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Apple Doesn't Manufacture in the US, but Don't Blame China!

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The US is simply not competitve even in high-tech manufacturing, says one expert.

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MINYANVILLE ORIGINAL "Designed by Apple in California. Assembled in China." Those statements can be found at the back of any iPhone or iPad, as long-time Apple (NASDAQ:AAPL) fans will surely know.

These words reinforce a commonly-held assmumption that explains the weakness of US manufacturing and why Apple doesn't build its products at home -- namely, that the Cupertino, California-based company has outsourced the bulk of its production to China, because American workers are unable to accept the low wages and long hours Chinese employees tolerate.

Certainly, there's been plenty of media coverage this year about the exploitative working conditions at Apple's assembler-in-chief in China, Foxconn (HKG:2038), which also puts together products for other major tech companies such as Samsung (PINK:SSNLF), Hewlett-Packard (NYSE:HPQ), Microsoft (NASDAQ:MSFT), and Cisco (NASDAQ:CSCO).

It's also true that low-wage, labor-intensive manufacturing jobs will likely never come back to the US. Even China, which is looking at inflationary wage pressures, is facing stiff competition from new emerging markets such as Vietnam and Indonesia for labor-intensive foreign direct investment. However, Clyde Prestowitz, founder and president of the Economic Strategy Institute, argued that it was misleading to blame low-wage workers in China for 'stealing' manufacturing jobs away from the US.

"We continually hear about how Apple is made in China. But actually, the iPad and the iPhone are not made in China – they're assembled in China. The wholesale value of an iPhone is about $170, of which about $6.50 is Chinese. The rest of it – and this is where I think the US really needs to do some thinking – is high value-added components," said Prestowitz, who was moderating a panel on shifts in global trade patterns at the Asia Society in New York City, as part of HSBC's (NYSE:HBC) Changing the Game: Asia's Emerging Markets discussion series.

Prestowitz pointed out that "the electronic display of the iPhone, the digital signal processor, the microphone, the memory chip [and] the microprocessor" are all technology- and capital-intensive, not labor-intensive, parts, which is "what the US is supposed to be good at."

"So why is it that the US is not exporting to China those components to be assembled by Foxconn and then sold around the world?" he asked.

"Do you know where these components come from? …[T]hey come from Korea, Japan, Taiwan and Germany. These are not low-wage economies or low-tax economies. They have higher social benefits than the US! We're not competitive. That's the bottom line," Prestowitz, who previously served as counselor to the Secretary of Commerce in the Reagan Administration, asserted.

That the US is uncompetitive in higher-end capital intensive manufacturing was confirmed earlier in January by a report from the National Science Board (NSB). According to the report, the US lost 687,000, or 28% of total high-tech manufacturing jobs between 2000 and 2010, thanks to expansive engineering investment in Asia.

"Over time, global science and technology capabilities have grown, nowhere more so than Asia," said the NSB, according to the Washington Post. "In most broad aspects of science and technology activities, the United States continues to maintain a position of leadership. But it has experienced a gradual erosion of its position in many specific areas."

Speaking to the New York Times earlier in the year, Apple executives also admitted that US factories simply could not compete with their foreign counterparts for a myriad of reasons.

Factories in Asia "can scale up and down faster" and "Asian supply chains have surpassed what's in the US," said one executive. "[The US] can't compete at this point."

To address the issue, President Obama has frequently consulted with advisors on what the steps needed to revive US manufacturing are. Notably, Obama met with Silicon Valley highfliers, including former Apple CEO Steve Jobs, Facebook's (NASDAQ:FB) Mark Zuckerberg and Google's (NASDAQ:GOOG) Eric Schmidt, at a dinner last year where he asked Jobs point-blank what would be necessary for Apple to produce iPhones domestically. Jobs' reply? "Those jobs aren't coming back."

Current Apple head Tim Cook is a bit more optimistic. When asked earlier in the year if Apple would ever build another product in the US, he said, "I hope so. One day." That day, however, does not look like it is coming anytime soon.

Twitter: @sterlingwong
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No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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