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.

Just What is ‘Core Competency,’ Anyway?

I want to call attention to this long overdue piece by Forbes’ columnist Steve Denning.

Under the tantalizing headline, “Why Amazon Can’t Make a Kindle in the USA,” Denning makes the case that management, not manufacturing, is to blame, for its rather thoughtless, follow-the-herd mentality (my words, not his).

Case in point: Dell, which little by little gave more and more of its PC manufacturing and  design to Asustek, until the day came when Asustek had developed all the in-house expertise it needed to become an OEM. It no longer needed Dell. And while one could say Dell (whom I am using as a proxy here, as this scenario applies to scores of Western businesses) would have been eaten up by competition sooner or later anyway, the fact is one of its major suppliers — Foxconn — practically prints money, while Dell and fellow PC outsourcer HP look for ways to escape that low-margin business.

For nearly two decades, the EMS industry has sold the OEMs on the idea that they should outsource their lower-margin activities, while simultaneously refuting any suggestion that by doing so OEMs were setting themselves up to be replaced by their own suppliers. “We’re not in the business of ____,” was the EMS refrain. Well, they weren’t until they were. And then it was too late for OEMs to do anything about it.

Unlike populists like Lou Dobbs who shout that the loss of manufacturing must have a political solution, yet fail to consider the intricacies of what they propose, Denning takes a more nuanced approach. (I’ll add my two cents: If Wall Street could manage your business, why aren’t they?)

It’s worth your time to read.