Question

In terms of Global Business: Read the Who makes the Apple iPhone? case study and answer the question which follows. In answering the question, relate your discussion to the facts presented within the case.

In recent decades, China has become an important location for high-tech companies like Apple to source vital manufacturing inputs. Relating to the attributes highlighted in Porter’s Diamond of Competitive Advantage, analyse and discuss China’s competitive advantage in its high-tech components manufacturing industry. Your answer should include four cited quality academic sources.

Who makes the Apple iPhone?

In its early days, US-Based Apple usually didn’t look beyond its own backyard to manufacture its devices. By 2004, however, Apple had largely turned to foreign manufacturing. The shift to offshore manufacturing reached its peak with the iconic iPhone, which Apple first introduced in 2007. All iPhones contain hundreds of parts, an estimated 90 per cent of which are manufactured abroad. Advanced semiconductors come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chip sets from Europe, and rare metals from Africa and Asia. Apple’s major subcontractor, the Taiwanese multinational firm, Foxconn, performs final assembly in China.

Apple still employs some 43 000 people in the United States, and it has kept important activities at home, including product design, software engineering and marketing. Furthermore, Apple claims that its business supports another 254 000 jobs in the United States in engineering, manufacturing and transport. For example, the glass for the iPhone is manufactured at Corning’s US plants in Kentucky and New York. But an additional 700 000 people are involved in the engineering, building and final assembly of its products outside the United States, and most of them work at subcontractors like Foxconn.

When explaining its decisions to assemble the iPhone in China, Apple cites a number of factors. While it is true that labour costs are much lower in China, Apple executives point out that labour costs only account for a very small proportion of the total value of its products and are not the main driver of location decisions. Far more important, according to Apple, is the ability of its Chinese subcontractors to respond very quickly to requests from Apple to scale production up and down. In a famous illustration of this capability, in 2007 Steve Jobs demanded that a glass screen replace the plastic screen on his prototype iPhone. Jobs didn’t like the look and feel of plastic screens, which at the time were standard in the industry, nor did he like the way they scratched easily. This last-minute change in the design of the iPhone put Apple’s market introduction date at risk. Apple had selected Corning to manufacture large panes of strengthened glass, but finding a manufacturer that could cut those panes into millions of iPhone screens wasn’t easy. Then a bid arrived from a Chinese factory. When the Apple team visited the factory, they found that the plant’s owners were already constructing a new wing to cut the glass and installing equipment. ‘This is in case you give us the contract,’ the manager said. The plant also had a warehouse full of glass samples for Apple, and a team of engineers available to work with Apple. They had built onsite dormitories so that the factory could run three shifts seven days a week in order to meet Apple’s demanding production schedule. The Chinese company got the bid.

Another critical advantage of China for Apple was that it was much easier to hire engineers there. Apple calculated that about 8700 industrial engineers were needed to oversee and guide the 200 000 assembly-line workers involved in manufacturing the iPhone. The company had estimated that it would take as long as nine months to find that many engineers in the United States. In China it took 15 days. Also important is the clustering together of factories in China. Many of the factories providing components for the iPhone are located close to Foxconn’s assembly plant. As one executive noted, ‘The entire supply chain is in China. You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need a screw made a little bit different? That will take three hours.’

All this being said, there are drawbacks to outsourcing to China. Several of Apple’s subcontractors have been targeted for their poor working conditions. Criticisms include low pay of line workers, long hours, mandatory overtime for little or no additional pay and poor safety records. Some former Apple executives say that there is an unresolved tension within the company; executives want to improve working conditions within the factories of subcontractors such as Foxconn, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products.

Source: Hill, C.W., Hult, T.M., Wickramasekera, R., Liesch, P.W. & Mackenzie, K.S. (2017), Global Business Today: Asia Pacific Edition (4th edition) McGraw-Hill Irwin, Sydney.

Answer 1

China is the world's largest manufacturing economy today and is considered one of the world's most competitive nations. Initially driven by its capacity to supply low-cost labor and resources, China has progressed steadily through a range of other economic factors – including infrastructure, favorable regulations, a large customer base, and an existing manufacturer network – over the past 10-15 years, and has expanded its manufacturing capability from low-cost commodities to more sophisticated products.
China is at a crossroads as it seeks to retain its cost advantage and core low-cost production base while still developing the more sophisticated skills needed for advanced manufacturing, according to executives involved in the interviews and work sessions. Executives also said that China's economic growth momentum has weakened by opening markets and implementing reforms, and China needs breakthroughs to stimulate a new economic growth round.
Many executives agreed that China's 12th Five-Year Plan and its focus on seven strategic emerging industries ( e.g., energy-saving and environmental protection, new generations of IT technology, biotechnology, high-end equipment manufacturing, new energy, new materials, new energy vehicles), as well as many of China's current policies, are moving in the right direction and are important actions to address these challenges. Additionally, they said the World Bank China 2030 report 's strategic directions offer invaluable insights into China's path forward as it continues to sustain and extend its position as one of the world's most innovative countries.
Executives, however, cited concerns over a number of policy areas where improvements would further advance China 's competitiveness: fostering innovation; reforming local politics and bureaucracy, and environmental and health regulations. And while executives generally applauded the speed at which policy is being implemented, they said implementation is lagging behind and noted that enhancements could be made in terms of implementation. They also believed that policy-makers could make long-term resource distribution and environmental plans more forward-thinking and strategic. Executives expressed considerable concern regarding energy and environmental challenges in China, ranging from energy costs to the ability of China to provide clean and sustainable energy sources.
Executives believed the following set of recommendations would allow China to pursue more advanced fabrication capabilities.

