foxconn-factory-plans-in-wisconsin.html, accessed November 2017

[4] Jim Reid, Sukanto Chanda, “Mapping the World’s Prices 2017”, Deutsche Bank, May 3, 2017

[5] Nick Statt, “iPhone manufacturer Foxconn plans to replace almost every human worker with robots”, The Verge, December 30, 2016 https://www.theverge.com/2016/12/30/14128870/foxconn-robots-automation-apple-iphone-china-manufacturing, accessed November 2017

[6] Jamie Condliffe, “Apple’s $1 Billion Manufacturing Boost Will Likely Bring Robots, Not Factory Jobs”, MIT Technology Review, May 4, 2017, https://www.technologyreview.com/s/604328/apples-1-billion-manufacturing-boost-will-likely-bring-robots-not-factory-jobs/, accessed November 2017

[7] Rishi Lyengar, “Apple will finally sell ‘made in India’ iPhones”, CNN, May 18, 2017, http://money.cnn.com/2017/05/17/technology/apple-iphone-se-india-manufacturing-bangalore/index.html, accessed November 2017

[8] Clara Lu, “Apple Supply Chain – The Best Supply Chain in the World” Tradegecko, April 3, 2014, https://www.tradegecko.com/blog/apple-had-the-best-supply-chain-in-the-world-for-the-last-four-years-here-is-what-you-can-learn-from-it, accessed November 2017

 

 

 

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8 thoughts on “Who is making your next iPhone?

  1. What’s fascinating to me about Apple’s populist issues is how holistically outsourced Apple’s manufacturing and assembly process is. To your point, the iPhone is a ‘product of the world.’ So, although Apple receives the brunt of the political pressure on the issue due to its immense brand value and consumer visibility, the true pressure applies to the outsourced manufacturers like Foxconn, Pegatron, and FLEX whose value proposition is largely predicated on leveraging low cost labor in foreign countries like China and Mexico. This dynamic differs from U.S. automotive OEMs, for instance, who still operate some components of the vehicle manufacturing and assembly process.

    The impact of populism on Apple’s supply chain partners has been evident in recent industry developments. Following Trump’s election, for example, Apple asked its suppliers to explore moving iPhone production to the U.S. [1] Then, this past summer, Foxconn announced it would invest in a new $10 billion facility to manufacture LCD panels in Wisconsin. [2]

    While it’s unlikely that Apple will ever establish an entirely domestic manufacturing footprint through its supply chain partners, a recent MIT study suggested that even if all iPhone components were manufactured and assembled in the U.S., the cost of the phone to U.S. consumers would only increase by an estimated $100. [3] As an Apple supplier, this is a fact that would make me feel squeamish about the strategic direction of my business.

    [1] Apple is exploring moving iPhone production to the US: Report. Arjun Kharpal – https://www.cnbc.com/2016/11/18/apple-is-exploring-moving-iphone-production-to-the-us-report.html
    [2] Apple supplier Foxconn says it will build big Wisconsin factory. The firm will invest $10 billion in Wisconsin to build a new manufacturing plant that produces LCD panels. The project will create 13,000 new jobs-should 2020 – http://money.cnn.com/2017/07/26/technology/business/foxconn-wisconsin/index.html
    [3] Making iPhones in the U.S. might not cost as much as you’d think. Konstantin Kakaes – https://www.technologyreview.com/s/601491/the-all-american-iphone/

  2. Another challenge that I see arising from increased complexity in Apple’s supply chain is a disruption to the Company’s regular cadence of phone releases. Consumers have come to expect a new and improved phone every 12 months, and many have adjusted their purchasing trends to reflect such a schedule. This timeline imposes restrictions on Apple’s ability to improve its processes and products. For example, if Apple were to miss an update cycle but Samsung were to put out a revolutionary new phone with substantially better features, will Apple lose long term customers?

  3. I think there is a legitimate argument that can be made that no tax breaks are needed for Apple to make the effort to bring its supply chain – whether it be manufacturing or simply assembly – back to America. With more than $260 billion of cash on hand, Apple is well positioned to take short-term hits on profitability to invest in an American made supply chain. I agree that this will take time, however I’m not sure an urgent effort is completely necessary. In the event the currently proposed tax reform passes and Apple repatriates its cash back to America, it will be interesting to see if there is any associated move with its supply chain.

  4. Although labor shortage is a big challenge, I would not think that to bring manufacturing back is an unrealistic slogan. Apple can achieve cost savings in rent, utility and tax reduction. What I am worried about is the sell price. If iPhone was made and assembled in US and export to other countries such as China, the foreign governments shall impose high tarriffs on it and eventually push up the retail price. Given the increasingly competitive environemnt in the smartphone and tablet market, will customers still choose Apple?

  5. Interesting article! You bring up an interesting question as to whether one can truly achieve “bringing back manufacturing” through protectionism policies. For Apple, I do not think these policies will bring Apple to the US unless that is a specific initiative they are hoping for. At the end of the day, Apple owes in shareholders to make the biggest bang for a buck. In light of changing politics, it is obviously better for Apple (per your article above) to move to complete automation within the US. However, if the purpose of these policies are to bring back jobs, I do think that the unintended consequences are destroyed a supply chain, bringing no increased jobs, and increasing prices for an iPhone.

  6. In addition to protectionist rhetoric in the US and the call to “bring manufacturing jobs back home”, Apple is also having to deal with early challenges at its new manufacturing location in India. Given the inherent complexity of Apple’s global supply chain and the need to establish a supplier ecosystem around its production base, Apple has been seeking tax incentives from the Indian government for its suppliers so they can set up shop in the country. However, the Indian government has not readily accepted Apple’s demands, thus derailing its ability to drastically reduce the price of iPhone SEs being produced in India (since component import duties are extremely high). Thus, while the India move might bring benefits associated with a lower dependency on and exposure to China, it does not come without its own problems.

  7. Interesting article, the interesting underlying idea though is whether there is feasible and capable labor in the US. Tim Cook commented on the idea saying “The U.S., over time, began to stop having as many vocational kind of skills. I mean, you can take every tool and die maker in the United States and probably put them in a room that we’re currently sitting in. In China, you would have to have multiple football fields.” Although building this labor is always an option, however, the government should be ready to defend the company against fierce competition, that will undoubtedly take such a chance (if it takes place) to overtake Apple dominance in the US market, an aspect that would not play in anyone’s favor, and could lead to a loss for both the US and Apple.

  8. Very interesting article! The localization of Apple’s supply chain may bring manufacturing jobs back to the US, but the question is whether there are enough manufacturing labor resources available in the US. As the average education level increases, fewer people are willing to work on the floors in factories. For example, Amazon’s fulfillment centers in the US are already facing the challenging of finding enough labor to support their fast-growing operations. In my view, the True North is to fully automate the manufacturing processes, and hire more engineers to build and maintain the automations. In a world where most iPhones were automatically manufactured, the manufacturing factories would eventually move closer to end consumers. At the same time, the raw materials will still be supplied globally. Therefore, the supply chain system will be both globalized and localized.

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