November 18, 2016 12:20 am JST
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Apple could make iPhones in US in future: sources

DEBBY WU, Nikkei staff writer

TAIPEI -- iPhones might one day soon carry "Made in America" labels.

Key Apple assembler Hon Hai Precision Industry, also known as Foxconn Technology Group, has been studying the possibility of moving iPhone production to the U.S., sources told the Nikkei Asian Review.

"Apple asked both Foxconn and Pegatron, the two iPhone assemblers, in June to look into making iPhones in the U.S.," a source said. "Foxconn complied, while Pegatron declined to formulate such a plan due to cost concerns."

Foxconn, based in the gritty, industrial Tucheng district in suburban Taipei, and its smaller Taiwanese rival churn out more than 200 million iPhones annually from their massive Chinese campuses.

Another source said that while Foxconn had been working on the request from Apple Inc., its biggest customer that accounts for more than 50% of its sales, Chairman Terry Gou had been less enthusiastic due to an inevitable rise in production costs.

"Making iPhones in the U.S. means the cost will more than double," the source said.

The person added that one view among the Apple supply chain in Taiwan is that U.S. President-elect Donald Trump may push the Cupertino, California-based tech titan to make a certain number of iPhone components at home.

According to research company IHS Markit, it costs about $225 for Apple to make an iPhone 7 with a 32GB memory, while the unsubsidized price for such a handset is $649.

Apple, Foxconn and Pegatron all declined to comment.

Not Made in America

Apple's move appears to fall in line with Trump's pledge to push American companies to make their products at home. There is a widespread perception among American voters that the U.S. is losing manufacturing jobs to other countries in this age of globalization and free trade.

Other than having its popular gadgets assembled in China, Apple also procures most of the key components for its flagship iPhones from Asian suppliers.

Taiwan Semiconductor Manufacturing Co. makes chips for iPhones, Japan's Japan Display and Sharp supply panels for Apple's handsets, and South Korea's SK Hynix and Japan's Toshiba produce memory chips for the device.

Trump singled out Apple several times earlier this year to hammer home his point, and vowed to slap a 45% tariff on goods made in China.

"We're going to get Apple to build their damn computers and things in this country instead of in other countries," he said at Liberty University in Virginia in January.

In March, Trump further pointed the blame at China, where Apple's assemblers churn out iPhones, iPads and MacBooks.

"How does it help us when they make it in China?" Trump said during his Super Tuesday victory speech.

The anxiety among Trump's mostly white working-class supporters in the Rust Belt of America is understandable. While Apple claims that it created and supports 2 million jobs domestically, U.S. think-tank Economic Policy Institute estimated that America had lost 5 million manufacturing jobs between 2000 and 2014.

On the other hand, Foxconn employs some 690,000 workers in China as at the end of April, equaling the entire population of Detroit.

Even though the number is down from the peak of 1.3 million in 2012, it is still a high head count that many heads of countries, including Indian Prime Minister Narendra Modi, would like to secure for their people.

No easy job

Yet some in the Apple supply chain said it would be impossible to move iPhone production back to the U.S. due to a lack of infrastructure and a steep hike in costs.

Apple's Chief Executive Tim Cook told CBS' 60 Minutes program in December 2015 that America simply did not have enough skilled workers for the production of iPhones.

An industry executive familiar with the iPhone production process also said it would be difficult to produce the device in large quantities in the U.S.

"To make iPhones, there will need to be a cluster of suppliers in the same place, which the U.S. does not have at the moment," the executive said. "Even if Trump imposes a 45% tariff, it is still possible that manufacturers will decide to continue production overseas as long as the costs together with the tariffs are lower than the amount they need to spend on building and running production lines in the U.S."

Another industry source said: "It is not easy to make iPhones in America, unless the U.S. government subsidizes local companies for producing domestically."

Meanwhile, Beijing is getting edgy too. The state-run Global Times warned on Nov. 13 that if Trump starts a trade war with China, "U.S. auto and iPhone sales in China will suffer a setback."

Politics will trump everything

Yet there was precedent in the administration of incumbent President Barack Obama for political factors to overpower economic concerns when companies and governments haggle over corporate practices.

Faced with political pressure to bring jobs home under Obama's government, Apple helped its Singapore-based contractor Flextronics build a Mac Pro production line in Austin, Texas in 2013, after Foxconn set up an iMac assembly line in the same state the year before.

Sharp President Tai Jeng-wu, right-hand man to Foxconn's Gou, also hinted in late October that if Apple eventually decided to produce in the U.S., he would have no option but to follow his customer's instructions.

"We are now building a new [advanced organic light-emitting diode] facility in Japan. We can make [OLED panels] in the U.S. too," he said. "If our key customer demands us to manufacture in the U.S., is it possible for us not to do so?"

"Politics will trump cost concerns in the end," the industry executive familiar with iPhone's production process said. "The Apple supply chain must treat Trump's campaign pledge seriously and not write it off."

Mark Li, an analyst at Sanford C. Bernstein, echoed the sentiment.

"Although TSMC is very clear that it would be much more expensive to make chips outside of Taiwan, it's inevitable for the world's largest contract chipmaker to take 'Made in the U.S.' into consideration if the alternative is that it would lose Apple orders without moving to America," Li said.

Yet the big question is -- even if Apple moves the mundane assembly line back to the U.S., will American workers be keen for such monotonous and labor-intensive jobs that often attract criticism from rights groups and that even Chinese youngsters are turning their noses up on?

"Young people in China no longer want to work in factories but instead they want to be a Didi driver or run their small business on WeChat," an industry executive said.

Didi is the Chinese equivalent of Uber, and WeChat is China's homegrown real-time messenger.

"As a Didi driver, you can work whenever you want. But there is no freedom in a factory -- once you're on duty, you'll be on the production line for 10 hours or more," the executive said.

Nikkei staff writer Cheng Ting-fang contributed to this report

Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 50,479.98M
Shares: 17,328.73M
Asia300

Pegatron Corp.

Taiwan

Market(Ticker): TAI(4938)
Sector:
Industry:
Electronic Technology
Computer Processing Hardware
Market cap(USD): 6,764.07M
Shares: 2,575.16M
Asia300

Taiwan Semiconductor Manufacturing Co., Ltd.

Taiwan

Market(Ticker): TAI(2330)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 159,514.41M
Shares: 25,930.38M
Asia300

SK hynix, Inc.

South Korea

Market(Ticker): KRX(000660)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 30,559.95M
Shares: 728.00M

Japan Display, Inc.

Japan

Market(Ticker): TKS(6740)
Sector:
Industry:
Electronic Technology
Electronic Components
Market cap(USD): 1,486.35M
Shares: 601.41M

Sharp Corp.

Japan

Market(Ticker): TKS(6753)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 14,519.36M
Shares: 4,994.52M

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 8,434.89M
Shares: 4,237.60M

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