But as Steven
P. Jobs of Apple spoke, President 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? Mr. Obama
asked.
Mr. Jobs’s 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
American counterparts that “Made in the U.S.A.” 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
over $400,000 in profit per employee, more than Goldman Sachs,
Exxon Mobil or Google.
However, what has vexed Mr. Obama as well
as economists and policy makers is that Apple — and many of its
high-technology peers — are not nearly as avid in creating American
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 over 400,000 American 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 all electronics designers
rely 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.”
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 over 10,000 iPhones a day.
“The speed and flexibility is
breathtaking,” the executive said. “There’s no American plant that
can match that.”
Similar stories could be told about
almost any electronics company — and outsourcing has also become
common in hundreds of industries, including accounting, legal
services, banking, auto manufacturing and pharmaceuticals.
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.
“Companies once felt an obligation to
support American workers, even when it wasn’t the best financial
choice,” said Betsey Stevenson, the chief economist at the Labor
Department until last September. “That’s disappeared. Profits and
efficiency have trumped generosity.”
Companies and other economists say that
notion is naïve. Though Americans are among the most educated
workers in the world, the nation has stopped training enough people
in the mid-level skills that factories need, executives say.
To thrive, companies argue they need to
move work where it can generate enough profits to keep paying for
innovation. Doing otherwise risks losing even more American jobs
over time, as evidenced by the legions of once-proud domestic
manufacturers — including G.M. and others — that have shrunk as
nimble competitors have emerged.
Apple was provided with extensive
summaries of The New York Times’s reporting for this article, but
the company, which has a reputation for secrecy, declined to
comment.
This article is based on interviews with
more than three dozen current and former Apple employees and
contractors — many of whom requested anonymity to protect their
jobs — as well as economists, manufacturing experts, international
trade specialists, technology analysts, academic researchers,
employees at Apple’s suppliers, competitors and corporate partners,
and government officials.
Privately, Apple executives say the world
is now such a changed place that it is a mistake to measure a
company’s contribution simply by tallying its employees — though
they note that Apple employs more workers in the United States than
ever before.
They say Apple’s success has benefited
the economy by empowering entrepreneurs and creating jobs at
companies like cellular providers and businesses shipping Apple
products. And, ultimately, they say curing unemployment is not
their job.
“We sell iPhones in over a hundred
countries,” a current Apple executive said. “We don’t have an
obligation to solve America’s problems. Our only obligation is
making the best product possible.”
‘I Want a Glass
Screen’
In 2007, a little over a month before the
iPhone was scheduled to appear in stores, Mr. Jobs beckoned a
handful of lieutenants into an office. For weeks, he had been
carrying a prototype of the device in his pocket.
Mr. 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 Mr. Jobs wanted perfect, there was nowhere
else to go.
For over two years, the company had been
working on a project — code-named Purple 2 — that presented the
same questions at every turn: how do you completely reimagine the
cellphone? And how do you design it at the highest quality — with
an unscratchable screen, for instance — while also 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. Though components differ between
versions, all iPhones contain hundreds of parts, an estimated 90
percent of which are manufactured abroad. Advanced semiconductors
have come from Germany and Taiwan, memory from Korea and Japan,
display panels and circuitry from Korea and Taiwan, chipsets from
Europe and rare metals from Africa and Asia. And all of it is put
together in China.
In its early days, Apple usually didn’t
look beyond its own backyard for manufacturing solutions. A few
years after Apple began building the Macintosh in 1983, for
instance, Mr. Jobs bragged that it was
“a machine that is made in America.” In 1990, while Mr. Jobs
was running NeXT, which was eventually bought by Apple, the
executive told a reporter that
“I’m as proud of the factory as I am of the computer.” As late
as 2002, top Apple executives occasionally drove two hours
northeast of their headquarters to visit the company’s iMac plant in Elk Grove,
Calif.
But by 2004, Apple had largely turned to
foreign manufacturing. Guiding that decision was Apple’s operations
expert, Timothy D. Cook,
who replaced Mr. Jobs as chief executive last August, six weeks
before Mr. Jobs’s death. Most other American 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.
