Apple making iPhones in the United States? Do not hold your breath

An exclusive report from Nikkei Asian Review a week ago claimed that Apple was looking at ways it, and its manufacturing partners, Foxconn and Pegatron, might move some iPhone assembly operations to the United States.

This is all conjecture, as none of the companies mentioned in the article responded to comment, but you can count on theories like this being floated thanks to the “Trump effect,” a reference to the recent elections in the United States. These “winds of change” were further carried by a conversation Mr. Trump apparently had with Apple’s CEO, Tim Cook, signaling a desire to have Apple build more of its products in the US. Of course, the president-elect also wants to place a tariff (tax) on foreign-made products of American companies.

I am not trying to enflame anyone’s political feelings, but facts do not care about your feelings, and there are some realities that need to set-in quickly if you think there will be a remigration en masse of American manufacturing over the next four or eight years.

Pegatron assembly workers line up before knocking out a 10-12 hour shift putting together iPhones. Such a scene is not so viable in the US. Photo credit - Bloomberg

20th Century and American manufacturing

Anyone that is old enough to consider themselves part of the first two or three post-WWII generations will remember that vast array of products that were “Made in the U.S.A.” I have a few of these relics, most of which still work great. Indeed, Americans were, and still are, good at making stuff.

Once the war was over, and nations began to pick up the pieces, there was only one manufacturing center left, the United States, left virtually untouched by the fires of war that destroyed all of Europe, the Pacific Rim, and significant portions of Asia. In short, the US was the only show in town, and it was the engine that would rebuild the world – everything from basic circuits to zippers – “Made in the U.S.A.”

A world rebuilt

Many people do not realize the scale of what was required to rebuild everything. It took decades, and much of that progress was hampered by emerging geo-political realities, like the Cold War, Korea, Vietnam, ad infinitum.

Despite those variables, the past 75 years are, in broad terms, considered an era of post-war peace. As countries began stabilizing their economies, they emerged as investment opportunities for affordable labor, and new consumer markets. Right now, China and India are the two hot markets, and they alone also represent more than 35% of the world’s population, making them a potent economic hub, and massive consumer base.

I am by no means like Milton from Office Space, but I have had this Acco 30 stapler for at least 20 years. Made of steel, made in the USA, and shipped around the world until less expensive manufacturing venues became available. Try and find a stapler not made in Asia nowadays.

From building to servicing

The US economy made a pretty dramatic shift since 1980. Manufacturing began to “off-shore” as cheaper opportunities presented themselves. This impacted a lot of skilled labor, but it was more than offset by the larger economic growth from 1983 through 1999.

That was when the “service” economy evolved, and when the internet began to open up to the world (beyond the dial-up days of TELENET, Prodigy, or Compuserve) and create unprecedented growth in international commerce.

All of that developed into an economy which is now 80% comprised of “services.” Many heavy and technological industrial elements remain, but where cheaper labor was available, China and India easily grew to take on manufacturing at a scale that is physically not possible anywhere else in the world due to a simple lack of people.

The previous tech migration

The United States has seen this type of industrial migration before. As nations rebuilt and economies grew, competition in all sectors of commerce began to heat up. Through much of 1970s and 1980s, Americans begrudgingly accepted the increasing supply of electronics (and cars), made in Japan.

Sony became a powerhouse with the Walkman, and would soon do the same with televisions. Stereo systems would reshape “high fidelity” sound, thanks to Sony, Onkyo, Aiwa, et al. Within a veritable blink of an eye, “Made in Japan,” became not only the norm, but a sign of quality for many great products, from electronics to automobiles.

Mobile phones at the time? Those bricks, like the Motorola DynaTAC of the 1980s, were initially made in the good old USA (accessories elsewhere).

The first cell phone, the Motorola DynaTAC

Simple math

The rhetoric to bring manufacturing back to the United States brings distant memories of the salad days of America’s dominance in the world economy. Make no mistake, the US is still the big boy on the block, but it must contend with “first world” problems – higher wage and benefit expectations, competent and sometimes overbearing regulations for labor, safety, environmental considerations, and navigating through an ever-more-complicated tax system that punishes success in ways not imagined a century ago.

