In the recent years, Apple has undergone financial tear thus realizing continuous record quarters. The market share of Mac records is all-time high. While the iPad has nearly depleted the integrated market for tablets, iPhone 4 has sold extra units during the last quarter compared to other single phones, given the fact that it is an 18-months-old device (Dong & Zhang, 2016). However, the novel management under CEO Tim Cook, gearing the company to an advanced era, is working on preparing its markets' growth abroad as well as in the U.S. with the release of iPhone 5. Apple is likely to focus more on the region of Asia-Pacific, China in particular. China is believed to be primed for massive growth in the near future thus influencing Apple's manipulation in various ways (Grimes & Sun, 2016). Nonetheless, there are various hindrances to the growth in China, although, recently, a few trends have proved the country as a crucial region for consumers to adopt the products of Apple, thereby ensuring the company's growth in the future. This report focuses on the ways and reasons of Apple's moving its manufacturing operations to China, its impacts, ethical issues, and its main competitor (Xiaomi).
How and Why Apple Moved Its Manufacturing to China
Apple encounters numerous criticism concerning manufacturing in China, and, lately, the issue arose once again following the release of iPhone 5 (Grimes & Sun, 2016). It is presumed that Apple begun shipping jobs abroad since the manufacturing costs in Asia were extremely lower. More so, these lower costs did not only focus on wages, but also moving nearer the chain of supply as well as the willingness of employees to work extra time. According to a study comparing Apple to Timbuk2, a U.S. company manufacturing messenger and traveler bags, Timbuk2 locates the majority of its production is San Francisco - the most costly region globally (Grimes & Sun, 2016). The employees in Timbuk2 are not underpaid or overworked; yet, the company does not undergo financial struggles compared to various U.S.-based manufacturers. Therefore, the question remains why Apple cannot emulate Timbuk2 and shift jobs back from China. Apple productions are standard, mass produced, and not custom-made; thus, they do not require quick deliveries, accounting for the reasons as to why the company does not need to stay near end-customers (Nagurney & Li, 2016). On the contrary, Timbuk2 manufactures custom-made bags orderable through the company’s website; therefore, they cannot wait for several days to be delivered. The most challenging issue for Apple is flexibility, engineering changes, and supplier availability. Since Apple is a huge manufacturer, the rate of production and often-random engineering shifts need engineering capabilities as well as manufacturing flexibilities, what is impossible in the USA (Grimes & Sun, 2016). By contrast, in China, manufacturers have the capability of deploying numerous collocated engineers to introduce the required changes instantly, since a vast labor supply permits ramp down as well ramp up capacity rapidly. It is presumed that in the U.S., there is no company with the ability to employ 250 000 employees’ day and night, bordered with capable and flexible suppliers (Dong & Zhang, 2016). Therefore, the decision regarding the location does not necessary rely on the cost of labor, but rather the production risk and the place where the available risk can be managed appropriately. Additionally, various enterprises ought to shift manufacturing to the U.S. from China since the advantages surrounding the delivery speed and various capabilities are also present in the U.S., although Apple is not counted among them (Dong & Zhang, 2016).
