ESSA

ESSA

The Profitable Orientation


Hanbo Li

By

June 24th, 2012


It’s not just cheaper to send jobs overseas, there are synergy benefits.


“It is no longer economically viable to continue manufacturing here.” These are words which we have become increasingly desensitized to, and now expect from large companies in many industries. Resentment towards the faceless foreign factory workers who stole our jobs has largely died down, and has been replaced by arguments over how best to protect those remaining jobs (think, car subsidies). It has come to be accepted, somewhat incorrectly, that jobs are being moved overseas, simply because workers in another country are willing to do the same job for much less pay. This pay differential is, in fact, often not the most important consideration in relocating manufacturing operations.

Apple used to be a paradigm of domestic manufacturing in America. In 1983, when Apple was building the Macintosh, Steve Jobs bragged that it was “a machine that is made in America”. In 1990, he said “I’m as proud of the factory as I am of the computer”. Today, Apple’s executives believe that the enormous scale of overseas factories, along with the flexibility, diligence and skills of foreign workers are far superior to those in America.

This belief was confirmed, no better than in 2007, upon the launch of the original iPhone. A little over a month before the phone’s eagerly-anticipated launch, Jobs angrily held up a prototype of the phone he’d been carrying around to his board. He pointed out the scratches on the phone’s plastic screen; “People will carry this in their pockets, with their keys. I won’t sell a product that gets scratched,” he said, “I want a glass screen, and I want it perfect in six weeks.”

Apple could meet this demand with its offshore facilities. The factory contracted for the glass cutting job was located 8 hours from where the rest of the iPhones were assembled. This meant a huge saving on transportation costs as the pieces required to make the product had less distance to travel to be assembled; “the entire supply chain was in Asia”, according to a former Apple executive.

The facility which assembled the phones, Foxconn City, housed 230,000 employees, who worked 6 days a week on 12 hour shifts and earned less than $20 a day. They lived in on-site dormitories, consumed 3 tons of pork and 13 tons of rice a day, and required 300 guards to direct foot traffic alone. This amount of man-power and productivity meant that it could produce over 10,000 iPhones a day.

It was estimated that the assembly would require 8,700 industrial engineers to oversee the production, and that hiring this army of semi-skilled workers would take months. In China it took 15 days. The flexibility offered made Steve Jobs’ last minute request seem pedestrian.

According to one former Apple executive, in mid 2007 engineers finally delivered the first truckloads of the new scratch-resistant glass, after some experimentation with cutting techniques, to Foxconn in the dead of night. Managers woke thousands of employees, who lined up to the assembly lines and began producing the phones. Within 3 months, Apple had sold one million iPhones.

For Mr. Cook, Apple’s CEO, the focus on Asia came down to two things: factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” Some academics have tried to price the iPhone as though it were built in the US. They found that the premium for hiring domestic workers was $65 per phone. Since Apple makes hundreds per phone, keeping the jobs in local factories would have still been economically viable. It was the other benefits afforded by off-shoring which drove them to their decision.

 

Read more here.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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