Tuesday, February 26, 2013

Apple's Offshoring in China:Time to Backshoring?



After reading the article “Time to rethinking offshoring?” and “Supply Chain for iphone Highlights Costs in China”, the offshoring manufacturing of Apple really attracts my interest. The production of high-tech goods, like iphone, has moved steadily from the U. S. to Asia over the last decades. Apple, considering the leader in the smartphone market, in terms of manufacturing, is entirely dependent on offshoring manufacturing, primarily in China, a believed low-cost country.

Introduction of Offshoring
Offshoring describes the relocation by a company of a business process from one country to another country. Companies offshore their productions by taking advantage of lower wages and operating costs in such nations as China, India and Mexico. Several reasons are considered important for offshoring manufacturing, including low cost labor, a stable global economy and rapidly growing local market. The decision of a location for offshoring manufacturing may also be influenced by factors such as the language and education of the local workforce, transportation systems or natural resources.

Rethinking of Offshoring
By rethinking of the impact exerted by offshoring, the changing economic conditions in recent years may have undermined some of the benefits of offshoring. Influenced factors include wages, logistics charges, and raw material, etc. Is offshoring manufacturing still the trend to achieve cost savings in a company? This is the question we should consider about. With the Japanese earthquake and tsunami on the global supply chain, along with the increasing costs in the former low-cost countries, making many companies began to rethink the offshoring manufacturing. A large scale of U.S. manufacturers moving out of Asia back to America, indicating “offshore” is not the trend anymore.
From the reading, the figure shows the total landed cost for a midrange server, comparing scenarios in Asia and the U.S.  In 2003, Asian production hold a total $64 landed-cost advantage, however, only five years later, changing economic conditions have reversed it. It clearly shows that, in 2008, the former offshore savings have turned to negative $ 16, because of higher labor and freight costs. With the inflation and rising oil price, Asia lost its competitive advantages in producing the midrange server in this case.

Also from the reading, by comparing the wage saving from offshoring with the cost of logistics, the exhibit shows the optimal regions for products with a range of different unit manufacturing costs and various product weights. The paper has chosen breakeven curves for China (offshoring location), Mexico (nearshoring location) and United States (backshoring location). Still for midrange server, in 2008, it was already below the breakeven line in China because of higher wages and freight costs, indicating server could be produced more economically in Mexico (nearshoring location).

However, noticing that for the high-end server, China (offshoring location) still hold the competitive advantages until 2008.

Apple's Current sistuation
According to the New York Times, Apple employs 43,000 people in the U.S., however, Foxconn, the largest Apple offshoring company in China, has 230,000 employees to make iPhones and iPads. It is also estimated that there are more than 500,000 people in China building Apple products. The current issue about Apple’s offshoring manufacturing is whether it is over-dependent on offshoring? Is Apple ready to exit China and backshore to the U.S.? I will discuss those questions by analyzing the pros and corns in manufacturing in three locations, including the United States (backshoring location), Mexico (nearshoring location) and China (offshoring location).

It is important to consider the location of the end market into which the products will ultimately sold, when an Offshoring Electronic Manufacturing (OEM) is deciding on where to conduct its electronics manufacturing.  Generally speaking, closer is better, especially for the large and heavy products. Although direct labor cost only accounts for a tiny small part of an Apple product, it is still meanigful for OEMs to consider. According to the reading, much of the value in Apple’s products, the high-end products, is captured by the brand and the distributors and retailers.

