Cycle 3 Essay

Apple has always been a company with an upstart brand. Yet it has
become more of a cautionary tale in recent years. Multiple incidences of
suicide in Apple manufacturing facilities caused outrage and feelings of
betrayal in those who bought into its idea. Apples solutions have not
worked. The best option for fixing this is an unconventional one; reverse the
tide of offshoring and relocate production of some products back to the USA.
A combination of rising costs in China, increasing productivity in the US,
stronger synergies with design studios, and solving its moral issues all tip the
balance in favor of this policy. This will create strong benefits for all of its
stakeholders, including those in China.
Apples problems in China comes from a need for high turnaround. The
company likes to have a very short turnaround between product
announcement and sales, which puts pressure on the production process. For
example, when Steve Jobs decided that the original I-Phone should have a
glass screen (just weeks before it was due on shelves) American factories
told him it was impossible. But a Chinese factory had already built the
dormitory to house its workers before negotiations even finished, and woke
them up when they were, allowing them to finish the impossible order. i These
short turnarounds are to please both their customers and to minimise leaks.ii
There are no free rides in the economy however, and the give in this
situation has been the Chinese workers who are put under such
psychological pressure from the strict working conditions to ensure the
efficiency required for turnaround, that many are seriously imapcted from a

Cycle 3 Essay

well-being point of view and some have even been driven to suicide.

iii

This

negative externality is caused by Apple, and so it has a responsibility to fix it.

The company has attempted to correct this. It has primarily tried to
keep manufacturing in China, echoing Steve Jobs famous quote of Those
jobs arent coming back [to the US], and tried to force reforms on its many
contractors. After the Fair Labour Association was asked by Apple, its newest
member at the time in 2012, to investigate Foxconn (one of Apples largest
and most heinous suppliers), the FLA found flagrant abuses forcing Foxconn
to pledge wideranging reforms.iv v Problems included issues such as
violations of Chinese overtime laws, excessive accidents, and a lingering
sense among workers that theyre in a dangerous place.vi This approach
seemed to succeed in 2013, when the FLA issued reports on Foxconn
claiming that continued programs around worker/employer training, and
pressure from Apple had contributed to large scale elimination in abuses.

vii

However, all other evidence seems to point away from success. In October
2014, 1000 workers at Foxconns SW manufacturing plant went on strike to
protest low pay

viii

and the BBC filmed workers at its Pegatron supplier

collapsing at their stations from the exhaustion of 18 straight days of work .

It seems inescapable that Apples strategy of forcing reforms is a failure.
It is unreasonable to expect Apple to fix the issues of workers rights,
when the government itself is having trouble fixing its underlying cause of
corruption.x An anti-corruption campaign, started by Premier Xi when he

ix

Cycle 3 Essay

came to office, found 182,000 officials in contempt in 2013 alone. xi The real
solution is for Apple to fix the incentives in this situation so that it doesnt
cause a situation in which workers abuse is the natural outcome, The best
way for it to do this is to shift part of its production to the US, so that its
production is spread more evenly and there is less time pressure on its
Chinese factories. Not all production would, nor should, move to the US in
such a move. 35% of Apples 2013 I-Phone production ended up in the US, a
figure that has probably lowered since then.xii

xiii

Some of this could be moved

to the US, such that it would help to take off the pressure from Chinese
factories to fulfill the entire order.
The biggest objection that is likely to be raised is that this too
expensive a solution, yet a combination of the dynamics of off-shore cash
reserves and a hidden structure of costs and benefits make this the right
choice. Apples manufacturing strategy in China has led to huge dividends in
terms of cash. With more than $175 bn in cash to spend, Apple has one of
the largest concentrations of cash in the world. xiv They have enough cash, in
fact, to run their own Apollo program, get to the moon and still have change
left over.

xv

More than $100 bn of this, however, is trapped overseas because

of US tax rules that allow foreign cash to not be taxed until repatriation.

xvi

One option is to put this cash to work on expanding local production

factories. By utilising loopholes such as corporate bonds, Apple could bring
that money back for more than free; it would actually be paid to have it by
the market as its interest rate would be below inflation.

xvii

And Apple has

Cycle 3 Essay

displayed a willingness to go this direction with its cash as Apple CEO Tim
Cook, a longtime supply management expert at Apple, has been using its
cash to buy up the supply chain.

xviii

Why does it make sense to do this in the US? For one thing, the wage
cost difference between the US and China is not as large as it used to be.
Salaries in Shanghai, where Apple has multiple suppliers xix, grew by 125%
between 2006 and 2011 vs a tiny 2% growth in the US.xxxxi Estimates for the
total extra cost of I-Phone production in the US are around $4 per unit,xxii or
an increase of only 2% on the cost of an IPhone 6.xxiii And to look at a real
world case that has proven this, the Moto X was completely assembled in the
US (the first smartphone to do so). Its cost? At $226, it was in the middle of
the Iphone 5c (at $207) and the Samsung Galaxy SIII ($237).

