Why are they built in China (hint: its not entirely cheap labor)?

This is in follow-up to the last post on How are iDevices built? Now we all must have experienced a scenario like this one:

A recently US returned ‘Uncle’ or ‘Aunty’ :” Wow those countries are amazing, look at all the stuff we got – shirts, toys, souvenirs, electronics (doesn’t matter that they are cheaper in India these days), and shoes!!! You pick up one of any of these purchases with a mixture of contempt (these morons are still excited about going to the US) and envy . While turning it over, you see 3 small words “Made in China”. You then, out of spite, pick up all of them one by one and start turning them over. ALL of them say the same three words..Made in China. While you gleefully inform your ‘Uncle’ or ‘Aunty’ about how they really haven’t gotten anything from the US, I bet you are wondering how everything these days has those 3 words….

A recent New York Times article tried to answer this question – the answer is NOT cheap labor.. well at least not entirely. Turns out that over the past decade or so, China has now a very flexible, scalable and highly productive supply chain.

At an event Steve Jobs was asked the question ” What would it take to make the iPhone in the US and bring those jobs back?”. Steve Jobs apparently replied – ” those jobs are not coming back”. Now why is that?

It costs Apple about $8 to make an iPhone in China. It would cost an additional whopping $65 to make it in the US. However, Apple make almost $250 gross margin per iPhone, so they would still be making a heft gross margin if the iPhone is made in the US. So its definitely not just the cost. Like I mentioned at the beginning of this post, it is the scalability, flexibility of the supply chain and the ecosystem that basically forces Apple to manufacture it’s iDevices in China.

A few weeks before the iPhone was to be launched, Steve Jobs wanted to change the screen of the iPhone, because the existing plastic one was not scratch resistant. So (in typical Jobs fashion), he wanted a glass screen and wanted it perfected in 6 weeks! Now Apple already had a company to make the glass screens but to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. This led to a visit from Apple executives to a plant in China. Here they were already building a new wing for the manufacturing of the glass panes.” This is just in case you give us the contract” – said the plant manager, they also had a warehouse full of glass to experiment and an army of engineers virtually free of charge. The plant got the job.

As a former Apple executive put in the NY Times article –“You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

It was also estimated that Apple would need 8,700 industrial engineers to oversee 200,000 workers on the assembly line. The company had estimated that it would take about 9 months to find and recruit so many people. In China? 15 days!!!!

Now I know that these workers are paid $17 a day and so on but like in the last post – this work is still perceived to be a good job. I also realize that there are cases of accidents due to lack of safety standards and working conditions but I think that is a separate issue entirely. Apple definitely needs to ensure compliance to safety standards at it’s supplier locations and they should be penalized for not doing so. But the fact remains that due to a lot of factors – the availability of workers, engineers,  focused state effort, flexibility, and even education, Apple and its peers don’t really have a choice – it has to be China.

And don’t think that this affects only the US – these days step out to buy plumbing equipment or tiles or toys or electronics in India. You will see the same three words!

“Those Jobs are not coming back… any were.. in any country

Now read the articles which this post has borrowed heavily from:

New York Times :How the U.S. Lost Out on iPhone Work

Business Insider Article

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