THE RESILIENCE OF THE RELATIONSHIP BETWEEN APPLE AND …
Transcript of THE RESILIENCE OF THE RELATIONSHIP BETWEEN APPLE AND …
UNIVERSITECATHOLIQUEDELOUVAIN
LOUVAINSCHOOLOFMANAGEMENT
and
KATHOLIEKEUNIVERSITEITLEUVEN
FACULTEITECONOMIEENBEDRIJFSWETENSCHAPPEN
THERESILIENCEOFTHERELATIONSHIPBETWEENAPPLEANDFOXCONN
SCENARIOSBASEDONTHEOLIFRAMEWORK
SupervisoratLSM:Jean-ChristopheDefraigneSupervisoratKUL:RoelLeus
ProjectbasedMaster’sThesis
SubmittedbyDeborahDanau
Withaviewofgettingthedegrees:
Masterintoegepasteeconomischewetenschappen:khandelsingenieur
MasterinBusinessEngineering
ACADEMICYEAR2015-2016
Acknowledgments
Iamsincerelyandheartilygrateful tomypromoter, Jean-ChristopheDefraigne, for
theguidanceandthepatienceheshowedmethroughouttheprocessofwritingthispaper.I
amalsoverygratefulforitsconstantavailability.Withouthishelp,itwouldn’tbepossibleto
concretizethispaper.
Thismaster thesiswouldnothavebeenpossiblewithout the supportofmy family
andfriends.Inparticular,Iwouldliketothankmymumfortakingtimeinreadingmythesis.
Lastbutnot least, Iowesincere thankfulness toProf.RoelLeus forbeingattentive
andcomprehensive.Ialsothankhimforthetimehegrantedforthereadingofmypaper.
Executivesummary
This paper is an analysis of the Alliance between two multinationals. On the one
hand,Apple Inc.,oneof themostadmiredand innovative firm in theworld famous for its
electronicproducts.Ontheotherhand,Foxconn,themajorApple’ssubcontractorsince2004
that is inchargeofAppleproducts finalassemblyandmanufacturing.Thethesis isdivided
intotwosections.First,wewill investigatethereasonswhyAppledecidedtooutsourcethe
finalassemblyofitsproductstoFoxconnthatismainlysituatedinChina.Wewillanalyzeit
bymeansof theOLI framework that focusonOwnershipSpecificAdvantages, Localization
advantagesand InternalizationAdvantages.Second,wewill investigatepossibleevolutions
of thisalliance.Todoso,wewilldevelopsix scenarios that seemparticularly relevantand
likely to happen. The first one will be about the possible consequences of bad working
conditions inFoxconnfactoriessituated inChina. Indeed,manyscandalsbrokeout in2010
followingmanyworker suicides.Wewill therefore look at possible consequences. Then, a
scenario will investigate the possible consequences of China transition phase. Indeed, the
countryisfacingrisingwagesanddecliningnumberofmigrantworkers.Therefore,Foxconn
maystartshiftingitsactivitiesinothercountries.Thethirdscenarioswilldiscussthepotential
consequencesofrobotinstallationinFoxconnplants.ItwillprobablynotinciteAppletostop
workingwiththelatter.Onthecontrary,it isbeneficialforApple.Next,thefourthscenario
willhypothesizethat thegrowingChinesemiddleclassmay inciteAppletokeeppartof its
productioninChina,tostayclosetothispromisingmarket.Thesecond-to-lastscenariowill
developtheeventualitythatApplejobswillcomebackintheUnitedStates.Finally,thesixth
scenarioisabouttheimportanceofenvironmentalconcerns.NewregulationstocontrolCO2
emissions may dramatically change Apple supply chain and therefore its alliance with
Foxconn.