Simply put, a skilled, or unskilled, worker in the US costs many times more than their counterparts in Asia. Moreover, everything else is more expensive too. That is a hard reality when dealing with a purchasing power of $55,000 per capita in the US, versus $14,000 in China, or only $6,200 in India.

Do not buy the political rhetoric

None of these realities are helped by some of the bloviating of president-elect Trump. His promises to place tariffs on goods made overseas for American-based companies will have limited impact, particularly in the manufacture of electronics. Of course, the president does not have the power to unilaterally invoke a tariff, that is done by Congress, and they have not been very productive lately.

Mr. Trump is also thinking about incentives to make Apple, and other companies, bring more operations to the US. A relaxation of the corporate income tax rate is likely part of that picture, but that does little to abate actual costs of doing business in the US, especially when it comes to manufacturing. To even think of operations on the scale of Foxconn or Pegatron, there would have to be subsidies on a scale that would rival the GDPs of small nations, and that would be just for Apple, never mind other enterprises that contract with manufacturers overseas.

A 35% ad valorem tariff on something like the iPhone will not increase the retail price from say, $650 to $875. Rather, it is a levy applied against the cost of the product, not the sale price. In the case of an iPhone, which costs Apple roughly $225 per-unit to make, that would raise the unit-cost to about $300. Some would argue that still leaves Apple and its retail partners plenty of room to make money with, and indeed, these businesses are more than capable enough to manage the narrower economic path a tariff would impose. However, there is another factor that must be considered, China.

The fine print of a tariff? It raises prices across the board, whether an iPhone is made in the US or not. Image credit - Assignment Point

China

Like a game of chess, there are moves and countermoves in the world of trade. Though, for purposes of the current global climate, it probably feels a bit more like backgammon, each player has a strategy, but the world is tossing the dice, and no one knows what moves they may be forced to make. Such as it is (or would be) with China.

What many people are not taking into account is that China will not sit sublimely by while its largest economic partner begins invoking trade barriers on products that are the fruits of its manufacturing engine. What an engine it is too, in less time than it took for Americans to accept Japanese-made goods, we have seen tremendous strides in build quality of many products made in China, not the least of which is, the iPhone. We have also seen amazing levels of quality reaching far less expensive products from ZTE, Huawei, and BBK (parent of OnePlus, Oppo, and Vivo).

Some may think that China would just go tit-for-tat, but I would expect moves that are more subtle, if not more manipulative. China, at its whim, could simply readjust the value of its currency. Or, perhaps just as likely, it would subsidize manufacturing costs so that companies would not have to bear as high a cost for goods made, thus canceling the ad valorem tariff premium. Perhaps an even more “in your face” move by China would be to re-peg its currency to the dollar the way it used to.

In any instance, the world’s two largest economies would find themselves being checked at every move. While that would make for some interesting drama, and for all the warts and debt the United States has accumulated, China has weathered the economic turmoil from the past several years be literally building cities and leaving them empty. That is hard-asset debt (estimated in multiple trillions of dollars) that ostensibly stays off the books. Nope, China is not going to simply give up its manufacturing base that powers over 30% of its economy. The same can be said for any emerging market with growing productivity.

Where arguments for "free market adaptation" fail, is the assumption that China is truly a free market. It is not. It is an open (well, open-ish), centrally planned economy that grows based on mandate, not market conditions.

Think long, and change how people see the big picture

The point is not about the United States not manufacturing stuff anymore. It is about leading the way of manufacturing. Solid state silicon-based technology is a big boom, with room for high margins and making money. However, it is a commodity. Smartphones are inescapably in that downward price spiral as components get perpetually cheaper.

No, the key is for the United States to continuously re-invent how people grow and participate in this world. From Ford inventing the assembly line, to the Grigg brothers inventing tater-tots, to BBN developing the ARPANET, these creations changed how people bought cars, ate potatoes, or conducted communications and commerce.

The scale of production involved in making something like the iPhone is not necessarily beyond the ability of the current US market, but I would argue it is beyond the threshold of a generation raised in "safe spaces" and "participation trophies." The effort exerted by Apple's contract manufacturers to build tens-of-millions of devices each quarter, strains all western ideals of "good jobs," as evidenced by the exhaustion experienced by workers in China.

Making phones, or staplers, or textiles is not the future. The American market must be driven to create, not simply manufacture. That is something worth holding your breath for.

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