For Mr. 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 as soon as Mr. 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 already selected
an American 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. “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, free of charge. 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.”
In Foxconn City
An eight-hour drive from that glass
factory is a complex, known informally as Foxconn City, where the
iPhone is assembled. To Apple executives, Foxconn City was further
evidence that China could deliver workers — and diligence — that
outpaced their American counterparts.
That’s because nothing like Foxconn City
exists in the United States.
The facility has 230,000 employees, many
working six days a week, often spending up to 12 hours a day at the
plant. Over a quarter of Foxconn’s work force lives in company
barracks and many workers earn less than $17 a day. When one Apple
executive arrived during a shift change, his car was stuck in a
river of employees streaming past. “The scale is unimaginable,” he
said.
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. While factories are
spotless, the air inside nearby teahouses is hazy with the smoke
and stench of cigarettes.
Foxconn
Technology has dozens of facilities in Asia and Eastern Europe,
and in Mexico and Brazil, and it assembles an estimated 40 percent
of the world’s consumer electronics for customers like 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 thousands of 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 one million iPhones. Since then, Foxconn has
assembled over 200 million more.
Foxconn, in statements, declined to speak
about specific clients.
“Any worker recruited by our firm is
covered by a clear contract outlining terms and conditions and by
Chinese government law that protects their rights,” the company
wrote. Foxconn “takes our responsibility to our employees very
seriously and we work hard to give our more than one million
employees a safe and positive environment.”
The company disputed some details of the
former Apple executive’s account, and wrote that a midnight shift,
such as the one described, was impossible “because we have strict
regulations regarding the working hours of our employees based on
their designated shifts, and every employee has computerized
timecards that would bar them from working at any facility at a
time outside of their approved shift.” The company said that all
shifts began at either 7 a.m. or 7 p.m., and that employees receive
at least 12 hours’ notice of any schedule changes.
Foxconn employees, in interviews, have
challenged those assertions.
Another critical advantage for Apple was
that China provided engineers at a scale the United States could
not match. Apple’s executives had estimated that about 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 as long as nine
months to find that many qualified engineers in the United
States.
In China, it took 15 days.
Companies like Apple “say the challenge
in setting up U.S. plants is finding a technical work force,” said
Martin
Schmidt, associate provost at the Massachusetts Institute of
Technology. In particular, 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 contend.
“They’re good jobs, but the country doesn’t have enough to feed the
demand,” Mr. Schmidt said.
Some aspects of the iPhone are uniquely
American. The device’s software, for instance, and its innovative
marketing campaigns were largely created in the United States.
Apple recently built a $500 million data center in North Carolina.
Crucial semiconductors inside the iPhone 4 and 4S are manufactured
in an Austin, Tex., factory by Samsung, of South Korea.
But even those facilities are not
enormous sources of jobs. Apple’s North Carolina center, for
instance, has only 100 full-time employees. The Samsung plant has
an estimated 2,400 workers.
“If you scale up from selling one million
phones to 30 million phones, you don’t really need more
programmers,” said Jean-Louis Gassée, who oversaw product
development and marketing for Apple until he left in 1990. “All
these new companies — Facebook, Google, Twitter — benefit from
this. They grow, but they don’t really need to hire much.”
It is hard 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 American
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. Apple
executives believe there simply aren’t enough American 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.
Manufacturing glass for the iPhone
revived a Corning factory in Kentucky, and today, much of the glass
in iPhones is still made there. After the iPhone became a success,
Corning received a flood of orders from other companies hoping to
imitate Apple’s designs. Its strengthened glass sales have grown to
more than $700 million a year, and it has hired or continued
employing about 1,000 Americans to support the emerging market.
But as that market has expanded, the bulk
of Corning’s strengthened glass manufacturing has occurred at
plants in Japan and Taiwan.
“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.”
Corning was founded in America 161 years
ago and its headquarters are still in upstate New York.
