Bringing iPhone Assembly to U.S. Would Be a Hollow Victory for Trump
19 September 2018 - 5:21PM
Dow Jones News
By Greg Ip
President Trump says there's an easy way for Apple Inc. to avoid
his tariffs on China: make its products in the U.S. But this would
be a hollow victory. If Apple follows his advice, Mr. Trump will
have grabbed the least valuable link in the electronics supply
chain with little net benefit to Americans, without addressing the
real contest in global trade.
That contest is over the more valuable production steps like
research, design and the manufacture of more sophisticated
components where the U.S. is dominant but China is closing the gap.
Mr. Trump has correctly identified Chinese practices -- such as
forcing U.S. companies to transfer technology to Chinese
competitors -- as a threat to that dominance. But an all-out trade
war could end up doing more long-run harm than good.
Apple's iPhone is one of the most successful consumer products
in history, and one of the most globalized. Its camera is Japanese,
its memory chips South Korean, its power management chip British,
its wireless circuits Taiwanese, its user-interface processor Dutch
and the radio-frequency transceiver American, according to a study
of the value added in smartphones by Jason Dedrick of Syracuse
University and Kenneth Kraemer of the University of California at
Irvine.
The factory workers who assemble iPhones in China contribute
just 1% of the finished product's value. Apple's shareholders and
employees, who are predominantly American, capture 42%.
Suppose Apple decided that all the phones it sells in the U.S.
would be assembled here. Mr. Dedrick estimates each phone requires
two hours of assembly. For 60 million phones, that means 120
million hours of work, or roughly 60,000 jobs.
Hiring that many workers is no picnic: In 2013 Motorola Mobility
set out to make its Moto X phone in the U.S. but struggled to find
enough American workers according to Willy Shih, an expert in
manufacturing at Harvard Business School who is also a director of
Flex Inc., the contract manufacturer that Motorola used. In 2014
Motorola decided to outsource production. Apple has encountered
similar problems assembling its Mac Pro computer in Texas.
Assuming Apple could find 60,000 workers, it would have to hire
many away from other employers given how low unemployment currently
is. The benefit of the wages they earn would be offset by the
higher prices other Americans pay for their phones.
How much would that add to the price of a phone? Mr. Dedrick
says about $30; Mr. Shih thinks it would be more because of the
cost of shipping individual components to the U.S. Still, such an
increase would hardly kill sales of iPhones, now priced at $600 to
$1,100. The bigger cost of U.S. assembly, says Mr. Dedrick, would
be the inability to quickly add hundreds of thousands of workers
when new phones are launched, which is only possible in Asia. Apple
can charge premium prices in part because it introduces superior
features before its competitors do.
"If they are coming to market late and their products cost
more...Apple is going to lose market share," says Mr. Dedrick.
The economics of the iPhone's competitors are quite similar:
Assembly represents only 1% of the value of Samsung Electronics
Co.'s Galaxy S9 and just 4% for Huawei Technologies Co.'s P9,
according to Mr. Dedrick and Mr. Kraemer. For all three phones, the
most valuable parts of the supply chain occur elsewhere: in the
parent company's design and research; the manufacturing of key
components such as microprocessors, memory and communications
chips, and cameras; and the intellectual property embedded in key
patents. These jobs aren't as numerous but they pay more and have
more spin-off benefits for the rest of the economy in the form of
innovation, expertise and profits reinvested in new products and
markets.
This is where the real stakes in the current trade row lie. It's
too late for the U.S. to bring back all of the supply chain. The
time to act would have been in the early 1980s, before western
manufacturers began outsourcing the assembly of personal computers
and many components to east Asia. Taiwan and South Korea exploited
those supplier relationships to acquire know-how for manufacturing
increasingly sophisticated products.
In the 2000s China copied that playbook, starting with low-end
assembly, then attracting related suppliers by promising
preferential access to its domestic market. China now boasts four
of the world's six largest smartphone manufacturers. Huawei now
sources many high-value components such as chips and processors
internally or locally, and thus captures almost as much of the
value of its phones as Apple does, although its phones sell for far
less.
The real question is whether even more of the value in the
technology supply chain will flee the U.S. for China.
Mr. Trump accuses China of using forced technology transfer,
subsidies and nontariff barriers to help its companies supplant
foreign competitors at home and abroad. The U.S. has a lot of
leverage in this fight given China's continued dependence on U.S.
technology and the presence of companies like Apple to hone its
capabilities. But the fight has risks: forcing Apple to shoulder
costs its competitors don't hurts its own dominance, and China has
multiple ways to punish American companies, as it did recently by
blocking Qualcomm Inc.'s takeover of Dutch chip maker NXP
Semiconductors NV on antitrust grounds.
American companies broadly back Mr. Trump's goals and are
prepared to suffer some short-term pain to achieve them, so long as
success is measured not simply in how many jobs they create in the
U.S. now, but in the quality of the jobs they create both now and
in the future.
Write to Greg Ip at Greg.Ip@wsj.com
(END) Dow Jones Newswires
September 19, 2018 11:06 ET (15:06 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.