Figure 1. Fully Burdened Cost of Mexico v. China Labor (Industry average per Direct Labor hour in US$)


Backshoring to the Unitd States:  refers to bring back offshored manufacturing operations 
Advantages:
  • “Made in the U.S.” could add value to the high-end productions of Apple to customers around the world, because for iphones and ipads, the purchase price is not the main criteria for customer decision, but rather technology, flexibility, brand, and design.
  • Backshoring manufacturing could help Apple to achieve greater agility and responsiveness of supply and meeting customer expectations in product variation. A study (Laine and Laiho) introduces a successful example, for a Finland company, a backshoring of the final assembly of the whole production from Taiwan to Finland, providing increasing supply responsiveness and product quality, as well as maintaining the total cost of operations at the same time.
  • The north America is a huge market for Apple products.
  •  It is believed that bring back offshored productions will bring back the jobs to America as well.
Disadvantages:
  • The extremely high labor costs still hinder the Apple’s entirely backshoring manufacturing to the U.S., within the fiercely competition among electronics companies.
  •  With the rapidly increasing Asian demand market, it still takes long time and high logistics charges to send all demanded products to Asia area.

Nearshoring to Mexico:
Advantages:
  •  As nearing the U.S., save more on logistics costs.
  • As labor rates in the electronics manufacturing industry increasing for years, Mexico’s labor wages has been very stable since 2003, and became even slightly lower than China.

Disadvantages:
  • As business risk in the whole industry is increasing, the frequently happened violence in Mexico could make situation worse and raise physical safety concerns.
  • Although Mexico nears the U.S., it does not have a large domestic demand for Apple’s products.
  •  Workers may not be as skilled as China’s workers.
Offshoring to China:
Advantages:
  • China has the absolute advantage over Mexico because its domestic consumption has been pointed by the government as a key to its future economic growth, while manufacturing in Mexico remains almost exclusively for export.   China’s middle class is estimated to consist of 100-300 million people, which is even larger than the entire population of Mexico. 
  • The rapidly expanding Asian market attracts Apple’s interests, and China’s location and position make it easily access to other Asian countries.
  •  China has large amount of well-educated semi engineers and skilled workers, who can work at a highly efficient level.
  • With the large amount of resources, China could build a faster and cheaper supply chain. Many suppliers of Apple are from Asia.
  • Untaxed profit kept U.S. offshore in China.
Disadvantages:
  • As oil price increased, logistics charges have been dramatically increased.
  •  As the economic developing, the cost of labor in China has increased significantly and will probably continue to increase (Figure 1). With the inflation keep going up in China, raw materials and energy costs also raised.
  • Intellectual Property (IP) safety is concerned in China, as Apple treats its technology and design as top secret.

Apple’s Next Step
Apple announced that, it will invest $100 million in the U.S. in new manufacturing facilities for some of its Mac computers in 2013.  This new investment could indicate a backshoring manufacturing of some high-end productions to the U.S. Apple’s reasons for investing in new U.S.-based manufacturing are unsure.  Most are believed for Supply disruptions in Japan and rising labor costs in China.  However, it is also argue that Apple is committed to creating American jobs.  




Question:
is entirely backshoring from China possible for Apple, as well as maintain the cost savings?
if Apple choose to continuosly offshoring parts of its productions, how can it avoid or mitigate  the emerged problem?
if Apple move all the offshored manufacturing back to America, how can it achieve its costs saving? 





[1] Laine, Jari AT, and Aki Laiho. "Offshoring is not a shortcut to success–a critical view on operations strategies of Finnish SMEs."
[2] Caniato, Federico, Ruggero Golini, and Matteo Kalchschmidt. "Offshoring and nearshoring success: the importance of strategic reasons." (2011): 3-6.
[3] Levy, David L. "International sourcing and supply chain stability." Journal of International Business Studies (1995): 343-360.
[5] Schoenherr, Tobias, V. M. Rao Tummala, and Thomas P. Harrison. "Assessing supply chain risks with the analytic hierarchy process: Providing decision support for the offshoring decision by a US manufacturing company." Journal of Purchasing and Supply Management 14.2 (2008): 100-111.
[7] Goel, Ajay, Nazgol Moussavi, and Vats N. Srivatsan. "Time to rethink offshoring?." The McKinsey Quarterly 14 (2008): 1-5.

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