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Donald Trump’s demand that Apple must make iPhones in the U.S. actually isn’t that crazy

Donald Trump’s demand that Apple must make iPhones in the U.S. actually isn’t that crazy
by Vivek Wadhwa on 05-21-2016 at 7:00 am

 Donald Trump has promised that “we’re gonna get Apple to start building their damn computers and things in this country, instead of in other countries.” He said this ata speech at Virginia’s Liberty University andseveralother events. It is very likely that he is not serious; Trump tends to say things he couldn’t possibly mean. But he did raise an intriguing question about whether Apple — and other American companies — could bring manufacturing back to the United States.

When American companies moved manufacturing to China, it was all about cost. China’s wages were amongst the lowest in the world and its government provided subsidies and turned a blind eye to labor abuse and environmental destruction. Things have changed. China’s labor, real estate, and energy costs have increased to the point that theyare comparable to some parts of the United States. Subsidies are harder to get and Chinese labor is not tolerating the abuse that it once did. China is now a more expensive place to manufacture than Indonesia, Thailand, Mexico, and Indiaaccording to Boston Consulting Group.

Add to this the efforts by the Chinese government to spur indigenous innovation — by forcing foreign companies to reveal their intellectual property and use local suppliers—and you have strong motivation to relocate manufacturing.

But Apple is by no means looking to exit from China, its second largest market. It justannounced an investment of $1 billion in Uber’s rival Didi Chuxing. It clearly saw a large market opportunity and a way to appease the Chinese government.

Technology is, however, changing the labor-cost equation even more and China is becoming unpredictable because of its faltering economy. It may make sense for Apple to locate some of its manufacturing closer to other markets just to protect itself from this uncertainty.

What is changing the labor situation is robotics. Robots can now do the same manufacturing jobsas humans — for a fraction of the cost. A new generation, from companies such as Rethink Robotics of Boston, ABB of Switzerland, and Universal Robots of Denmark, are dexterous enough to thread a needle and nimble enough to work beside humans. They can do repetitive and boring circuit board assembly and pack boxes. These robots cost less than $40,000 to purchase andas little as a dollar per hour to operate. And unlike human workers, they will work 24-hour shifts without complaining.

The hurdle in relocating manufacturing for any company such as Apple is the tie to the chain of suppliers of its products’ electronics components. The key question therefore is: how dependent is Apple on its China supply chain?

In 2015, the supply chain for Apple’s products consisted of 198 global companies with 759 subsidiaries — so this is quite complex. Seamus Grimes of National University of Ireland and Yutao Sun of Dalian University of China studied each of these subsidiaries and interviewed executives of those located in China. The objective of their research was to advise China on how it could move further up the value chain and cause foreign companies to give it more of their intellectual property. The paperthey published, however, provides another interesting insight: into how few of Apple’s technology suppliers are actually Chinese.

The authors researched each of the 759 subsidiaries and categorized the electronics components into core, non-core, and assembly-related, with the high-cost, intellectual-property dependent technologies being designated as core. They learned that 336, or 44.2 percent, of these subsidiaries were manufacturing in China; 115 were in Taiwan; and 84 in Europe or the United States.

When the researchers looked into the ownership of subsidiaries that were manufacturing in China, they found that only 3.95 percent were Chinese. And only 2.2 percent of the core component suppliers were Chinese. The largest proportion, 32.7 percent, were Japanese; 28.5 percent were American; 19.0 percent were Taiwanese; and 6.5 percent were European.

To put it simply, more than half of the components of Apple’s products are imported into China and practically none of the important, core, technologies are made by Chinese companies. Foreign companies do not trust China and nearly all of the intellectual property in Apple’s products originates from outside it.

This means that the value chains could be shifted over time. This begs the question: what it would cost to move manufacturing to the United States?

For this, it may be best to look at what Apple’s manufacturing partner Foxconn is doing in India. The Economic Timesreports that Foxconn is finalizing negotiations to build a $10 billion facility to manufacture iPhones in India. The report anticipates it will take 18 months to get this operational.

India does have a labor cost advantage over the U.S. but robots could eliminate this. Similar manufacturing facilities could be set up in the United States, product by product.

Of course, this will not be easy and there are many risks. But it certainly is possible for Apple to bring manufacturing back to the United States. If Apple can do this, so can most other companies; their value chains are a lot less complex than Apple’s.

So it may turn out that for once, Donald Trump’s rant isn’t so crazy.

Here is an interview on CNBCs Squawk Box with Becky Quick. For more, follow me on Twitter: @wadhwa and visit my website: www.wadhwa.com.

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