How Do You Like Them Apples?

by BILL WADDELL

There is an interesting interview with a Harvard guy named Umair Haque in Business Week, in which he carries on about the "sweatshops" in which iPods are made.  He has done some rough math, learned that the Chinese manufacturer (Foxconn I presume) takes 2.7 labor hours to make one at about $1.50 an hour for a total Chinese value add of $4 per iPod.  He then multiplies that same 2.7 hours by an American labor cost of $23 an hour for a total, theoretical American value add of $62 per iPod.  With these two numbers he waxes about how Apple and their customers should make them here and pay the extra $58 per iPod to get out of the "sweatshops".

I'm not going to get into the whole sweatshop issue - most people who describe places like the Foxconn plant in Longhua as a "sweatshop" have never actually been there, nor have they seen any other Chinese factories.  By their standards, every manufacturing plant in China would be classified as a sweatshop.  China is a poor place and the people there view a hundred bucks a week as a great deal - and they line up for jobs at Foxconn.  That's just the way it is.  And his notion that either Apple or their customers would or should lay out an extra $58 for an iPod in order to pay what he terms as the "real human cost" ridiculous.

My focus is on the 2.7 hours and the $58 dollar premium he calculates for the final assembly.  This is based on data dug up by three Cal Irvine guys.  You can tell the study was performed by an academic gang, rather than people who actually work in manufacturing.  The 2.7 hours to make an iPod in an American factory is so far off the common sense chart as to be laughable.  I don't know what goes into an iPod, but I have a pretty good idea.  If an American factory could not produce 100,000 iPods in a week with 600 people I would be shocked - and that includes everyone from production people to the guy who sweeps the floor at night.  That is not 2.7 hours per iPod - that is more like .25 hours per iPod.

Chinese manufacturing is built around and thrives on cheap labor, and the 2.7 hours does not surprise me in the least.  With workers so cheap, there is not much premium placed on efficiency and methods, and automation is much tougher to justify.  In the USA and Western Europe a completely different dynamic is at work.  A productivity differential of a factor of 10 between those places and China is not a stretch - it is typical.

So the $58 premium for American labor is really less than $2 (2.7 hours X $1.50 per hour in China versus .25 hours X $23 per hour in the USA).  Then factor in the costs of logistics and the ongoing battle to maintain decent quality from China and making iPods in China, rather than in a lean American factory makes no sense at all.

I have no idea how Apple arrived at the decision to make iPods where they do, and I imagine some of the data cited by the Cal Irvine guys is off (not by much, though), but I do know that any economy they think they are getting from buying into the notion that everything has to come from China or it won't be competitive is just plain wrong.  Kevin invented the term "outsourcing lemmings" long ago to describe this sort of follow-the crowd decision making.  As innovative as Apple may be with their products, they are dyed in the wool lemmings on the manufacturing side.  I can only imagine how lean and effective they could be if they applied some of their incredible creative energy that goes into designing their products to making them

Comments

[Dan Markovitz]

Bravo, Bill. Well said. So often in these analyses people forget that the level of automation in US factories is higher than that in China, for precisely the reasons you mention, so the math doesn't reflect reality.

[6sigma]

Excellent. Well-reasoned & written. Reversing those "old outsourcing decisions" is one of the keys to returning the U.S. economy to greatness. Will we have the courage?

[Greg Glockner]

The only issue I see is that Apple got out of the manufacturing business years ago, and it's clear that they are in the business of software and hardware design. Not hardware manufacturing. So if they were to take manufacturing back to the USA, they would still be looking for a contract manufacturer. That said, I don't doubt your math, and perhaps Apple could find a contract manufacturer in the USA that would give the same efficiencies from your calculations.

[Anon]

I'm surprised you would brush off bad conditions as "That's just the way it is." I don't hear you saying "there's too much waste in processes... well, that's just the way it is."

People should fight for what's right, not just shrug their shoulders. It's interesting to see what fights you choose to pick.

[Bill Waddell]

I have written before that I view China as a lean wasteland. There are major cultural issues that get in the way. I believe that companies and coutnries, for whatever reason, are not open to lean until they are starting to feel enough pain from doing things the traditional way. China is still churning cheap labor and, except for some American and European owned plants where they send in their own experts, lean is nowhere in the equation.

