Apple spent nearly $10 billion this past year on the tools and equipment needed to make its products. In that light, Apple CEO Tim Cook’s promise this week to invest more than $100 million to move production for one of its Mac lines to the U.S. next year sounds paltry.
But even such a small sum could signal something much bigger for the U.S. economy: namely, that moving manufacturing jobs back from China to the U.S. is starting to make financial sense.
For more than a dozen years, Apple has relied on a “designed in the U.S., made in China” strategy. That’s chiefly because the cost of labor in China is so much cheaper. This simple reality has shifted the globe’s economic center of gravity over the past decade. China has become the world’s manufacturing hub.
But that influx of wealth into China hasn’t only meant more money for factory owners and CEOs. Hal Sirkin, a senior partner with The Boston Consulting Group, has spent the past two years examining the phenomenon of “insourcing” — the return of jobs to the U.S. from overseas. When China joined the World Trade Organization in 2001, Sirkin says, the average Chinese worker made 58 cents per hour — a cost that had companies around the world banging on the doors of Chinese factories. Every year since, however, Sirkin says wages in China have risen an average of 15 to 20 percent annually.
“Once labor stops becoming cheap, all of a sudden the equation turns,” he says.
Worker productivity adds another variable that could make the math behind insourcing even more attractive to U.S. companies. Sirkin says American workers are about three times as productive as their Chinese counterparts, even as the Great Recession has kept U.S. wages stagnant. At 58 cents an hour, 10 Chinese workers were still cheaper than a single more productive worker in the U.S. But by 2015, if current trends continue, Sirkin says the wage gap will shrink enough that lower productivity combined with transportation costs will make Chinese workers the more expensive option for making goods to be sold in the U.S.
All that said, a mere $100 million from Apple doesn’t register as a huge vote of confidence in insourcing, nor does the part of its business it’s bringing back home. The Mac lineup is no longer Apple’s main source of revenue, nor is it a growing sector. In its most recent quarter, the company sold just under 5 million Macs, a 1 percent increase from the previous year. In comparison, the company sold 14 million iPads, up 26 percent from the prior year, and just under 27 million iPhones, a whopping 58 percent jump from the same quarter one year ago.
“This is going to impact a very small percentage of the business,” says Tom Dinges, a senior supply chain analyst at IHS.
Dinges says Cook is under a lot of pressure to create more U.S. jobs in the U.S. when so many of its products are sold here, though the company itself says it’s responsible for nearly 600,000 American jobs directly and indirectly. Add the bad publicity Apple has faced following revelations of employee suicides, poor working conditions and low wages at Foxconn factories in China and $100 million starts to seem like a small price for Apple to pay to polish its tarnished corporate image.
But no company gets to be as big as Apple without keeping a sharp eye on global economic trends. Apple has built up an incredibly efficient supply chain overseas, and we won’t be seeing iPhone or iPad factories springing up stateside anytime soon. But even a small move back to the U.S. gives Apple better footing to make further strides if insourcing starts to look like a clearer path to more profits.
And it’s not the only PC maker headed in that direction. Lenovo, the world’s second largest PC maker, has committed to building a manufacturing facility in Whitsett, North Carolina, close to its U.S. headquarters — though this isn’t exactly insourcing, since Lenovo is itself a Chinese company. Google made it’s Nexus Q, albeit a failed device, in the U.S. And server companies like SeaMicro have also opted to manufacture close to home.
In the end, every company will make its own calculations, and the answer won’t always come out the same, says Michael Marks, former CEO of contract manufacturer Flextronics Inc. and a founding partner at Riverwood Capital, a private equity firm. Asia has built up a huge infrastructure over decades supplying the components to make consumer electronics, which makes makes any attempt to manufacture gadgets in the U.S. again a complicated proposition.
At the same time, he says “the balance of power in cost has changed.” Nobody will be making circuit boards or displays in U.S., Marks predicts. But he says bringing all the components together and assembling them for just-in-time delivery to stores and customers could help PC makers stay competitive in the domestic market compared to having a fully assembled machine sit on a boat for a month en route from China.
Even then, insourcing still might not be an unequivocal cause for celebration. If more assembly-line jobs do return to the U.S., Marks says they won’t be like the fabled post-World War II middle-class manufacturing jobs in automaking and aerospace. “A hamburger flipper makes more money at McDonald’s than an assembly line worker would make,” he says. Such factories also won’t be massive 5,000-employee behemoths, he says, since the U.S. — even with its current unempoloyment rate — doesn’t have the labor pool to staff them. Instead, he says the country will see smaller shops more in the range of 100 employees each.
Still, he says insourcing is real. And it will change the job landscape.
“A whole bunch of hundreds turns into thousands,” Marks says. “It’s definitely a useful trend for America.”
