Article on Why Apple Has to Manufacture in China

Why Apple Has to Manufacture in China

Apple gets a lot of stick about manufacturing in China, and the issue came up again recently with

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the release of the iPhone 5. A recent article on the “Cult of Mac”contrasts Apple to Timbuk2, a US

producer of traveler and messenger bags, that proudly locates most of its of its manufacturing in San

Francisco, one of the most expensive places on earth. The workers in the factory are neither

overworked nor are they underpaid, yet Timbuk2 is not struggling financially unlike many other US-

based manufacturers. This begs the question: can’t Apple do the same and move jobs back from

China? We covered this issue in a recent post on HBR network.

As it happens, one of us actually authored the case

on Timbuk2 cited in that article and both of us have

taught it for many years at INSEAD and Wharton and

we also blogged about Timbuk2 recently as an

example of an innovative company. So it’s with some

authority that we can say that there is no good

business rationale for Apple to manufacture in the

United States; if it were to try it would almost

certainly get into serious trouble. It is not an issue of

labor costs. In fact, labor costs play a very small role

in the equation — both for Apple and for

Timbuk2. According to most sources, component

costs (which are about the same everywhere) are

responsible for a lion’s share of Apple’s expenses.

Timbuk2 manufactures in the US because it

produces custom-made bags, orderable through its

handy web site, and customers ordering custom

bags cannot wait for weeks for a bag to come from

China by boat, while shipping by air is expensive

and there would still be some uncertainty due to

customs clearance. A very similar logic lies behind

fashion retailer Zara’s choice to manufacture in

Europe, also an expensive location in terms of labor

costs. Of course, Timbuk2 does also produce many

bags in China but these are mass-produced, non-

customized bags, sold wholesale at a fraction of a

price of a custom bag, and they are not time-

sensitive.

Apple does not produce custom products and so it

does not need to deliver quickly — all of its

products are standard and mass-produced; just like

the standardized bags for Timbuk2, so there is no

reason to stay close to end-customers. Moreover,

Apple does not change its assortment often — the

new iPhone will probably be for sale for another

year or two. The much bigger issue for Apple is

supplier availability, engineering changes, and

flexibility. Apple is a huge company and as a New

York Times article published in January this year

details, its production volumes and often

unpredictable engineering changes require

manufacturing flexibilities and engineering

capabilities on a scale that is simply unavailable in

the USA.

In China, by contrast, manufacturers can deploy

thousands of collocated engineers to introduce

needed changes overnight, and large supply of

labor allows to ramp up and ramp down capacity

quickly. There is simply no factory capable of

employing 250,000 workers day and night in the

USA, surrounded by flexible and capable suppliers.

So the location decision isn’t really about labor costs

— it’s about manufacturing risk and where that risk

is best managed (for a fuller discussion of risk in

Business Models, see our recent HBR article). Bottom

line: there may be many companies that ought to

locate manufacturing back from China to the US

because of the advantages in terms of delivery

speed and other capabilities that the USA has, but

Apple is not one of them.

Find article at

https://knowledge.insead.edu/blog/insead-blog/why-

apple-has-to-manufacture-in-china-2710

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Copyright © INSEAD 2019. All rights reserved. This article first appeared on INSEAD Knowledge (http://knowledge.insead.edu).

 

http://renaissanceinnovator.com/2011/04/03/timbuk2/
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