Keywords
Apple~ Foxconn~Outsourcing~Finalassembly~Scenarios~China
Abbreviations
EPZ ExportProcessingZone
ETDZs EconomicandTechnologicalDevelopmentZones
EU EuropeanUnion
FDI ForeignDirectInvestment
FLA FairLaborAssociation
FTZs ForeignTradeZones
GHG GreenhouseGases
HTDZs HighTechnologyDevelopmentZones
IP IntellectualProperty
PC PersonalComputer
R&D ResearchandDevelopment
SAIDI SystemAverageInterruptionDurationIndex
SAIFI SystemAverageInterruptionFrequencyIndex
SCC SupplierCodeofConduct
SEZ SpecialEconomicZones
USA UnitedStatesofAmerica
VAT Value-AddedTax
WTO WorldTradeOrganization
I
Content
1.Introduction.....................................................................................................................................1
2.Problematic:AnalysingthepossibleevolutionsofthealliancebetweenFoxconnand
Apple.....................................................................................................................................................3
2.1Applestory...............................................................................................................................................3
2.2Problematic.............................................................................................................................................6
2.2.1ScenarioI:Consequencesofbadworkingconditionsscandals.......................................................6
2.2.2ScenarioII:ConsequencesofChinatransitionphase.........................................................................72.2.3ScenarioIII:Thegrowinguseofrobots....................................................................................................7
2.2.4ScenarioIV:ThegrowingimportanceoftheChineseconsumermarket.....................................7
2.2.5ScenarioV:ApplejobsbroughtbackintheUnitedStates................................................................8
2.2.6ScenarioVI:Consequencesofthegrowingenvironmentalconcerns...........................................8
3.Methodology..................................................................................................................................9
3.1Informationgatheringprocess.............................................................................................................9
3.2Choiceofscenarios..............................................................................................................................10
3.3Assumptions.........................................................................................................................................13
4.ApplicationoftheOLI-Framework...........................................................................................15
4.1 Ownershipspecificadvantages....................................................................................................15
4.2 Locationspecificadvantages........................................................................................................16
4.2.1 Economicadvantages............................................................................................................................17
4.2.2 Socialandculturaladvantages...........................................................................................................26
4.2.3 Politicaladvantages................................................................................................................................28
4.3 Internalisationadvantages............................................................................................................31
5.Scenarios.......................................................................................................................................41
5.1 ScenarioI:Consequencesofbadworkingconditionsscandals..............................................41
5.1.1AppleandFoxconnalliancemaystayunchangeddespiterisinglabourcosts........................50
5.1.2AppleandFoxconnalliancemayonedaybebrokentoprotectApplebrandimage...........51
5.1.3Applemayincreaseitsmanufacturingnetworktodiversifyrisksandavoidrisingcosts....54
5.2 ScenarioII:ConsequencesofChinatransitionphase...............................................................56
5.2.1TheendofAppleandFoxconnrelationship........................................................................................60
5.2.2Applemayincreaseitsmanufacturingnetwork................................................................................60
II
5.2.3ApplemayshiftfinalassemblyoutofChina.......................................................................................60
5.3 ScenarioIII:Thegrowinguseofrobots.......................................................................................66
5.4 ScenarioIV:ThegrowingimportanceoftheChineseconsumermarket..............................68
5.5 ScenarioV:ApplejobsbroughtbackintheUnitedStates......................................................71
5.5.1Apple’sjobskeptinAsiancountries......................................................................................................73
5.5.2VoluntarydecisionofAppletobringjobsbackintheUnitedStates.........................................75
5.5.3InvoluntarydecisionofAppletobringjobsbackintheUnitedStates......................................77
5.6 ScenarioVI:Consequencesofthegrowingenvironmentalconcerns....................................78
6.Limitationsofthispaperandfurtherresearch.......................................................................83