Influence of the Decision to Outsource to China
The decision of Apple to outsource to China influenced the company in various ways. First, the company experienced flexibility of production. In the recent years, the key motivation for Chinese production has been their capability to reduce and increase production in hours (Lüsted, 2012). Nonetheless, it is impossible to do the same in the U.S. since the country lacks numerous workforce on a phone call away, because of the existence of the Occupational Safety and Health Administration (OSHA), unlike in China where OSHA does not apply (Chan, Pun, & Selden, 2013). Secondly, the shift influenced the energy cost, with China rating the highest. Presently, the cost of energy is marginally high in China compared to the U.S.. However, the Shale gas revolution in the U.S. is expected to reduce the cost of energy in the country for a few years. The third factor is shipping cost (Abdelsamad, et al., 2010). More so, the cost of shipping from China is higher compared to the domestic shipping of the U.S.. Additionally, the cost of transportation from China constitutes nearly 5% of revenue, depending on the transported materials. However, in the case of Apple, it is less of a factor since electronics comprise high rate density (Chan, Pun, & Selden, 2013). In various companies, this is an additional 3-4% in shipping directly in contrast to the situation when the products are manufactured in the USA. Fourthly, there is a factor of wages. In comparison, Chinese wages are expected to escalate to about 50% in the coming 5 years, whereas the U.S. wages will increase by almost 10% (Dong & Zhang, 2016). However, the wage might not be different, as individuals believe. U.S. employees make 40-60 thousand USD yearly, what is higher than the Chinese workforce making 5-10 thousand USD annually. It takes a Chinese employee almost 3 fold to achieve similar output as a single U.S. employee (Grimes & Sun, 2016). Fifth, the shift influenced quality. The consideration of quality is a well-documented issue. Chinese enterprises usually manufacture output that is most likely to be returned or rejected during quality control, thus approximately adding to 5-10% and affecting profit margins significantly. This has greatly influenced Apple’s products because of the issues such as screen discoloration. Additionally, lead-time was also affected, given that most products require being reengineered midprocess in case of an instant turnaround time basing on the request of the customer (Chan, Pun, & Selden, 2013). Therefore, it is difficult to achieve halfway around the world, unless the product is airfreight. Moreover, that will increase the cost of shipping. Other factors include the Made in America label that has been replaced with Made in China. Every manufacturer is aware that the label carries much value. In addition, there is a factor of intellectual property (Grimes & Sun, 2016). Apple has often had uncontainable leaks of products design as well as specs. The features and design of the next iPhone are already known to the world months ahead of time; thus, it is hard for Apple to manufacture as the company values secrecy so much.
Ethical Issues of Labor in China
Long Working Hours, Low Wages, and High Workers Suicide
In China, various companies make employees work with a lack of suitable wages, adequate protection, limited breaks, and toiling long hours. Most organizations operate without fire safety measures thus subjecting employees to poor standards of living. Furthermore, in China, quitting means losing the earned wages. The China Labor Watch did an undercover investigation in major companies and realized various issues such as limited paths for laborers to seek recourse, poor safety measures, broken labor contracts, unpaid work, mandatory and excessive overtime work, as well as hiring discrimination.
Concerning low wages, in 2012, Foxconn Technology Group’s chairperson acknowledged that the salary level of Chinese workers might be adjusted to match the level of Taiwanese employees prior to August 2013, which increases RMB 900 to RMB 2,120 and RMB 2,450, following the probation period during the last five years (Dong & Zhang, 2016). More so, the company unilaterally cancelled food as well as housing allowances, together with other company bonuses. From 2011 to 2015, the workforce of Foxconn received an increased cumulatively basic salary of 12%; however, the Consumer price Index (CPI) has escalated cumulatively to 16.9%. Thus, the disposable income of labor force is definitely lower (Lüsted, 2012).
Concerning long working hours, employees are forced to work overtime to earn extra income in order to cope with the daily life expenditure (Grimes & Sun, 2016). Additionally, during peak seasons, workers are forced to work consecutively for a month with only one day off. Therefore, the monthly overtime hours during peak seasons would stretch to 160 hours, which seriously violates the Chinese Labor Law. As a result of covering up the excessive operating hours, overtime work is paid for as a bonus; more so, the attendance record is kept on paper rather than in the computer system. According to the report result conducted by the China Labor Watch, 60% of the respondents claim not to stop working overtime because of lower basic wages (Nagurney & Li, 2016). Additionally, the irrational salary system forms a loophole for the management to penalize and control employees through overtime work. For instance, the company can intentionally lower the employee’s overtime work for those on record for complaining about the issues regarding the factory. On the other hand, the company can largely increase the productive target of the employees by hard-pressing them to voluntarily resign (Lüsted, 2012).