Theoretically, the company could manufacture all its glass
domestically. But it would “require a total overhaul in how the
industry is structured,” Mr. Flaws said. “The consumer electronics
business has become an Asian business. As an American, I worry
about that, but there’s nothing I can do to stop it. Asia has
become what the U.S. was for the last 40 years.”
Middle-Class Jobs
Fade
The first time Eric Saragoza stepped into
Apple’s manufacturing plant in Elk Grove, Calif., he felt as if he
were entering an engineering wonderland.
It was 1995, and the facility near
Sacramento employed more than 1,500 workers. It was a kaleidoscope
of robotic arms, conveyor belts ferrying circuit boards and,
eventually, candy-colored iMacs in various stages of assembly. Mr.
Saragoza, an engineer, quickly moved up the plant’s ranks and
joined an elite diagnostic team. His salary climbed to $50,000. He
and his wife had three children. They bought a home with a
pool.
“It felt like, finally, school was paying
off,” he said. “I knew the world needed people who can build
things.”
At the same time, however, the
electronics industry was changing, and Apple — with products that
were declining in popularity — was struggling to remake itself. One
focus was improving manufacturing. A few years after Mr. Saragoza
started his job, his bosses explained how the California plant
stacked up against overseas factories: the cost, excluding the
materials, of building a $1,500 computer in Elk Grove was $22 a
machine. In Singapore, it was $6. In Taiwan, $4.85. Wages weren’t
the major reason for the disparities. Rather it was costs like
inventory and how long it took workers to finish a task.
“We were told we would have to do 12-hour
days, and come in on Saturdays,” Mr. Saragoza said. “I had a
family. I wanted to see my kids play soccer.”
Modernization has always caused some
kinds of jobs to change or disappear. As the American economy
transitioned from agriculture to manufacturing and then to other
industries, farmers became steelworkers, and then salesmen and
middle managers. These shifts have carried many economic benefits,
and in general, with each progression, even unskilled workers
received better wages and greater chances at upward mobility.
But in the last two decades, something
more fundamental has changed, economists say. Midwage jobs started
disappearing. Particularly among Americans without college degrees,
today’s new jobs are disproportionately in service occupations — at
restaurants or call centers, or as hospital attendants or temporary
workers — that offer fewer opportunities for reaching the middle
class.
Even Mr. Saragoza, with his college
degree, was vulnerable to these trends. First, some of Elk Grove’s
routine tasks were sent overseas. Mr. Saragoza didn’t mind. Then
the robotics that made Apple a futuristic playground allowed
executives to replace workers with machines. Some diagnostic
engineering went to Singapore. Middle managers who oversaw the
plant’s inventory were laid off because, suddenly, a few people
with Internet connections were all that were needed.
Mr. Saragoza was too expensive for an
unskilled position. He was also insufficiently credentialed for
upper management. He was called into a small office in 2002 after a
night shift, laid off and then escorted from the plant. He taught
high school for a while, and then tried a return to technology. But
Apple, which had helped anoint the region as “Silicon Valley
North,” had by then converted much of the Elk Grove plant into an
AppleCare call center, where new employees often earn $12 an
hour.
There were employment prospects in
Silicon Valley, but none of them panned out. “What they really want
are 30-year-olds without children,” said Mr. Saragoza, who today is
48, and whose family now includes five of his own.
After a few months of looking for work,
he started feeling desperate. Even teaching jobs had dried up. So
he took a position with an electronics temp agency that had been
hired by Apple to check returned iPhones and iPads before they were
sent back to customers. Every day, Mr. Saragoza would drive to the
building where he had once worked as an engineer, and for $10 an
hour with no benefits, wipe thousands of glass screens and test
audio ports by plugging in headphones.
Paydays for Apple
As Apple’s overseas operations and sales
have expanded, its top employees have thrived. Last fiscal year,
Apple’s revenue topped $108 billion, a sum larger than the combined
state budgets of Michigan, New Jersey and Massachusetts. Since
2005, when the company’s stock split, share prices have risen from
about $45 to more than $427.