7.Conclusion.....................................................................................................................................87
8.Bibliography..................................................................................................................................91
9.Annexes.......................................................................................................................................103
III
Figures
Figure1:Apple'sFortune500rank...........................................................................................5
Figure2:Chinesepopulationevolution..................................................................................18
Figure3:Chineseactivepopulation........................................................................................18
Figure4:Chineseprovincespopulationconcentration..........................................................19
Figure5:LocationofFoxconnfactoriesworkingforApple....................................................20
Figure6:Applesuppliersthroughouttheworld.....................................................................24
Figure7:SAIDIandSAIFIindexes............................................................................................26
Figure8:Chinesesocialprotests............................................................................................27
Figure9:Worldwidegovernanceindicators...........................................................................30
Figure10:2015globalpeaceindex........................................................................................31
Figure11:Foxconnmanagementhierarchy...........................................................................42
Figure12:Appleannualaudits...............................................................................................45
Figure13:ValuedistributionoftheiPhonein2010...............................................................50
Figure14:Apple'snetsalesevolution(inmillion)..................................................................52
Figure15:Averagewageperyear(inYuan)...........................................................................57
Figure16:Chinesepopulationstructure(inmillion)..............................................................58
Figure17:Ruralresidentsin2015(inmillion)........................................................................61
Figure18:Averagemonthlywagesin2013(inUS$)..............................................................62
Figure19:Indiansmartphonemarketshare..........................................................................65
Figure20:Shareofthepopulationthatisinthemiddleclass................................................69
Figure21:Netsalesevolutionbyoperatingsegment(inmillion)..........................................70
Figure22:Americanunemploymentrate...............................................................................72
Figure23:Averagemonthlydisposablesalary(netaftertax)(in$).......................................74
Figure24:TotalGHGEmisisonspercountryin2012(inMtCO2)............................................79
Annexes
AnnexI:Apple’sfinalassemblyfacilities…………………………………………………………………………103AnnexII:ListofFoxconnworkerswhocommittedsuicide………………………………………………104
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1.Introduction
Apple is an intensely successful company, and people all over the world are so
addictedto itsbrand.Thatwhenanewmodel is launched,peoplequeueforhourstobuy
theproduct.However,behindthescenes,thisfamouscompanyisnotasperfectasitwould
likepeopletothink.BehindeveryAppleproductareexploitedChineseworkersandchildren,
workingeverydayinconditionssodeplorablethatpeoplehaveevencommittedsuicideto
escape the exploitation.Despite scandals linked toworking conditions, so fewpeople are
aware of these conditions because Apple is skilled at manipulating its brand image and
controlling this information. The simplest proof of their manipulative power is observed
whenaskingquestionsofSiri,theAppleiPhonevoicepersonalassistant.
Wheredoyoucomefrom?
Likeitsaysonthebox…IwasdesignedbyAppleinCalifornia.
Whobuiltyou?
I,Siri,wasdesignedbyAppleinCalifornia.
Wherewereyoumanufactured?
I’mnotallowedtosay.
WhomanufacturedtheiPhone?
I’mnotsure,butIthinktherewasagarage.Anouterplanetwithsomestrangemetals.Andabunchofnerds.
DoChildrenmaketheiPhone?
Interestingquestion.
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Youreallydon’tknow?
Unfortunately,Iamasyetimperfect.
DoyouknowFoxconninChina?
I’msorry,I’mafraidIcan’tanswerthat.
DoesApplerespecthumanrights?
Ican’tanswerthat.ButApple.comshouldbeableto.
Apple seemingly has a talent for avoiding every unpleasant question, and not just
whenaskingSiri.Indeed,emailstothecorporateofficethatbroachtopicsofmanufacturing
conditions either remain unanswered, or elicit replies that refer back to their perfectly
manicuredwebsite.BrowsingthroughtheApplefurtherpushestheidealsofaconscientious
and respectful company that cares about its suppliers throughout the world. The
disingenuousness of such responses prompted this paper,which aims to provide a better
understanding of what is hidden behind these well-design products used by millions of
people.Nevertheless,thistopicissobroadthatwehadtomakeachoice.Inresponsetothe
growingnumberofitsworkerscommittingsuicide,wethereforedecidedtoinvestigatethe
relationshipbetweenAppleanditsmajormanufacturerFoxconn,inparticular.