Concerning the high rates of workers' suicide, Foxconn, among various companies in China, is presumed to force the workers to operate overtime, thus leading to suicide and occasional karoshi-death resulting from overwork or the exhaustion related to work (Grimes & Sun, 2016). The All China Federation of Trade Union (ACFTU) states that workers in these companies operate for over 10 hours daily without days off or, if any, one day only. Most companies are small or middle-sized and privately owned; hence, their employees are not offered a paid leave. Therefore, the illegitimate long hours cause numerous psychological problems among workers that, on some occasions, lead to suicide and karoshi. Foxcon, the key supplier of Apple's components, has been in the limelight for wrong reasons. Activists accuse the company of high pressure and tough working conditions leading to a series of suicides committed by its employees (Nagurney & Li, 2016). So far, the company has not been investigated or punished for increasing illegal overtime hours, thus showing other enterprises how to earn more revenue. However, overtime is a challenge faced by most enterprises since workers want to work more to earn more, while the companies are obliged to conform to the laws and regulations governing their legal interests in the primary country. According to the report, in October, Foxconn’s Chongqing plant employees protested to make the factory stop overtime work. Although Foxconn has offered employment to over a million employees in the Chinese mainland, only in 2010, an average of 14 employees committed suicide (Grimes & Sun, 2016).
Competition from Xiaomi
It is evident that India is the world’s fastest expanding smartphone market. Therefore, the two world’s most widespread phone manufacturers including Apple and Xiaomi are competing to ensure they seize the greatest piece possible. Recently, Xiaomi, a Chinese smartphone upstart, has declared collaboration with Foxconn, a Taiwan-based manufacturer, to begin assembling handsets in India (Dong & Zhang, 2016). However, Xiaomi is not a household name in the United States, although this Chinese electronics enterprise manufactures HDTVs, tablets, and smartphones. In 2011, after the release of its initial smartphone, the popularity of Xiaomi increased significantly, partly because the enterprise is shameless about replicating the hardware design of various organizations, specifically that of Apple. For 2 years now, numerous instances have indicated that the products of new Xiaomi are similar to the present Apple products. More so, the company has gone ahead to even copy Apple's event invitations (Dong & Zhang, 2016). The primary reason as to why Xiaomi is successful is that it operates on minimal margins and provides compelling devices at significantly lower prices compared to its competitors. The market research firm HIS Technology claims Xiaomi’s shares of the Chinese smartphone market are at 18% (Nagurney & Li, 2016). The rise of Xiaomi is the reason behind Samsung’s smartphone sale trending downward recently. Apple faces competition from its low priced competitors in China. The company once enjoyed bumper sales in the Chinese market; however, currently, it is the third biggest China supplier after Xiaomi and Huawei, both being Chinese firms. The smartphones of these two Apple's rivals are popular outside China and within China. Other local smartphone manufacturers, including Oppo and Vivo, are immediately following Apple (Nagurney & Li, 2016). According to a report, Apple’s drooping sales in China are caused by the general usage trends of smartphones in the market. Nowadays, the majority of individuals own smartphones; thus, the rate of first-timer buyers has decreased. Initially, smartphones were exchanged averagely after over a year; currently, this average frequency is increasing. Therefore, the present purchasing trends affect Apple since its devices are priced very steeply (Chan, Pun, & Selden, 2013). In China, an Apple smartphone is presumed as a status symbol. Nonetheless, China is in the midst of an economic slowdown that might prompt a change to low-cost and snazzier substitutes existing in the Chinese market. Additionally, even though Apple is undergoing steep competition in China, it cannot be ignored. Various factors surrounding Apple, such as better distribution channels, the ability to command premium rates, China-specific iOS software, and a cult status, will offer the company an edge over other Chinese smartphone manufacturers (Grimes & Sun, 2016).
Apple relocated its manufacturing operations to China for various reasons including lower manufacturing costs in China in terms of labor; the willingness of Chinese employees to work extra time resulting in higher productivity; and the ability to manage production risks effectively. The decision to outsource to China affected the company in various ways including increased production flexibility, an increase in the costs of shipping and production. Nevertheless, the company is suffering numerous ethical issues including long working hours, low wages, and a high rate of workers' suicide.