Nearly all the executives proposed that China switch from low-cost, labor-intensive production to high-end, technologically advanced production. They agreed that China can not relinquish its core competence in low-cost manufacturing, but advised policymakers to find another basis for differentiation, such as technology and innovation.

Executives believed there is an immediate need to redefine the position of state-owned enterprises to promote the transition to high-end manufacturing. An independent Chinese report showed that if all government incentives and implicit subsidies were withdrawn, state-owned companies would lose revenue, which is a burden on China's capital and affects the productivity of China.4 This redefinition would entail a wide variety of policy activities: reform of several main sectors; promotion of export rates of goods and services alone.
Executives have proposed that policy-makers advise and enable companies to pursue digital product production to satisfy consumers' varied needs. Modularized industrial customization could combine Chinese mass manufacturing technologies with inventions required to produce personalized, differentiated goods domestically and globally.
Executives also believed that China is well placed to pursue smart manufacturing, involving the development and implementation of artificial intelligence in manufacturing processes. Executives said the government would increase the expected funding for smart manufacturing to facilitate the transformation of China to produce, use, and sell smarter fabrication equipment.
Many said China's low-cost edge is fading as it loses ground to new low-cost fabrication destinations like Vietnam on a cost basis. Monetary policy was a perceptible concern. Furthermore, executives said China would be challenged on a wage basis, as the government recently proposed to increase Chinese labor's average wages by more than 80 percent by 2015. This will essentially reduce China's dominance in labor-intensive sectors, making it much more imperative to push into more advanced manufacturing.
Executives recommended the following to serve as a catalyst for China's transformation to high-end manufacturing:

• Build an industry-led business transition strategy that focuses on technical advancement and competitiveness in industrial production.
• Implement policies and strategies from developed countries that bring in capital and technology-intensive industries.
• Promote indigenous innovative ideas, including original and integrative innovation, as well as improve innovations imported from abroad, by encouraging local governments to set up exploration funds, innovation awards, and stock exchanges for innovation firms.
• Develop programs that support entrepreneurship and fund it.
• The move from large-scale development to mass customization, including end-to-end modularisation.
• Promoting system integration and application of intelligent manufacturing, as well as supporting core intelligent measuring and control devices for R&D and innovation.

Executives predicted that in the future the requirement for all nations will be environmentally friendly and energy-efficient manufacturing. Present industrial practices in China are perceived as environmentally destructive, energy-intensive, and not associated with this dream. Executives have said that Chinese officials need to understand how the country needs to put itself in terms of energy prices and make adjustments now to stay competitive for potential manufacturing sites. Having existing energy market investments will help reduce air emissions now and have a positive effect on China's future trajectory.

The perception by executives is that current Chinese companies are weak in green design capabilities and have large gaps in the development and safety of energy-saving products. Executives urged policymakers to establish and optimize the technical specifications, standards and regulatory system for green manufacturing; encourage companies to focus on developing technology and equipment capable of enhancing the energy efficiency and resource utilization of traditional industries, and consider how to leverage the scale of the country's progress towards green development

Executives cited the United States as a perfect example of where energy prices and efficiency have a major comparative edge, pointing out that some exporting firms are considering moving operations back to the U.S. based on the competitiveness and electricity supply.

Executives made the following recommendations for tackling the energy challenge:

• Create specially designated funds to support the optimization and sustainability of energy consumption.
• Enhance policy efforts to promote energy conservation, reducing emissions, protecting the environment, and producing clean energy.
• Speeding up R&D in alternative green energy supplies.

Not surprisingly, both Chinese and non-Chinese executives cited the protection of intellectual property as a critical necessity to continue the growth of the manufacturing industry in the country. Executives said policy-makers ought to promote a "fair play" atmosphere to encourage the Chinese market's long-term growth. Some Chinese executives believed that the lack of protection of intellectual property has caused China 's position to weaken relative to its key competitors, particularly in a market that often necessitates joint ventures or strategic partnerships as a cost to operate in China for foreign business.

Most executives were explicit in their viewpoints that China 's responsibility for the security of intellectual property does not lie in a lack of strategy. Their concerns were based primarily on the lack of enforcement of existing laws on the protection of intellectual property, as well as the current business culture and intellectual property attitude. One business leader explained that legacy institutions tend to underestimate individual contributions, favor seniority heavily, and lack a culture of risk-tolerance necessary to spur innovation. Intellectual property (and other intangibles, such as services) is therefore often undervalued. Many CEOs have generally accepted that this does not fit with the current business expectations and goals of industrial firms.

Still, when compared to emerging low-cost countries like Vietnam, Thailand, and Indonesia, China is viewed as having stronger intellectual property protection laws. As a result, some executives said China has the opportunity to improve the enforcement of its laws and provide a strategic advantage for the region's operating manufacturers. By doing so, and given the other competitive driver's China delivers, China 's journey to advanced manufacturing would have a positive impact.