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2.Problematic:Analysingthepossibleevolutionsofthe
alliancebetweenFoxconnandApple
2.1Applestory
Before explaining the problematic and the two main parts of this paper in more
detail,wewillfirstintroducethetopicandbrieflyconsiderimportantdatesintheevolution
ofApple, thecompany thatgrew fromasimplePC firm intooneof thebiggest consumer
electronicsfirmsintheworldinlessthan40years.
Apple Company was created in 1977 by Steven Jobs and Steven Wozniak. They
establishedtheirheadquartersinCupertinoinSiliconValley.
In 1980, Apple announced the construction of two manufacturing plants in Texas
(Carrollton)andinIreland(Cork)responsibleforthecomputersontheEuropeanmarket.A
year after, they opened a plant in Singapore. In 1983, the factory launched a highly
automatedplant inCalifornia.After some restructurings, themajorityofApple computers
soldintheUnitedStateswerebuiltbytheElkGrove(California)andtheFountain(Colorado)
plants, and Jobs claimed to be as ‘proud of the factory in America as [he was] of the
computer (Prince, M., & Plank, W. (2012)). In fact, in the 1980s, Apple resisted offshoring
despite the rapidmigration of electronic componentsmanufacturing toAsia (Duhigg, C.,&
Bradsher,K.(2012);Teagarden,M.(2016)).
In 1993, the company entered the Chinesemarket in order to capture PCmarket
share inoneofthe largestconsumermarkets intheworld (Teagarden,M.(2016)). (In2008,
AppleopeneditsfirststoreinBeijing).
However, in 1996, Apple encountered financial problems and began changing its
supply chain. The company reorganised their activities, determiningwhich shouldbe kept
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insidethecompanyandwhichshouldbeoutsourced(Berger,S.(2013)).TheysoldtheFoutain
planttothecontractmanufacturerSCISystem,whichimpliesthatalargenumberofApple’s
computers were now manufactured by another company. As part of the reorganisation,
Applealsorelocatedthecircuitboardassembly.
In 2001, after considerable changes in the consumer electronics domain, Apple
shifted its emphasis from the PC (Personal Computer) industry to new sectors. After the
launch of the iTunes store, they released the iPod and—somemonths later—the iPhone
(Teagarden,M.(2016)).
In 2004, Apple finally closed its last US manufacturing line in Elk Grove and
succumbedtothelureofoffshoring.Theytransferredthemajormanufacturingoperations
from the US to China, outsourcing its production to Foxconn. Foxconn is a multinational
electronicscontractmanufacturingsubsidiaryofHonHaiPrecisionIndustry,headquartered
in Taiwan. The company uses Taiwan as its design centre, and China as its main
manufacturingbase.TheyalsoestablishedservicecentresinAsia,Europe,andmajorcitiesin
theUnitedStates(Foxconn(2007)).
In2011,ApplelaunchedtheiPadtocoordinatecomputing,telecommunication,and
media,finallyreleasingtheirlastproduct,theAppleWatch,in2015(Teagarden,M.(2016)).
In 2013, the Taiwanese company, Foxconn, became the principal manufacturer of
Apple.(Whenlookingatthetop200supplierslistreleasedbyApple,wenoticethatFoxconn
(Hon Hai Precision Industry Co. Ltd.) is a predominant supplier of the American firm)
Working with Apple has clearly contributed to the success and the growth of the
manufacturer.FoxconnhasbecomeChina’slargestprivateemployerandtheworld’slargest
electronicscontractor,producingmorethan40%oftheworld’sconsumerelectronics,while
40%to50%ofFoxconntotalrevenueisgeneratedthroughApple(Chan,J.,Pun,N.,&Selden,
M. (2013)). Nowadays, Foxconn employs 1.4 million people in China. The company
manufactureselectronicproductsforcompaniessuchasSony,Hewlett-Packard,andDell,as
wellassmartphonesforNokia,Motorola,Huawei,Cisco,andXiomi.
