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Originally published Saturday, January 21, 2012 at 9:05 PM

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Vast, fast factories overseas is why Apple can't make iPhones here

Why Apple executives believe that "Made in the USA" is no longer a viable option for most Apple products.

The New York Times

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When President 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 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 and 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, 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.

What has vexed Obama, economists and policymakers is that Apple and many of its high-technology peers are not nearly as avid in 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 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: An additional 700,000 people engineer, build and assemble iPads, iPhones and Apple's other products.

But 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 Obama administration.

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

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone's screen at the last minute, forcing an assembly-line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company's dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing more than 10,000 iPhones a day.

"The speed and flexibility is breathtaking," the executive said. "There's no American plant that can match that."

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.

"Companies once felt an obligation to support American workers, even when it wasn't the best financial choice," said Betsey Stevenson, chief economist at the Labor Department until last September. "That's disappeared. Profits and efficiency have trumped generosity."

Apple was provided with extensive summaries of the reporting for this article, but the company, which has a reputation for secrecy, declined to comment.

"I want a glass screen"

In 2007, about 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.

He 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. 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.

For more than two years, the company had been working on a project that presented the same questions at every turn: How do you completely re-imagine the cellphone? How do you design it at the highest quality while ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States.

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 Cook, who replaced Jobs as chief executive last August, six weeks before Jobs' death. Most other U.S. electronics companies had already gone abroad, and Apple, which at the time was struggling, believed 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.

For Cook, the focus on Asia "came down to two things," said one former high-ranking Apple executive. Factories in Asia "can scale up and down faster" and "Asian supply chains have surpassed what's in the U.S." The result is that, "We can't compete at this point," the executive said.

The impact of such advantages became obvious after Jobs demanded glass screens in 2007.

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had selected a U.S. company, Corning, 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.

A bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant's owners were already building a new wing. "This is in case you give us the contract," the manager said, according to a former Apple executive. 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, for free. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

"The entire supply chain is in China now," said another 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."

Foxconn City

An eight-hour drive from the glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled.

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. More than 25 percent of Foxconn's workforce lives in company barracks and many workers earn less than $17 a day.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility's central kitchen cooks an average of three tons of pork and 13 tons of rice a day.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles about 40 percent of the world's consumer electronics for customers such as Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

"They could hire 3,000 people overnight," said Jennifer Rigoni, who was Apple's worldwide supply demand manager until 2010, but declined to discuss specifics of her work. "What U.S. plant can find 3,000 people overnight and convince them to live in dorms?"

In mid-2007, after a month of experimentation, Apple's engineers finally perfected a method for cutting strengthened glass so it could be used in the iPhone's screen. The first truckloads of cut glass arrived at Foxconn City in the dead of night, according to the former Apple executive. That's when managers woke the workers, who crawled into their uniforms — white and black shirts for men, red for women — and quickly lined up to assemble, by hand, the phones. Within three months, Apple had sold 1 million iPhones. Since then, Foxconn has assembled more than 200 million more.

Foxconn, in statements, declined to speak about specific clients. It disputed some details of the former Apple executive's account about the glass, saying a midnight shift, such as the one described, was impossible.

Foxconn employees, in interviews, challenged that assertion.

The education factor

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple's executives had estimated 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company's analysts had forecast it would take up to nine months to find that many qualified engineers in the United States. In China, it took 15 days.

Companies such as Apple "say the challenge in setting up U.S. plants is finding a technical workforce," said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. Companies say they need engineers with more than high school, but not necessarily a bachelor's degree. Americans at that skill level are hard to find, executives said. "They're good jobs, but the country doesn't have enough to feed the demand," Schmidt said.

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 $65 to each iPhone's expense. Since Apple's profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

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.

Innovation — and loss

Apple executives believe there 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, such as Corning, also say they must go abroad.

"Our customers are in Taiwan, Korea, Japan and China," said James 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."

Toward the end of the Silicon Valley dinner last year, a crowd of photo seekers formed around the president. A slightly smaller scrum gathered around Jobs. Rumors had spread that his illness had worsened, and some hoped for a photograph with him, perhaps for the last time.

Eventually, the orbits of the men overlapped. "I'm not worried about the country's long-term future," Jobs told Obama, according to one observer. "This country is insanely great. What I'm worried about is that we don't talk enough about solutions."

In the past 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.

Before Obama and Jobs said goodbye, the Apple executive pulled an iPhone from his pocket to show off a new application — a driving game — with incredibly detailed graphics. The device reflected the soft glow of the room's lights. 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 reporting.

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