Don’t Sweat, Taiwan: Apple is Still Yours

Forbes today offers an interesting take on Apple, specifically, that Taiwan would feel the crunch of a major shift in the supply chain back to the US.

If Apple scales back contracts in Asia, at least a half-dozen core suppliers and assemblers in tech hardware hub Taiwan would face a loss in orders, analysts forecast. But those corporate heavyweights might be able to retain Apple’s business by moving their China-based production back home to Taiwan, if not to the U.S., and using automation for lower costs.

Let’s consider the various angles to this.

First, Forbes is right: A shift by Apple to somewhere outside China (it doesn’t have to be the US) would absolutely affect Taiwan’s major electronics ODMs. That precise outcome occurred when Cisco, AT&T, Motorola, Alcatel, Tellabs, Lucent and many, many others moved their manufacturing to suppliers outside North America. How much laminate is now manufacturing in the US? How much solder mask? Process equipment? Components? How many merchant fabricators and assemblers still do volume production in North America?

But let’s be straight here: Just who will be affected? Key Apple ODMs such as Pegatron, Compal, Wistron, Zhen Ding, and of course Foxconn would be directly impacted. They would have to spend tens of millions to rebuild elsewhere. But … they can afford it. Can anyone else?

Keep in mind, Taiwan doesn’t operate factories in China as a favor to the Chinese. It does so because it has to. Taiwan is a small nation with a population of less than that of New York City and roughly 16 to 17 million people of working age. The unemployment rate is 3.7%. It has no available domestic workers to hire into engineering and manufacturing. China has ample population resources, not to mention the stark differential in labor rates. (Taiwan’s national minimum wage is more than twice that of Shanghai’s, which is the highest in mainland China, and could be five times higher than that of China’s less developed areas. The fully burdened rates are equally disparate.) Taiwan has every incentive, financial or otherwise, to introduce more automation. If it could, it would. If Apple were to bail, China stands to lose much more than Taiwan.

Second, if not Taiwan, where would Apple go? The US doesn’t have the spare workers either. The unemployment rate is 3.9% and has been under the benchmark 6% rate for more than four years. Immigration is at a post-WW II low, further straining the labor pool. Wages are rising as businesses compete for a smaller available workforce.

Third, how long would it take? Building a supply chain in a new region takes time. Granted, the US has the processes in place to bring industrial parks online, but space in key areas is at a premium and local, state and federal regulations often impede quick progress. Many other nations have various issues (graft, corruption, lack of educated or trained workforce, lack of infrastructure, little or no IP controls, etc.) that also prevent a mass exodus. Businesses, especially public ones, cannot afford disruptions in getting products to market. They tend to be risk-averse, for good-reason.

Fourth, not all manufacturing plants are the same, a fact Forbes downplays.

Some Taiwan tech firms, most notably Foxconn, already operate factories in the US and could feasibly move final assembly of Apple’s gear to the US after some initial work at their cheaper China bases, says Tracy Tsai, research vice president with tech market analysis firm Gartner in Taipei.

If only it were that easy. An LCD panel plant is not the same as an SMT placement plant. It would be nearly as expensive to convert a plant as to greenfield one. And final assembly tends to be more labor intensive that upstream processes, which means higher costs. Putting that work in the higher (highest?) labor rate nation —  the average manufacturing labor rate in the US is now close to $39/hr. — makes little sense.

All in all, Forbes is waxing hypothetical, but it’s not a realistic notion.

Don’t Expect Apple to Fall for US Again

Analysis of the impact of Apple moving its production — or at least some of it — to the US will continue over the next several months but with the imminent change in US administration it could be peaking now.

Back and forth continues among various media sites debating whether Apple can or can’t, and should or shouldn’t, relocate some of its assembly.

Forbes today points to multiple studies, one by Syracuse and another by MIT (from June) that estimate assembly costs for a high-end domestically produced iPhone would rise 5% ($30 to $40). Other estimates peg it at closer to 13% ($100).

To be sure, there will be more of these types of discussions taking place. But much of the chatter disregards that Apple can’t do this alone. We have argued previously that Apple’s mastery of the supply chain has as much to do with its success as the occasionally startling hipness of its designs. The cool factor is subsidizing; keep in mind Apple has only 12% share of the cellphone market, and the tablet market — in which it once commanded a 90% stake — is now absolutely flooded with competitors and shrinking by the year. Apple’s net income has been falling with it, and the Watch Series 2, its latest entrant in the smartwatch sector, is not only losing share, the entire category is diving.

Capacity would not only be a huge issue, but the costs of scaling up are not included in any of the financial analyses I’ve read. The very real costs of $1 million or more per high-volume line would be to be absorbed — and passed on. (Zhengzhou is said to be the largest Foxconn/Apple factory in the world, with 94 lines currently running.) That’s not including the costs of finding and/or greenfielding factories, hiring, training, and so on. By the time all that is done, a new administration could be in place.

And then there’s the issue of taxes, which most reports fail to assess or even discuss. A New York Times article today, however, quotes a former chief of staff of the congressional Joint Committee on Taxation as saying: “US multinationals are the world leaders in tax avoidance strategies. In doing so, they create stateless income — income that has become unmoored from the countries to which it has an economic connection.”