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Twenty-twoFoxconnplantsarepartoftheproductionlineforApple.Amongthem,
oneplantissituatedinBrazil,twoareinTaiwan,andtheothersarelocatedinChina(Apple
(2016, b)). Out of 18 Apple final assembly facilities in the world, seven of the plants are
ownedbyFoxconnand6ofthemarelocatedinChina(SeeAnnex1)(Apple(2016,c)).
Concerning Apple, the company has been on a steady upwards trajectory and has
become one of the most well-known firms in the world due to its innovation, people
management, quality ofmanagement, social responsibility, financial soundness, quality of
products/services,globalcompetitiveness,and long-term investmentvalue.The firmholds
thefirstplaceinthe‘World’sMostAdmiredCompanies’rankingfortheninthyearinarow
(Fortune(2016,b)).Applealsoholds3rdplaceinthe‘Fortune500ranking’witharevenueof
233,715milliondollars.Thecompanyhasgracedthis list forthepast22years, risingfrom
the325thpositionin2002,asshowninthefigure1(Fortune500(2016)).
Figure1:Apple'sFortune500rank
Source:Fortune500(2016)
Applealsoholdsthe15thpositioninthe‘Global500ranking’andhasbeenrankedfor
thelast13years(Fortune(2016,a)).
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2.2Problematic
We can now detail the two objectives of this paper: (1) understanding Apple’s
decision to outsource the manufacturing and assembly to Foxconn, and (2) generating
scenariosaboutthepossibleevolutionsofthealliancebetweenthesetwomultinationals.
First, we analyse the reason for this alliance. In order to do so, we use the OLI
frameworkandapplyittotherelationship.ByusingOLI,wecanunderstandthelogicbehind
Apple’s decision to outsource the production and the final assembly of its products, and
what will ensure their success (Ownership specific advantage). Then, we examine the
reasonswhyApplechosetoworkwithFoxconnandthustooutsourcethemanufacturingin
Chinaratherthaninanothercountry(Locationadvantage).Finally,weemphasisewhyApple
decided to outsource rather than make Foreign Direct Investment (FDI) by acquiring a
ChinesefirmorbymakingaGreenfieldinvestment(Internalisationadvantage).
In the second main part of the paper, we look at possible evolutions of the
relationshipbetweenthesetwomultinationalsbydevelopingseveralscenarios.Thechoice
ofthescenariosisexplainedhereafterinthemethodology.
2.2.1ScenarioI:Consequencesofbadworkingconditionsscandals
ThefirstscenarioregardscontroversialworkingconditionsinFoxconnfactories.The
Taiwanese firm was scrutinised in 2010 when many workers attempted suicide. We
therefore initially evaluate theworking conditions anddetermine themainproblems that
may have caused these suicides. Then, this paper emphasises the reactions of Apple,
Foxconn, the Chinese state, and the workers following this scandal. Finally, we develop
differentpossibleevolutionsof thissituation.For instance,Applemaystartdiversifying its
supplier network, consumers may stop buying Apple products, Foxconn may have to
improve conditions andwages and so forth. All these evolutionsmay impact the relation
betweenAppleandFoxconn,soweinvestigatewhichscenarioismostlikelytohappen.
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2.2.2ScenarioII:ConsequencesofChinatransitionphase
Thesecondscenario isabouttheChinesetransitionphase.Forseveralyears,China
hasbeenintransition,andislosingitsstatusas‘thefactoryoftheworld’.Infact,wenote
somemajor changes such as the rise of salaries, the decline ofmigrantworkers, and the
growing middle class. Therefore, we develop these changes in more detail, and look at
possibleconsequences.Weespecially investigatecountries thatmayhavethepotential to
replace China. Moreover, we examine actual Foxconn factory locations, and how it may
evolveaswellasthemajoradvantageofdoingbusinessinthesecountries.