Some of that wealth has gone to
shareholders. Apple is among the most widely held stocks, and the
rising share price has benefited millions of individual investors,
401(k)’s and pension plans. The bounty has
also enriched Apple workers. Last fiscal year, in addition to their
salaries, Apple’s employees and directors received stock worth $2
billion and exercised or vested stock and options worth an added
$1.4 billion.
The biggest rewards, however, have often
gone to Apple’s top employees. Mr. Cook, Apple’s chief, last year
received
stock grants — which vest over a 10-year period — that, at
today’s share price, would be worth $427 million, and his salary
was raised to $1.4 million. In 2010, Mr. Cook’s compensation
package was valued at $59 million, according to Apple’s security
filings.
A person close to Apple argued that the
compensation received by Apple’s employees was fair, in part
because the company had brought so much value to the nation and
world. As the company has grown, it has expanded its domestic work
force, including manufacturing jobs. Last year, Apple’s American
work force grew by 8,000 people.
While other companies have sent call
centers abroad, Apple has kept its centers in the United States.
One source estimated that sales of Apple’s products have caused
other companies to hire tens of thousands of Americans. FedEx and
United Parcel Service, for instance, both say they have created
American jobs because of the volume of Apple’s shipments, though
neither would provide specific figures without permission from
Apple, which the company declined to provide.
“We shouldn’t be criticized for using
Chinese workers,” a current Apple executive said. “The U.S. has
stopped producing people with the skills we need.”
What’s more, Apple sources say the
company has created plenty of good American jobs inside its retail
stores and among entrepreneurs selling iPhone and iPad
applications.
After two months of testing iPads, Mr.
Saragoza quit. The pay was so low that he was better off, he
figured, spending those hours applying for other jobs. On a recent
October evening, while Mr. Saragoza sat at his MacBook and
submitted another round of résumés online, halfway around the world
a woman arrived at her office. The worker, Lina Lin, is a project
manager in Shenzhen, China, at PCH International, which contracts
with Apple and other electronics companies to coordinate production
of accessories, like the cases that protect the iPad’s glass
screens. She is not an Apple employee. But Mrs. Lin is integral to
Apple’s ability to deliver its products.
Mrs. Lin earns a bit less than what Mr.
Saragoza was paid by Apple. She speaks fluent English, learned from
watching television and in a Chinese university. She and her
husband put a quarter of their salaries in the bank every month.
They live in a 1,080-square-foot apartment, which they share with
their in-laws and son.
“There are lots of jobs,” Mrs. Lin said.
“Especially in Shenzhen.”
Innovation’s Losers
Toward the end of Mr. Obama’s dinner last
year with Mr. Jobs and other Silicon Valley executives, as everyone
stood to leave, a crowd of photo seekers formed around the
president. A slightly smaller scrum gathered around Mr. 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,”
Mr. Jobs told Mr. Obama, according to one observer. “This country
is insanely great. What I’m worried about is that we don’t talk
enough about solutions.”
At dinner, for instance, the executives
had suggested that the government should reform visa programs to
help companies hire foreign engineers. Some had urged the president
to give companies a “tax holiday” so they could bring back overseas
profits which, they argued, would be used to create work. Mr. Jobs
even suggested it might be possible, someday, to locate some of
Apple’s skilled manufacturing in the United States if the
government helped train more American engineers.
Economists debate the usefulness of those
and other efforts, and note that a struggling economy is sometimes
transformed by unexpected developments. The last time analysts
wrung their hands about prolonged American unemployment, for
instance, in the early 1980s, the Internet hardly existed. Few at
the time would have guessed that a degree in graphic design was
rapidly becoming a smart bet, while studying telephone repair a
dead end.
What remains unknown, however, is whether
the United States will be able to leverage tomorrow’s innovations
into millions of jobs.
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.
“New middle-class jobs will eventually
emerge,” said Lawrence Katz, a Harvard economist. “But will someone
in his 40s have the skills for them? Or will he be bypassed for a
new graduate and never find his way back into the middle
class?”
The pace of innovation, say executives
from a variety of industries, has been quickened by businessmen
like Mr. Jobs. G.M. 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 Mr. Obama and Mr. 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.