Power And Billions Of Dollars: Apple’s Deal With Communist China, And Why They Did It

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One of the world’s largest technology conglomerates has amassed significant power and billions of dollars from its deals in China, a country often firmly opposed to the values the company’s leadership regularly espouses domestically.

Apple Inc. made headlines recently for capitulating to the Chinese government while its CEO argues against President Donald Trump’s agenda at home. However, the company gave way to Beijing decades ago when it moved much of its manufacturing and assembly processes to China from elsewhere. Pursuing profit and power, the company made arrangements with probably the only country that could help it become what it is today, even if doing so potentially conflicted with certain company values.

Apple’s CEO Tim Cook, who defends progressive liberal causes, has made significant concessions to Beijing over the past year, in some cases contributing to the suppression of human rights and internet freedom. Apple has repeatedly yielded ground to the Chinese government, giving in to its demands, even as China engages in some unethical business practices to drive the tech company out of the country and reduce its market share. (RELATED: While Trashing Trump, Apple Is Selling Its Soul To Do Business In China).

Cook, who sits on the board of a human rights foundation, played a prominent role in moving Apple’s production and assembly activities to China. Since Apple jumped in bed with China, the company has made billions of dollars in profits and built an enormous technology empire.

Why China?

“Many other [information and communication technologies] ICT companies had parts of their supply chains in China — the assembly costs were low, China was such a huge market opportunity, and the Chinese government was offering massive incentives to Apple and its suppliers,” Dr. Scott Kennedy, deputy director of the China Power Project at the Center for Strategic and International Studies, told The Daily Caller News Foundation.

In the 1990s, companies producing notebooks, such as Compaq, HP, and Dell, began producing and assembling some of their components in China. After China joined the World Trade Organization, the opportunity became much more stable, and the supply chain networks in China began to expand rapidly. As an authoritarian country, China has the ability to force projects through the system, overlooking numerous human costs while dismissing potential criticisms of state plans. This system, for all its flaws, allowed China to advance its industrial capabilities quickly.

Cook, an ICT industry veteran, left Compaq and joined Apple in 1998 to manage the company’s worldwide operations, specifically manufacturing, distribution, and supply chains in China, where the supply chain was in disarray.

Apple primarily made its way into China through its early partnership with Foxconn, and that relationship has paid off. The company’s partnership has weathered rough patches, like the string of suicides at some of the factories due to poor labor conditions and environmental problems. Apple has since addressed these issues.

The Power:

Apple is not only the largest technology company, but it is is also the ninth-largest company in the world. Where other companies like Motorola failed, Apple built a massive global supply chain incorporating dozens of countries, not just China, and established a technology empire. China accounts for roughly 25 percent of Apple’s total sales and serves as an important player in the manufacturing and assembly processes. This gives the country a certain degree of leverage over the company. While that situation comes with its share of problems, Apple has made a lot of money in China. Not only does Apple sell many of its products to Chinese customers, but manufacturing in China has also netted the company billions.

Last year, Apple saw $217 billion in sales, $45 billion in profit, $331 billion in assets and a market cap of $752 billion.

The Billions:

To better understand how much more money Apple has made by producing and assembling products in China, consider the price difference were Apple to try to produce iPhones in the U.S., something Trump previously pushed the company to do.

“We’ve calculated that if they were just to move final assembly to the U.S., it would probably cost them $30 to $40 more to make each phone,” Dr. Jason Dedrick, a professor in the School of Information Studies at Syracuse University, told TheDCNF. “But that’s a small part of the whole supply chain.”

Trying to build an iPhone in the U.S. would be extremely costly for Apple and possibly consumers as well. “A real all-American iPhone would cost $70 to $80 more because suppliers would have to set up plants in the U.S. Part of it is the labor costs, but a lot of it is logistics and where the supply chain is,” Dedrick explained. As the cost to Apple for an iPhone is around $250, adding an extra $80 to the final cost would increase the cost to Apple per phone by roughly 25 percent, maybe even more.

While accounting for factors like the costs of labor and investments in supply chain development, there is the possibility that by building in the U.S. the cost to Apple per phone could increase even further. As Apple sells hundreds of millions of iPhones a year, one could estimate that it has potentially saved a few hundred billion dollars producing in China.

But, for Apple, operating in China is about more than just the money. Apple probably could not have produced its phones anywhere else, especially the U.S. where the necessary industrial infrastructure simply did not and does not exist.

“In the early days of the smartphone, that was really the only way it could be done back then. It just didn’t exist in the United States,” Dan Panzica, the chief analyst for the outsourced intelligence manufacturing service at IHS Markit Technology, explained to TheDCNF. Now, it would probably be even more difficult for Apple to change course.

Could The iPhone Be Produced In The US?

“The supply chain is so well entrenched in China and East Asia” Dedrick said, “All of the suppliers are there. And all of the knowledge is there. To try and replicate that in the U.S. is probably impossible at this point.”

“I think it would be impossible to envision an iPhone where every single component is designed, manufactured, and assembled in the United States,” Kennedy remarked, adding, “I don’t think that’s technically feasible.” For Apple to build in the U.S., it would take significant government subsidies to make it possible, even if Apple decided to sacrifice a portion of its profit margins, which tend to run around 35 percent in most cases.

It is not that the U.S. alone is unsuitable for Apple, though. “There was no other place in the world that it could have been done,” Panzica explained. Other countries lack the population size necessary for a factory of 100,000 people, the engineering skills, the low labor costs to provide inexpensive, high-quality goods to global consumers, and the required logistics capabilities. Some countries have some of these abilities, but no other country except China has them all to the degree that Apple needed.

Apple could potentially move production to the U.S. for low-volume, high-end, limited-edition phones, but that is probably the only way that would work, according to Panzica.

“If you are talking about an iPhone that is in high demand, and they are going to build all the volume, you are talking about 80,000 to 100,000 people on a site. If you look at all of the volume, forget it, it is impossible given the process,” he pointed out, “There isn’t a city that can support that many people. If you are looking at a limited edition, yeah, sure.” But, it seems potentially ill-advised to do that.

“It makes very little sense other than to stroke someone’s political agenda,” he said.

Cook actually attempted to move some of the production facilities to the U.S. after a meeting with Trump, but most of the suppliers were unwilling to relocate. If Apple did try to move production to the U.S., it might be corporate suicide for the company.

“The problem they would have had if they were to move production then or even now is that they would be sort of intentionally adding a significant amount to their costs, while none of their competitors would do the same,” Dedrick commented, “Samsung and Huawei and other competitors are still going to be taking advantage of that lower cost and very rich supply chain. Apple would have intentionally put themselves at a disadvantage relative to their competitors.

“That would be a pretty tough decision for them to make,” he added.

Nonetheless, Apple, specifically its leadership, has tried to present the company as more than just a capitalist corporate giant. Apple’s CEO has advocated for human rights and progressive agendas by arguing against the transgender ban, the travel ban, and other Trump policies. But given the opportunity, the company chose a clear path to more power and revenue by making a deal with China.

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