2.2.3ScenarioIII:Thegrowinguseofrobots
The third scenario discusses the increasing use of robots. This growing trend
accompanied the transition phase of China. Many Chinese cities, especially in Guandong
provinces,arecompensatingforthedeclineofworkersandthegrowingsalariesbyinstalling
robotsintheirfactories.Thestatesalsostartincitingcompaniestodosobecausetheywant
China to shift from ‘the sweatshop of the world’ to an innovation centre. This scenario
thereforedevelopsthistransitionandtheconsequencesfortherelationbetweenAppleand
Foxconn.Foxconnisnoexceptiontotherule,andhasalsostartedestablishingrobotsinits
factories.
2.2.4ScenarioIV:ThegrowingimportanceoftheChineseconsumermarket
Asmentionedinthesecondscenario,acharacteristicoftheChinesetransitionphase
is the growing middle class. The fourth scenario is focused on this important trend. The
Chinese consumer market is becoming more and more attractive for Apple, and even
became its second largestmarket.We therefore investigate it inmoredetail, and look at
possibleconsequencesforAppleandFoxconn.
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2.2.5ScenarioV:ApplejobsbroughtbackintheUnitedStates
The fifth scenario discusses the eventuality of bringing Apple jobs back into the
United States. After the financial crisis of 2008, the unemployment rate inAmerica grew,
andApplewascriticisedforhiringmorepeopleinothercountriesthaninitshomecountry.
Therefore,ApplebroughtsomefactoriesbacktoAmerica;although,thebulkofproduction
isstilldoneabroad.Wethereforediscussdifferentpossiblepermutationsofjoboutsourcing.
Ontheonehand,thesituationwillpossiblystayasitisbecauseChinaismoreattractivethan
Americatomakebusiness.Ontheotherhand,jobsmightreturnduetofactorsindependent
fromApple’scontrolortobenefitfromAmericanadvantages.
2.2.6ScenarioVI:Consequencesofthegrowingenvironmentalconcerns
Finally, the last scenario develops the consequences of growing environmental
concerns.Overthelastseveralyears,climatechangehasbecomeacrucialconcerntomany
societies. The CO2 emissions are rising exponentially and actions must be undertaken in
ordertostabilisethegrowingtemperatureoftheplanet.Moreover,Chinaisclearlyamajor
playerthatshouldtakemoresignificantmeasuresbecauseof itsmassive impactonglobal
warming.ThissectiondevelopsthepossibleconsequencesofnewregulationsinChinaand,
more broadly, in theworld. Applemay clearly be tempted to stop its collaborationwith
Foxconninordertoavoidenvironmentaltaxes.Theymayalsobringproductionplantsnext
to main consumer markets in order to avoid long transport, which may become heavily
taxed.Differenteventualitieswillbedeveloped.
Beforetheconclusion,apartofthispaperwillbedevotedtothe limitationsofthis
essay. Recommendations for further research are also set out as some topics may be
interestingtodevelopfurther.
Wewilleventuallyconcludebyhighlightingthemostimportantfactsofthisthesis,as
wellasthemostlikelyscenarios.
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3.Methodology
Beforebeginningwith the firstpartof thispaper,whichconsidersapplying theOLI
frameworktothealliancebetweenAppleandFoxconn,thefollowingisexplained:(1)how
wegatheredthenecessaryinformation,andwhichsourceswetypicallyused,(2)thereasons
whywedecidedtodevelopthesespecificscenariosratherthanothers,and(3)assumptions
weshouldputforth.
3.1Informationgatheringprocess
Intheframeworkofthispaper,ourtimeandresourceswerelimited.Indeed,wedid
not have the ability to interview—or even go to China to interview—Foxconn and Apple
employees or other third parties. Therefore, in order to write this paper, we focused on
threekindsofdocumentation.