I know that the working conditions in China are miserable by US standards, I also know that Don Quixote went into literary legend as a fool for tilting at windmills. China is what it is, and if we want to get worked into a lather over their culture, conditions and labor policies, that is fine, but it does not advance the cause of manufaturing excellence one iota.

More important, US companies will return manufacturing to this country based on economics, not social causes. So I will leave the working conditions to the social scientists, and I will fight for lean where it has a chance of being heard, and I will make the economic case as best I can for lean manufaturng in the rest of the world.

Do I care about conditions in China? Of course I do. Is it worth my time writing about it, ot your time reading about it? Absolutely not. If you look at old posts, you will find that we have wasted enough time already on the subject of Chinese labor policies.

[david foster]

The excellent U.S. factory would probably have some significant additional capital costs, above and beyond the Chinese factory, which would need to get factored into the unit-cost analysis.

[Bill Waddell]

You're right, David, although a privately held, serious manufacturing company would not put nearly as much weight on that cost as a public company would. The private companies view investments in machines as a strategic issue, while the public ones tend to view those investments as a financial analysis exercise.

[Matt Youell]

Just a note on that final sentence... Something breaks when Apple puts their creative energy into manufacturing. In the 90s I worked at one of their US plants. Very high tech, shiny and impressive. But the problems... ugh. It was like watching a 10 year old drive a Ferrari. In their case, outsourcing to experts (wherever those experts may be) was the best move they could have made.

[david foster]

Thinking about it some more...how on earth could final assembly on an iPod take 2.7 hours? Does this include hand-whittling the case or something?

It looks like Umair backed into this number by dividing the claimed assembly cost of $4 by an average Chinese wage rate. This methodology ignores supervisory overhead and facilities costs which are almost certainly included in the $4 number.

[Olivier]

After all, even if it's not neither the only nor the best solution, outsourcing is a solution for poor countries to growth and to learn modern practices. Would it be a good move to close all factories in poor countries?

[Peter]

Excellent posting. I do want to add a little tidbit, that is often overlooked.

Apple sells iPod outside the United States as well as within, and I believe the shippings lanes/logistics around the chinese manufacturers are much better suited for global distribution than a factory in say: South Carolina or Kentucky.

[Pete]

I'm really surprised nobody has mentioned that Apple might possibly be selling iPods and such in Asia and it therefore makes a lot of sense to have a factory there. Since Apple apparently doesn't break out sales by region, we outsiders won't know how important those sales could be.

[Bill Waddell]

Actually Apple does publish its sales by region in its financial reports. Although there is no breakdown by product the overall sales are:

North America - 44%
Europe - 26%
Japan - 5%
Retail stores - 18% (there is only 1 in China)
All other (including the Asia Pacific Region which includes China) - 7%

Apple's inability to sell in China and their churning through sales management, and their batles with China Mobil over the iPhone are pretty well documented.

The bottom line is that Apple's sales in China are negligible, primarily because the idea of a Chinese middle class is more hope than reality and the Chinese cannot afford their products. Cheaper MP3's do well in China, but not iPods

[Pete]

Bill, not to quibble but your figures include CPU's etc. and I don't believe sales of those items would be great in Asia. Apple doesn't break sales out by product by region which would be required here. Roughly 29% of sales is iPods related and roughly 12% is in the Asia/Pacific region. I think iPods and iPhones are more likely to appeal to folks throughout Asia, not just China.

[Renaud]

I think this is pretty good reasoning, but applied to an inappropriate example. Foxconn is just the opposite of the average cheap Chinese workshop--they have more than 15,000 patents! I'm sure they actually help Apple design the new generations of iPods.
I would say this type of demonstration is better applied to industries such as apparel, where the search for the "cheapest needle" has lead to lots of nonsense (American Apparel was featured on your blog several times, and it is an excellent exemple).

[PeterB]

Hi Bill, I read your blogs daily, thanks for writing them!

Your comments about Apple struck a particular chord with me. I have been a particular fan of James Dyson and his vacuum cleaners which are big sellers in the UK. His company has a site in the UK designing and manufacturing, perhaps I should say had, he must be an outsourcing lemming as his manufacturing went offshore only a few years ago.

Another case of if only they had used some of their product design talents on how to manufacture the damn things.

Also, every company I’ve worked for has off-shored something or other, only looked at the headline price and forgotten the rest. Every single one has cost more than expected, usually more than the previous total and without putting the correct level of resource (i.e. any) within the company to manage the supply chain, the results have been sadly predictable.