Apple has stashed scores of billions of dollars offshore to avert a ginormous tax bill. The US corporate tax rate is third highest in the world on a top marginal basis, according to the Tax Foundation. This is a bit of a red herring — the lowest listed non-island nations are Uzbekistan and Turkmenistan, and no one is thinking of rushing there. But Ireland is among the lowest 20, a fact Apple has used to its advantage (although that could bite them, if the EU has its way).

All of this adds up to a very unlikely scenario that Apple will be motivated to relocate production. I could see a bit of highly publicized migration to what’s essentially a US showroom as a means to give politicians a “win” and displace some heat, but it would be trivial relative to the overall volume.

Update: Here’s yet another opinion, published on Dec. 29. And other, from the South China Post, asking whether China’s manufacturing is “hollowing out.”

Dec. 30 update: Foxconn’s CEO says will invest $8.8 billion in a new flat-panel display plant in China.

Apple to US a Supply Chain Hurdle

It was, to paraphrase Homer, the headline that launched a thousand blogs: “Apple Could Make iPhones in US in Future: Sources.”

Cue all the breathless op-eds.

It won’t happen.

Not because Apple doesn’t care about the US. And not because Tim Cook, struggling as mightily as any billionaire could to fill the shoes of Steve Jobs, has something against American workers.

But it’s simply not that simple.

In 2013, to great acclaim, Google opened a handset plant in Dallas, where it hoped to employ nearly 4,000 workers, proving once and for all America could compete in high-volume cellphone manufacturing.

Not two years later, the search giant shuttered the site.

Almost all the components used in the various Apple iPhones are made in Japan, Korea, Taiwan or China. For the geographically challenged, that’s an ocean way from the US. Manufacturing is a supply-chain business; no company makes everything themselves. And most of Apple’s suppliers are foreign-owned. Apple is not exactly known for its generosity. Those suppliers won’t be willing to spend the billions it would take to relocate just to keep what in some cases is not much better than break-even business.

Even the unnamed source for the initial Nikkei Asian Review report acknowledges that Foxconn would be hit by a sharp rise — perhaps 50% — in production costs. “Making iPhones in the US means the cost will more than double,” the source said.

The notion, especially, that Taiwanese stalwarts Foxconn and Pegatron would suddenly build giant factories in the US is far-fetched as well. Remember that $40 million investment Foxconn said it would make a couple years ago? Pennsylvania is still waiting.

Indeed, they are likely salivating at the possibility of new US trade barriers, even for a key customer like Apple. Why? Because Apple’s gross profit margin is breaching 40%, while those of their ODM suppliers are around 10% or less. With the design, manufacturing and supply chain knowledge so firmly in the hands of the ODMs, should events conspire to make Apple slide, they are well-positioned to pick up the slack.

 

Automakers ‘Dashing’ for 3d Party Platforms

The fight for the dashboard is heating up as reports surfaced this week that two major automakers will ditch their current embedded software systems in favor of alternatives from Google and Apple.

Ford, which has dabbled with Apple’s CarPlay for two years even while using Microsoft Windows Embedded for its infotainment systems, drop Microsoft and migrate to an Apple-compatible platform, reports indicate.

Likewise, Hyundai is going all in on CarPlay and a competing system from Google called Android Auto.

There’s big money at stake. Automakers generate substantial profits on infotainment and related on-board gear: Ford bundles Sync with Sirius radio and other options in a package, priced at $1,250, which is purportedly nearly $1,000 higher than the OEM’s costs.

While the tools not only control today’s dashboard displays, they could be even more significant down the road as self-driving cars start to populate the roads, freeing vehicle occupants to do tasks once considered unthinkable in moving cars, such as shopping online.

So while the prospect of moving toward more interactive onboard systems holds promise and profits for the automakers themselves, major OEMs like Apple and Google stand to benefit from a captive audience inside the vehicle.

In the future, “keep your eyes on the road” may be replaced with “keep your eyes on the dash.”

What Apple’s Latest Supplier Audit Says About Apple

Apple’s annual supplier audit was released today and sure enough critics on both sides are already picking through the core and going at it over whether the company is doing enough to ensure the safety and compensation of the hundreds of thousands of workers who plug away in anonymity daily making Apple the wealthiest company ever.

Apple’s latest stats show a 92% compliance rate with its 60-hour workweek, and says the average workweek was less than 49 hours. Of course, that’s as it should be: Most of Apple’s supply chain is in China, whose laws cap the work week at 40 hours and monthly overtime at 36 hours. Adding nine hours per week over four weeks per month comes to 36, which means Apple suppliers are likely often breaking the local laws.

Indeed, that’s consistent with a separate study of nearly 100 Pegatron workers undertaken by labor rights group China Labor Watch, a constant thorn in Apple’s side, which found that more than half of the its workforce performs more than 90 hours of overtime per month, with some peaking at 132 hours.

