The reason we’re buying such a large percentage of electronics from China is no longer cheap labor, but it has the most complete and cost-effective ecosystem of component manufacturers in the world.
For argument’s sake, what would happen if we just stopped buying electronics from China?
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ASSEMBLY IN THE US OF CUSTOM ELECTRONIC PARTS FROM CHINA IS A LOGISTIC NIGHTMARE
To build an iPhone you need a lot of different parts: touch screens, camera modules, batteries… Many of these are custom made in China, and unfortunately, there are simply no suppliers of these kinds of parts left in the US.
Every custom part is a new product in itself, which especially in the beginning will need some adjustments.
If your first shipment of 10,000 LCDs has a wire which turns out to be a little too long, if you’re buying your electronics in China you just send them back to the factory, 5 minutes down the road.
They will send the fixed units back within 2 days. If those same LCDs would have been shipped to the US, it would be in a batch of 100,000, the shipment would take 3 weeks, and after discovering the problem the screens would all have to be shipped back and forth again.
Meanwhile, the assembly line is dead for 6 weeks. Oh, and during those 3 weeks it took before the problem was noticed, the LCD factory would have continued to produce another 200K LCDs with the wrong cables…
MADE IN THE USA?
So what happens if the US forces Apple to move iPhone production to the US?
Foxconn needs to make sure the complex assembly of all those custom made parts works well, so full final assembly and testing will still be done in China.
They will simply add an extra step to the process: take the phones apart again into say 2 halves, making it a knockdown kit.
They will then ship those halves, carefully packaged, to a screwdriver factory in the US. All that will be done there is screw the 2 halves of the phone together again.
In China, where manufacturing labor is now at about 15% of US rates, Foxconn is already replacing a lot of workers with robots.
In the US any new factory will be robotized up to the hilt. Especially with the kind of volumes of Apple, you can be sure they will use robots to screw and package 10 million phones a month.
So the number of jobs this new factory would create will be limited to a robot programmer, a repair guy and a doorman.
The cost of the extra steps in the process, and for all these robots, will only make the next-generation iPhone even more expensive.
1 FACTORY OWNER GETS RICH (TAX-FREE BTW), 325 M. US CONSUMERS PAY THE PRICE
If you look at the picture above of the Teardown of the iPhone X done by IFIXIT, it’s important to distinguish between Off The Shelf (OTS) Components, and Custom Parts.
On the circuit boards, there may be over 100 tiny components. They are standard, tried, and tested, and can easily be ordered online, anywhere on the planet.
The big silicon components are where the real money in this phone is, besides the ones embodying Apple’s own IP, they also use silicon from American and international vendors such as Qualcomm, Skyworks, TI, NXP, Murata, and STMicroelectronics.
The problem is with the non-OTS parts, all designed and manufactured specifically for this phone, by a large number of different suppliers.
They include custom batteries (notice there’s a 2-pack!), custom PCBs, little brackets, flex cables, lenses, housings, etc.
I do not have detailed research, but I am confident Apple is buying the majority of these custom electronics in China.
Even if the housing is sold by a Taiwan listed company called Catcher, on their site you can see that 7 of their 10 factories are in China.
This large number of plants, for a company you have never heard of, only underscores the importance of component suppliers being close to their clients.
Wherever Foxconn or Pegatron sets up a new electronic assembly plant for Apple, whether in Taiwan, China, or elsewhere, Catcher will build one next door.
BUYING CUSTOM ELECTRONICS FROM CHINA
So then you could think: “If we manage to get an Apple factory in the US, we can get a whole industrial park around it full of component factories to supply the final assembly plant.“
But if the REAL work were to be done in the US, we get to the problem Steve Jobs used to mention: In the US there is no way you can find 100,000 skilled factory workers to staff such a park.
Foxconn, Apple’s main electronics manufacturing services company, employs well over 1 million people in China. WSJ reported recently: “The U.S. labor market is the tightest it has been in nearly two decades.
THE REALITY OF THE SITUATION
The reality is that any company who wants to be competitive in today’s market needs to be buying its electronics from China.
Given the enormous size of the internal market in China and its momentum, it will stay this way for the next 20 years.
As such it makes a lot of sense to include Design For Manufacturability in China into your next electronic product development project.
