Very good post, over at Evolving Excellence, entitled How Do You Like Them Apples?.
Bill Waddell, a consultant with strong experience in operations management, analyzes Apple’s procurement of iPods. He tries to demonstrate that Apple probably doesn’t save any money by sourcing from China.
He starts with numbers from academic studies:
[…] The Chinese manufacturer (Foxconn I presume) takes 2.7 labor hours to make one at about $1.50 an hour for a total Chinese value add of $4 per iPod. He then multiplies that same 2.7 hours by an American labor cost of $23 an hour for a total, theoretical American value add of $62 per iPod.
Then he explains why these numbers are not representative of production in the US:
The 2.7 hours to make an iPod in an American factory is so far off the common sense chart as to be laughable. I don’t know what goes into an iPod, but I have a pretty good idea. If an American factory could not produce 100,000 iPods in a week with 600 people I would be shocked – and that includes everyone from production people to the guy who sweeps the floor at night. That is not 2.7 hours per iPod – that is more like .25 hours per iPod.
And he concludes that Apple’s procurement strategy makes no sense, based on this difference in labor productivity:
Chinese manufacturing is built around and thrives on cheap labor, and the 2.7 hours does not surprise me in the least. With workers so cheap, there is not much premium placed on efficiency and methods, and automation is much tougher to justify. In the USA and Western Europe a completely different dynamic is at work. A productivity differential of a factor of 10 between those places and China is not a stretch – it is typical.
So the $58 premium for American labor is really less than $2 (2.7 hours X $1.50 per hour in China versus .25 hours X $23 per hour in the USA). Then factor in the costs of logistics and the ongoing battle to maintain decent quality from China and making iPods in China, rather than in a lean American factory makes no sense at all.
Generally speaking, this is probably true of many products sourced in China.I agree that many American and European companies don’t consider the fully-burdened cost of imports.
The analysis above is quite interesting, except that… I don’t think it is applicable to Foxconn and Apple!
Apple is renowned for its innovations, its design and its marketing. But they are also very focused on their operations:
- They are consistently ranked as one of the most efficient manufacturers (better than Dell, but one has to admit that Dell’s product line is much broader).
- Who was the interim CEO when Steve Jobs was taking a sick leave? The COO.
And I have no inside information, but I bet that Foxconn is providing much more than basic contract manufacturing. They are one of the very, very few Chinese manufacturers that are world leaders on criteria such as quality, speed and innovation.
And that’s what Apple is probably looking for, more than cheap labor. Foxconn claims more than 15,000 patents. They probably work hand in hand with Apple’s R&D department, who is famous for incorporating innovations from other companies into their products.