It's not just cheap wages. China has more skilled factory workers and sits at the center of the global supply chain.
This weekend, The New York Times published a long exploration of the many reasons why Apple chooses to build its iPhones in China. The piece is indispensable reading for anybody who wants to understand why the United States has seen certain types of manufacturing all but disappear from its shores. But the article's core lesson might be tough to swallow: Apple doesn't only choose China because work is cheaper. Apple also chooses China because the factories and the workers do a better job.
Here are four basic lessons that we can learn from Apple's manufacturing:
Cheap Labor Isn't the Issue
There's no question that China's low wages are part of the country's appeal -- even though they've increased. According to the Times, building the iPhone stateside would add up to $65 to the cost of each device. To put that in perspective, it's about 10% of the full retail price for the cheapest iPhone 4S. Given the fat margins on Apple's products, the company could absorb that extra cost and still come away with a profit. But it's hard to imagine why they would make that sacrifice.
The price of labor, though, is just one small piece of what makes China a better place to make an iPhone. After years of building its computers in California, Apple began offshoring its production after the company's near collapse in the 1990s. Driving the decision was Tim Cook, now the company's CEO, and formerly its head of operations. Per the Times:
What does it mean to "scale up" faster? For Foxconn, the global manufacturing behemoth Apple pays to assemble its products, it's the ability to hire thousands of new workers in a single day. It's being able to wake up 8,000 employees, herd them out of the company's on-sight dorms, and order them pull a midnight shift fastening glass screens onto phones. In China, workers are cheap, plentiful, and -- most importantly -- mind bogglingly compliant in ways that America's culture and its tightly enforced labor laws simply wouldn't allow. Yes, Foxconn's notoriously harsh treatment of its employees led to a now-notorious spate of suicides. But how many Americans in the 21st century can you see under any circumstances agreeing to live in, say, a General Motors dorm?
For Mr. Cook, the focus on Asia "came down to two things," said one former high-ranking Apple executive. Factories in Asia "can scale up and down faster" and "Asian supply chains have surpassed what's in the U.S." The result is that "we can't compete at this point," the executive said.
China's labor advantage goes well beyond the low-skill workers who do the menial task of stuffing parts into iPhones. The country also excels at educating middle-skill "industrial engineers." These aren't Stanford graduates capable of designing the next iteration of the iPad. Rather, they're akin to alums from your local community college who have the technical skills to manage the iPad production line. As the Times notes:
Apple's executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufracturing iPhones. The company's analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.
In China, it took 15 days.
Those sorts of statistics should bring into cold, clear focus why America's education system is at such a disadvantage when it comes to manufacturing. The problem isn't a lack of elite graduates. We have those. It's our unskilled working class.
It's been widely reported that Chinese schools graduate roughly 600,000 engineers a year, versus about 70,000 in the United States. Some have tried to downplay the severity of that gap by pointing out that as many as half of those Chinese engineers have the equivalent of a 2-year associate's degree. That may be true. But it's also missing the point. China has learned to produce graduates with mid-level technical skills that, as The Atlantic's cover story this month illustrates, are crucial to the modern manufacturing process. The United States needs to learn to do the same if it wants to remain a manufacturing force in the future. Our immediate goal shouldn't be to prep more students for Harvard, Penn State, or University of Central Florida. It should be to find a way to make sure that more than 25% of the students who enroll at community colleges actually graduate within 3 years.
Industrial Policy Matters
The Times reports that when Apple was looking for a new factory to cut the high-strength glass for its iPhone screens, it picked a Chinese plant that had already built a new wing for work in anticipation that it might win the contract. It was able to afford that pricey gamble thanks to subsidies from the Chinese government.
In the United States, of course, most factories could not have counted on Washington for the same kind of support. Here, conservatives like to argue that the government shouldn't be in the business of "picking winners and losers." But that's what our competitors have been doing for decades, to great success. Both Germany and Japan rose up from the ashes of World War II and rebuilt themselves as industrial powerhouses thanks largely to carefully managed government industrial policy. China has done the same in the 21st century. Yet, as the scandal around failed solar panel maker Solyndra showed, a large part of the U.S. public is still deeply ill at ease with the idea.
The ironic part is that, although conservatives rail against the idea of an active federal industrial policy, they're very comfortable with it on the state level. Southern states such as Alabama and Tennessee have made an art of attracting foreign auto-makers using the promise of millions in tax breaks and other perks. Rather than putting the unmatched muscle of the federal government behind building our manufacturing base, we've settled for the scattered efforts of 50 states.
Where Apple Goes, Others Follow
Manufacturers have a habit of playing follow the leader. Or more precisely, follow the customer, especially when that customer is another industrial company.
Again, it's the natural outcome of needing to be close to the supply chain. The Times piece focuses on Corning, the Upstate New York-based company that produces the high-strength glass used in iPhone and other smartphone screens, which has moved much of its production to Japan and Taiwan in order to be closer to its buyers.
Our customers are in Taiwan, Korea, Japan and China," said James B. Flaws, Corning's vice chairman and chief financial officer. "We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that's 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.
As Corning's story shows, industries are often connected in unexpected ways. Because consumer electronics manufacturing has moved offshore, the United States is now losing out on jobs in glass production. If a company like Apple moves abroad, others will go with it.
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