Apple essentially ignores this by trying to turn a lemon into lemonade. It now touts its ban — as of October — on its suppliers’ charging workers to obtain jobs. As Apple senior vice president of operations Jeff Williams writes in the report, “You’ll see that we consistently report suppliers’ violations of our standards. … Because of these audits, over $3.96 million was repaid to foreign contract workers for excessive recruitment fees charged by labor brokers. And nearly $900,000 was paid to workers for unpaid overtime.” Williams says that this is proof that the system is working.

I don’t agree, but not because there are violations. I suspect any multibillion dollar company with operations (or contractors) in as many places that Apple has will encounter similar, if underreported, problems.

No, the reason I don’t agree is because the same subcontractors keep getting caught for the same violations. That shows a decided lack of regard for their major customer’s brand and mandates.

I think Apple is taking the problems seriously, but its supply chain is not. And the chain has no real incentive to change. As such, until Apple starts firing suppliers, the problems of what amounts to indentured servitude at its contractors’ factories will continue unabated.

Could Foxconn Deal Bite Apple?

The notion that Foxconn might take a large stake in a major Taiwanese telecom equipment company poses a litany of interesting questions for its largest customer — Apple.

For example, Foxconn, which gets 40% of its revenue from Apple, could now be in position to become both a major Apple supplier and a major enabler, since millions of iPhones and iPads would conceivably be connected via Asia Pacific Telecom’s network. What influence could Foxconn thus have over Apple’s ability to operate in key Southeast Asia markets? Would it possibly seek to leverage that network by negotiating with Samsung to force better pricing from Apple? Will other major EMS/ODMs that play heavily in this space (Jabil, Pegatron, Compal, Wistron) follow Foxconn’s lead?

The EMS/ODM model continues to evolve. Foxconn seems intent on speeding that evolution ever faster.

 

 

 

System Failure

Apple is front and center today saying the death of a 15-year-old worker at one of its subcontractors was not the result of conditions at the Pegatron factory in Shanghai.

The teenager died of pneumonia, according to news reports. He was employed after using someone else’s ID to get the job.

It’s very sad that this happened. But the truly uncomfortable fact is that the worker was 15.

Apple’s response, as usual, was stiff and unconvincing: “Apple has a long-standing commitment to providing a safe and healthy workplace for every worker in our supply chain, and we have a team working with Pegatron at their facility to ensure that conditions meet our high standards.”

Underage workers continue to gain employment in Chinese factories. Why does this continue to happen there? Is it a failure of management? Is it cultural? And how many others will die before the system is fixed?

 

 

Poison Apple?

Move over, Foxconn. First Pegatron and now Jabil have joined you on the Apple-watcher hit list.

In June, the New York-based employee rights group known as China Labor Watch singled out three Pegatron sites for worker abuse. The alleged violations are now like a refrain: excessive overtime, harsh working conditions and employment of underage workers.

Today it was Jabil’s turn, as its Green Point unit in Wuxi drew CLW’s ire. Perhaps most concerning is the accusation that Jabil workers must agree to a “list of punishments.” That sounds sickening and demeaning.

The common thread, of course, is Apple, whose corporate standards are apparently more for show than practice.

Chinese law prohibits more than 49 hours of work per week. Yet the CLW report shows 80% of the 80 Jabil workers interviewed put in more than that. While both Apple and many workers claim they want the overtime, the sad truth is they need to work the extra hours in order to make sufficient wages. Yet with Apple sitting on more than $100 billion in cash, it’s illogical to argue that company needs to suppress wages in order to make its iPhones and related products affordable to Western consumers.

Just 18 months ago, then Jabil CEO (and now chairman) Tim Main excoriated Foxconn for its “very abusive policies, employment policies.”

“I think their business will begin to suffer because of the way they treated their employees,” Main told Jabil shareholders. “And you can all be quite comfortable and proud that, you know, that’s not your company. We treat people like human beings like we want to … treat our own kids. So you don’t have to worry about that with us.”

Sadly, CLW’s report says something very different.

At the time of Main’s comments, Apple had just become a 10% customer of Jabil. Now, Apple is estimated to make up 13%, or $2.23 billion, of Jabil’s annual revenue. So like Foxconn and Pegatron, does serving Apple necessarily cost a company its soul?

Correlation is not causation, but the circumstantial evidence is getting mighty difficult to ignore. Will any EMS company be able to resist the temptation of Apple’s poisonous riches?

 

Believing Foxconn Means Suspending Belief

The Foxconn makeover is in full swing, with the latest this piece from the New York Times that supposes that the world’s largest ODM is worried that Apple — yes, Apple — might be bringing it down.

When Apple was subsequently criticized for low wages and poor working conditions at his factories in China, it was Mr. Gou’s company, the Foxconn Technology Group, and not Apple, that caught the most heat.

What this conveniently ignores, of course, is that no matter how demanding and dictatorial Steve Jobs could be, those weren’t Apple employees jumping to their deaths from their Cupertino offices.

Such unpleasantries aside, what the story also reveals is that Foxconn does not intend to go head to head with its customers. There’s ample evidence to the contrary already, of course, not the least of which are the Foxconn retail stores popping up all over China, not to mention the litany of ODM phones and other consumer electronics it design and makes.

To paraphrase an old saw, believe what I say, not what I do.