Why iPhone won't be made in USA

Apple emblematic of why innovation doesn't translate into jobs here

New York TimesJanuary 22, 2012 

When President Barack Obama joined Silicon Valley's top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steve Jobs of Apple spoke, Obama interrupted with an inquiry of his own: What would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can't that work come home? Obama asked.

Jobs' reply was unambiguous. "Those jobs aren't coming back," he said, according to another dinner guest.

The president's question touched upon a central conviction at Apple. It isn't just that workers are cheaper abroad. Rather, Apple's executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their U.S. counterparts that "Made in the USA" is no longer a viable option for most Apple products.

Apple has become one of the best-known, most admired and most imitated companies on Earth, in part through an unrelenting mastery of global operations. Last year, it earned more than $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Obama as well as economists and policymakers is that Apple - and many of its high-technology peers - are not nearly as avid about creating U.S. jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the more than 400,000 U.S. workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple's contractors: Roughly 700,000 people engineer, build and assemble iPads, iPhones and Apple's other products. Almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost every electronics designer relies upon to build their wares.

"Apple's an example of why it's so hard to create middle-class jobs in the U.S. now," said Jared Bernstein, who until last year was an economic adviser to the White House.

"If it's the pinnacle of capitalism, we should be worried."

But while Apple is far from alone, it offers a window into why the success of some prominent companies has not translated into large numbers of domestic jobs. What's more, the company's decisions pose broader questions about what Corporate America owes Americans as the global and national economies are increasingly intertwined.

'I want a glass screen'

In 2007, a little more than a month before the iPhone was scheduled to appear in stores, Jobs beckoned a handful of lieutenants into an office. For weeks, he had been carrying a prototype of the device in his pocket.

Jobs angrily held up his iPhone, angling it so everyone could see the dozens of tiny scratches marring its plastic screen, according to someone who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry their keys in their pocket. "I won't sell a product that gets scratched," he said tensely. The only solution was using unscratchable glass instead. "I want a glass screen, and I want it perfect in six weeks."

After one executive left that meeting, he booked a flight to Shenzhen, China. If Jobs wanted perfect, there was nowhere else to go.

In its early days, Apple usually didn't look beyond its own backyard for manufacturing solutions. But by 2004, Apple had largely turned to foreign manufacturing. Guiding that decision was Apple's operations expert, Timothy D. Cook, who replaced Jobs as chief executive in August, six weeks before Jobs' death. Most other U.S. electronics companies had already gone abroad, and Apple, which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn't driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

Asian advantages

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected a U.S. company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant's owners were already constructing a new wing. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built dormitories on site so employees would be available 24 hours a day.

The Chinese plant got the job.

"The entire supply chain is in China now," said a former high-ranking Apple executive. "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 that screw made a little bit different? It will take three hours."

It is difficult to estimate how much more it would cost to build iPhones in the United States. However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying U.S. wages would add up to only $65 to each iPhone's expense.

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans - it would require transforming the national and global economies. Apple executives believe there simply aren't enough U.S. workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

"Our customers are in Taiwan, Korea, Japan and China," said James B. Flaws, Corning's vice chairman and chief financial officer. "We could make the glass here, and then ship it by boat, but that takes 35 days. Or we could ship it by air, but that's 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas."

Innovation speeds up

In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in America, much of the employment has occurred abroad. Companies have closed major facilities in the United States to reopen in China. By way of explanation, executives say they are competing with Apple for shareholders. If they cannot rival Apple's growth and profit margins, they won't survive.

The pace of innovation, say executives from a variety of industries, has been quickened by businessmen like Jobs. GM went as long as half a decade between major automobile redesigns. Apple, by comparison, has released five iPhones in four years, doubling the devices' speed and memory while dropping the price that some consumers pay.

Before Obama and Jobs said goodbye after dinner last year, the Apple executive pulled an iPhone from his pocket to show off a new application - a driving game. The other executives, whose combined worth exceeded $69 billion, jostled for position to glance over his shoulder. The game, everyone agreed, was wonderful.

There wasn't even a tiny scratch on the screen. David Barboza, Peter Lattman and Catherine Rampell contributed.

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