Inthefirstpartofthispaper,weusedbookstogatherinformationandtoacquirethe
necessary familiaritywith theOLI frameworkandout-sourcing in theelectronicssector. In
fact,aspreviouslynoted,webeganthisthesiswithanexplanationofthealliancebetween
AppleandFoxconnbyusingtheOLI framework fromJohnDunning.Therefore, todevelop
thisfirstpartconscientiously,wereadfirstphasebookstogatherinformationabouttheOLI
framework and the reasoning behind out-sourcing and multinationals’ international
decisions.Indeed,thelogicbehindtheseconceptsisthefoundationofthisthesis.
Then,afternotingthismoretheoreticalaspect,wereadinternationalpressarticlesin
ordertogather informationaboutAppleandFoxconn.Wetypicallyusedarticles fromThe
Financial Times, The Economist, theHarvard Business Review, Forbes, the Foreign Affairs,
amongothers.
We also gathered information from official paper by national and international
organisationssuchastheOrganizationforEconomicCo-operationandDevelopment(OECD),
theWorldBank,theWorldTradeOrganization,theUnitedNations,andsoforth.Information
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from theNational Bureau of Statistics of China was also particularly useful in addition to
Apple’sofficialwebsite.
Wealsousedscientific literature,butinsmallerquantitybecausethesesourcesare
lessavailableandlessusefulforinformationaboutAppleandFoxconnspecifically.
In the second part of this paper, we used the same sources cited above—
international press articles, official organisations’ websites and scientific literatures—to
developthesixscenarios.
Apple and Foxconn keep a great deal of information confidential. Therefore, we
examined many sources released by many different organisations in order to gather the
mostinformationpossible.Nevertheless,someinformationwasstillmissing,aswediscussin
thelimitationsectionofthisthesis.
Also,thetopicofthispaper—therelationshipbetweenAppleandFoxconn—isvery
broad, and an infinite amount of research and investigation could be conducted on the
topic. Moreover, the electronic sector in which Apple operates moves rapidly, and new
competitors constantly enter the market to try to be better than the other players.
Therefore, information gathering is yet more complex. For this reason, we limited our
researchbyapplyingtheOLIframeworkanddefiningonlysixscenarios.Focusingoncertain
informationhelpedtoavoidbeingdistractedbytheinfiniteamountofavailabledataonthe
Internet.
3.2Choiceofscenarios
As explained above, we develop six scenarios for possible evolutions of the
relationshipbetweenAppleandFoxconn in thesecondpartof thispaper.Otherscenarios
could also have been developed to examine this future alliance; however,we decided to
focusonthesesixcasesforreasonsdefinedbelow.
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First,aspreviouslymentioned,wearelimitedintimeandresourcesforthisanalysis.
Indeed, this thesis was completed over the course of a master’s degree. Therefore, we
workedwithalimitedperiodoftime,whichrestrictedustoalimitednumberofscenarios.
Additionally,wedeterminedthatchoosingasmallnumberofscenariosallowedustofocus
optimally and to analyse each scenario sufficiently thoroughly. Choosing more scenarios
wouldhavemeantlesstimeforeachscenario,andthereforelessinformationandaccuracy.
Anotherreasonwhywedecidedtodevelopthesescenariosratherthanothersisalso
linkedtotheavailabilityofinformation.AppleandFoxconnarebothveryconfidentialfirms
thatworktokeepmuchoftheirinformationsecret.Further,wedidnothavetheabilityto
interview Apple’s employees or other third parties, nor to go to China to collect data.
Therefore,ourresearchwasrestrictedbytheavailabilityofsomeinformation.Wedecided
tochoosescenariosonwhichwewillbeabletofindenoughinformationtoanalysethemin
detail.Missinginformationarediscussedinthelimitationpartofthisthesis.