xxiv

And there is

an even closer precedent in Mac Pro production, which was recently

transferred to the US. Production of the high tech, proffessional focused
computer was switched to a factory in Arizona. Outlays for the all-renweable
powered factory only reached $100 million, truly an indication of the viability
of this strategy. xxv
Even if it would not be that much more expensive to manufacture here,
why would Apple do so? Because there are many other benefits that can lead
to both qualitative and quantitative cost reductions. AMR Research, a leading
supply chain research firm, claimed that 56% of offshore businesses were
met by higher total landed costs as a result of issues such as hiring more

Cycle 3 Essay

workers to compensate for lower productivity and higher scrap percentages

(such as in the case of Apples Iphone 6 Plus, where the rate reached an
excruciating 50% for displays)xxvi. So there is a good chance that production
costs could actually drop, considering by how small an amount they are
above Chinese current costs right now.
And a lot of the advantages are much more qualitative. Apple is the
worlds most valuable brand, and at $124 bn this is worth twice as much as
the next highest brand in Forbes annual study.xxvii This has come from an
emphasis on strong design that cannot be copied and an emphasis on
product experience that is unparalled. These areas do not benefit from
cheaper labour, but from the higher cost labour found in advanced
economies such as the US. For example, Corning (the company which
manufactures the Gorilla glass found on Iphones and almost every other
smartphone) is famous for its innovation and its low costs. Its secret? 5
plants and a R&D centre in Corning, NY which can communicate with each
other to produce nearly 250 new patents every year.xxviii Apple would be bale
to benefit from such close cooperation, as not only would the design
engineers be physcially closer but also closer in terms of culture to the
production managers. For example, one of the largest fears of executives in
China is that of intellectual property getting stolen, estimated by MITs Sloan
business school to reduce potential profits by nearly 20%.xxix One executive
went as far as removing the measurements from his Chinese factories
gauges, so that his workers would not be able to steal the measurements of

Cycle 3 Essay

his product.

xxx

Eliminating this would not only increase profit, through better

held industrial secrets, but also allow for more cooperation. A production
facility in the US would be able to communicate in real time, in the same
language with its engineers. This has done wonders for GEs battery
production division, where managers can push revisions on the fly to their
production teams from Ipads.xxxi Apples production in the US would benefit
enormously from these types of effects, when considering just how important
engineering and design are to it as a company.
This strategy will, without doubt, be supported by any of the politicians
and so could be arranged with even more tax breaks. There is already
evidence of this cooperation in the case of Boeing which secured $8.7 bn in
tax breaks for re-shoring 777X assembly to Puget Sound, WA.xxxii And there
are already rumours of a plan by the Obama admninistration to impose a
14% tax on cash held offshore, with a minimum of 19% for future profits. The
same rumours hold that investments in the US might be tax-free, and
bipartisan support for such a plan is demonstrable.xxxiii
On the whole, this plan appears to be a strong solution. It is certainly
executable, as seen by a combination of Apples ability to undertake it and
the precedent. It would generate higher value for shareholders and
customers in the long run from increased innovation. The government of the
US and its local stakeholdes would benefit from icnreased tax revenue and
investment into the community. But how would it solve the negative

Cycle 3 Essay

externality? As production shifted, the largest cause of this externality would

also be removed. As production capacity shifted to other countries, including
potentially those outside the US, there would be less stress placed on its
Chinese suppliers to have quick turnaround. Apple would be able to focus on
those suppliers who could produce this lowered output at the good
conditions it should demand, rather than imposing both the high quotas and
good working conditions. With a lower output, there is also the potential to
focus on the workers. So far, turnaround has averaged between 10 and 20%
per year in China. With less stressful working conditions the company should
be able to focus more on training its workers to do better at their jobs, and
make them higher value to its suppliers, and to itself.
Apple has been at the forefront of the tech world since it introduced
the IPod in 2001. Its introduction of the IPhone opened up a whole new world
of capabilities for consumers and is without a doubt the most culturally
significant technological innovation of the 21st century so far. Yet its
significance in China has been to cause suicides, depression and lowered
quality of life for whole communities, clearly not in line with the spirit of its
slogan for the original Macintosh; Why 1984 wont be like 1984 [the book].
Apple can fix this problem by shifting its production to the US. Not only will
the cost be similar, but the additional benefits of closer cooperation with
R&D and end-markets, and increased trust in its production team will
generate benefits for decades to come. Apple can not only fix its moral

Cycle 3 Essay

wrongs, but actually gain profit from its solution. All it needs to do is Think
Differently.

Cycle 3 Essay

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Cycle 3 Essay

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by Michael E. Porter and Jan W. Rivkin

Cycle 3 Essay

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Cycle 2 Essay

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xxxii

Reshoring intitiative

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Obama Proposes One-Time 14% Tax on Overseas Earnings Links It to Boosting

Infrastructure Spending to Improve Highways, TransitBy NICK TIMIRAOS and JOHN D.
MCKINNON