Most of us spend a good part of our lives glued to our iPhone or other similar devices. It seems as if we cannot survive without being connected to cyberspace.
It turns out that Apple, a U.S.-based company which makes the iPhone and depends on its sale, cannot survive without being connected to China, which is a key partner in the production of most every iPhone that people use. And that puts the iPhone at the center of the great power struggle underway between the United States and China.
One of the earliest insights into iPhone production came along in 2010 thanks to research by economists Yuqing Xing and Neal Detert. They lifted the veil off the mystery behind the iPhone label “Designed by Apple in California, Assembled in China”.
The iPhone model 3G was indeed designed in Cupertino, California, by Apple. But the vast majority of components were sourced from Japan, South Korea, Germany and elsewhere in the United States. All iPhone components were then shipped for assembly to Foxconn, a Taiwanese contract manufacturer based in Shenzhen, China.
Less than 4% of the iPhone manufacturing value came from the assembly in China.
Manufacturing capability
The iPhone was only first launched in 2007, and iPhones were not sold in China until late 2009. At the time, there was no production of Chinese smartphones. Since those days, the iPhone and other smartphones have become ubiquitous in modern life. Apple now sells 230 million iPhones annually, each one of which has one thousand components and about 90% of them are produced in China.
Financial Times journalist Patrick McGee, in his recent book “Apple in China“, explained how Apple began assembling iPhones in China for its cheap labour costs but that came with a different cost: China’s labour was not of high quality.
In contrast to the general impression, China does not have great vocational training systems. So Apple became China’s vocational school.
Although Apple did not own any factories, it assumed close control over the factories of Foxconn and other companies to ensure its traditional perfectionist quality control. This included sending over planeloads of high-level engineers from the United States to train Chinese workers and investing in machinery for production lines.
Further, while components from foreign companies are still used in Apple products, these companies are now increasingly based in China. Over time Chinese companies have played a growing role in the production of the iPhone and other devices. Workers from all these companies have also been trained by Apple engineers.
Over the past decade, Apple invested some $55 billion a year for staff training and machinery. Since 2008, 28 million Chinese have received training from Apple — a figure larger than the workforce of California.
Human capital
But there is more to China’s human capital than training offered by Apple. A key element has been China’s investment in human capital more generally, notably education and health.
Chinese students participating in the OECD’s Programme for International Student Assessment — from Beijing, Shanghai, Jiangsu and Zhejiang, collectively home to nearly 200 million people — have outperformed the majority of students from other education systems, including the United States.
China has also made extraordinary progress in lifting its life expectancy, which is now the same as that of the United States at 78 years, even though the gross domestic product per capita in the United States — a key measure of the economic health of a country — at $83,000, is more than six times that of China. For the first time, China has overtaken the United States in healthy life expectancy at birth, according to World Health Organization data.
Apple CEO Tim Cook has said that there is a popular conception that companies come to China because of low labour cost. Cook argues that the truth is China stopped being a low labor cost country many years ago.
He insists that Apple is motivated by the quantity and type of skill that China offers. For example, while it requires really advanced tooling engineers, Cook is not sure the United States could fill a room with such engineers, while in China you could fill multiple football fields. Such vocational expertise is now very, very deep in China.
India and the United States
U.S. President Donald Trump insists that Apple must “reshore” its production to the United States. This is not realistic. The United States does not have the capacity to produce Apple’s products at scale and at competitive cost. It most certainly does not have the same competitive cost, well-trained engineering workforce as China, which has some three million people working in Apple’s supply chain.
Under Trump 1.0, Apple made a commitment to build “three big, beautiful factories” (in Trump’s words) in the United States. But that was just hot air, as none were built. Now, Trump has threatened to impose a 25% tariff on iPhones if they are not made in the United States.
In response, Apple said that phones sold there would be labelled “Made in India” (although this is unacceptable for Trump), and has pledged to invest $500 billion in the United States. What this pledge means in reality is still unclear. Apple may ultimately need to build a token factory or two, with limited production functions, to pander to Trump.
Many commentators are suggesting India as an alternative production base for Apple. And some assembly functions are indeed being shifted to India. But these are just the very final assembly phase of production, which are sufficient to justify attaching an “Assembled in India” label.
All the pre-assembly activities remain in China. At this stage, India is not a viable option for replacing China because of deficiencies in human capital, infrastructure and logistics systems.
A close partnership
In many ways, modern China and Apple have made each other.
Technology and knowledge transfer have underpinned China’s growing contribution to the iPhone and other Apple products — as well as the Chinese smartphone brands like Huawei, Xiaomi and Oppo, which now dominate world markets. Moreover, Chinese engineers are capable of building all sorts of electronic products, some of which could be used in military conflicts.
In sum, Apple has made a major contribution to the rise of China as a technological powerhouse. China has been a key factor in the rise of Apple as one of the world’s most successful companies. Apple has a Chinese system for producing the iPhone and other products that works like a song.
No other country has the human capital, and production and logistics systems for producing Apple products at scale and at a competitive cost. Thus, Apple is in a way now trapped in China, which makes it vulnerable to coercion from China’s authoritarian government.
It should try to make greater efforts to de-risk itself from China, although that is not easy and might provoke the ire of the Chinese authorities.
Apple now finds itself caught between a rock and a hard place — meaning President Xi and President Trump.
Questions to consider:
1. Where is the iPhone made?
2. What would make a device that is made outside the United States more expensive to buy in the United States?
3. Should people be able to buy anything from anywhere without any extra costs from governments? Why?
