Monday, January 30, 2012

How the US lost out on iPhone work

WASHINGTON: When Mr Barack Obama joined Silicon Valley's top luminaries for dinner in February last year, each guest was asked to come with a question for the President.

But as Mr Steve Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: What would it take to make iPhones in the United States?

Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can't that work come home, Mr Obama asked.

Mr Jobs's reply was unambiguous. 'Those jobs aren't coming back,' he said, according to another dinner guest.

The President's question touched upon a central conviction at Apple. It is not just that workers are cheaper abroad. Rather, Apple's executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts' that 'Made in the US' is no longer a viable option for most Apple products.

Apple has become one of the best-known, most admired and most imitated companies on earth, in part through an unrelenting mastery of global operations. Last year, it earned more than US$400,000 (S$503,000) in profit per employee, more than Goldman Sachs, ExxonMobil or Google.

However, what has vexed Mr Obama as well as economists and policymakers is that Apple - and many of its high-technology peers - is not nearly as avid in creating American jobs as other famous companies were in their heyday.

Apple employs 43,000 people in the US and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple's contractors: An additional 700,000 people engineer, build and assemble iPads, iPhones and Apple's other products. But almost none of them work in the US. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

'Apple's an example of why it's so hard to create middle-class jobs in the US now,' said economist Jared Bernstein, who until last year was an economic adviser to the White House.

'If it's the pinnacle of capitalism, we should be worried.'

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone's screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company's dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into bevelled frames. Within 96 hours, the plant was producing more than 10,000 iPhones a day.

'The speed and flexibility are breathtaking,' the executive said. 'There's no American plant that can match that.'

Similar stories could be told about almost any electronics company - and outsourcing has also become common in hundreds of industries, including accounting, legal services, banking, auto manufacturing and pharmaceuticals.

But while Apple is far from alone, it offers a window into why the success of some prominent companies has not translated into large numbers of domestic jobs. What's more, the company's decisions pose broader questions about what corporate America owes Americans as the global and national economies are increasingly intertwined.

'Companies once felt an obligation to support American workers, even when it wasn't the best financial choice,' said Dr Betsey Stevenson, the chief economist at the Labour Department until last September. 'That's disappeared. Profits and efficiency have trumped generosity.'

Companies and other economists say that notion is naive. Though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need, executives say.

To thrive, companies argue that they need to move work where it can generate enough profits to keep paying for innovation. Doing otherwise risks losing even more American jobs over time, as evidenced by the legions of once-proud domestic manufacturers - including General Motors and others - that have shrunk as nimble competitors have emerged.

Apple, which has a reputation for secrecy, declined to comment.

This article is based on interviews with more than three dozen current and former Apple employees and contractors - many of whom requested anonymity to protect their jobs - as well as economists, manufacturing experts, international trade specialists, technology analysts, academic researchers, employees at Apple's suppliers, competitors and corporate partners, and government officials.

Privately, Apple executives say the world is now such a changed place that it is a mistake to measure a company's contribution simply by tallying its employees - though they note that Apple employs more workers in the US than ever before.

They say Apple's success has benefited the economy by empowering entrepreneurs and creating jobs at companies like cellular providers and businesses shipping Apple products. And, ultimately, they say curing unemployment is not their job.

'We sell iPhones in over a hundred countries,' a current Apple executive said. 'We don't have an obligation to solve America's problems. Our only obligation is making the best product possible.'

For over two years, the company had been working on a project - code-named Purple 2 - that presented the same questions at every turn: How do you completely reimagine the cellphone? And how do you design it at the highest quality - with an unscratchable screen, for instance - while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the US. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 per cent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from South Korea and Japan, display panels and circuitry from South Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

In its early days, Apple usually did not look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr Jobs bragged that it was 'a machine that is made in America'. In 1990, while Mr Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that 'I'm as proud of the factory as I am of the computer'. As late as 2002, top Apple executives occasionally drove two hours north-east of their headquarters to visit the company's iMac plant in Elk Grove, California.

But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple's operations expert, Mr Timothy Cook, who replaced Mr Jobs as chief executive last August, six weeks before Mr Jobs' death. Most other American electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semi-skilled workers there were cheaper. But that was not driving Apple. For technology companies, the cost of labour is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr Cook, the focus on Asia 'came down to two things', said a former high-ranking Apple executive. Factories in Asia 'can scale up and down faster' and 'Asian supply chains have surpassed what's in the US'. The result is that 'we can't compete at this point', the executive said.

The impact of such advantages became obvious as soon as Mr Jobs demanded glass screens in 2007.