Introduction of Offshoring
Rethinking of Offshoring
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
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
- “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.
- 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.
- 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.
- 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.
- 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.
- 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
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?