Wealsodecidedto focusourattentionon thesescenariosbecause theywerevery
visible inthemediaatthetimeorbecausetheyarecurrent issuesortransformationsthat
we commonlyhearabout. The concernsdeveloped in thispaperarebasedon issues that
might be found when browsing the Internet, or listening to the radio. Some of these
scenarios are actual topics commonly discussed at university because they are major
economictopicsthatmayinfluencefuturebusinessconduct.Wealsofocusedourattention
onthesescenariosbecausetheyaresomeofthemost likelytooccur.Wefurtherdecided
nottodevelopscenariosthatarelesslikelytoinfluenceAppleandFoxconn’srelationship.
In sum, while we could have chosen to develop smaller scenarios that are less
discussed in the media and less relevant, we decided instead to focus on popular or
controversialtopics.
Eachofthescenarioswedevelophavebeenchosenforspecificreasons.Wediscuss
the first scenario about working conditions in Foxconn plants because these conditions
createdaworldwidescandal in2010,andmanyarticlesandpublicationswerereleasedat
thetime.Untilthatscandal,manyorganizationsattemptedtosecretlyenterthesefactories
togathermoreinformationandtorevealthetruthtotheworld.Specialorganisationsalso
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commonlypublishreportsaboutworkingconditionsinthesefactories(ChinaLabourWatch,
forinstance).Afterthisscandal,Foxconnwasparticularlyinthespotlight,suchthatmuchof
theinternationalpresswastalkingaboutit.Therefore,wedecidedtodevelopthisscenario
because the highly visible broadcasted event caught our attention and motivated us to
gather more information to understand these working conditions and the possible
consequencestheirvisibilitymayhaveontherelationshipbetweenAppleandFoxconn.
We decided to develop the second and the fourth scenario because it is a highly
broadcastedanddiscussedtopicrecentlythatmayhaveworldwideimpact.Indeed,forthe
last severalmonths,wehaveheardagreatdealaboutChinaand its ‘transitionphase’.As
previouslymentioned, ‘transition phase’ refers to the risingwages in China, the declining
numberofmigrantworkers,andtherisingChinesemiddleclass.Moreover,asChinaisone
ofthemostpowerfulcountries intheworld,theseChinesetransitionsarecrucialandmay
impacttheglobaleconomy.
The sixth scenario discusses the possible consequences of growing environmental
concerns—acommonlydebated topic thesedays.Weheardabout theglobalwarmingon
theradioconstantly—attheuniversity,ontelevision,ontheInternet,andinnewspapers—
whichiswhywedecidedtodevelopthisscenario.
Regardingthefifthscenario,aboutthepossibilityofseeingApplejobsreturntothe
United States, we developed this case because after the 2008 financial crisis, talk of
unemploymentratesandrelatedproblemsabounded.Therefore,wedecidedtodevelopthis
scenario to thoroughly understand the role that Apple may potentially play in these
unemploymentproblems.
Finally, we discuss the third scenario regarding the growing use of robots as
automation isalsoacurrenttopic.Even if thistopic issubtlerthanthepreviousones,and
lessdiscussed inthemedia, inourviewautomation isstillavital factor inthecompetitive
market.Indeed,weliveinaglobalisedworldwherefirmsmustrapidlyadaptthemselvesto
be better than their competitors, and to attract potential clients. In sum, we decided to
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developascenario involvingtheuseofrobots inAsiancountriesbecauseautomationmay
helpcompaniestoavoidcurrentissuessuchasgrowingsalaries.
We discuss scenarios we decided not to develop, and the reasons behind these
choices,inthelimitationsectionofthisthesis.
3.3Assumptions
First, throughout the paper, we use the simple and common name ‘Apple’ to
represent theAmerican firmeven though this isnot itsexactname. Indeed, thecompany
wasinitiallynamed‘AppleComputer’,andrenameditself‘AppleInc.’in2007(Teagarden,M.
(2016)).
Secondly,asFoxconn is in chargeof theAppleproduct componentsmanufacturing
and of the final assembly of Apple products, the framework of this paper especially
considersthislatterrole.AmajorconcernofthisthesisisindeedtounderstandwhyApple
decidedtooutsourcethemajorityofthefinalassemblyofitsproductstotheTaiwanesefirm
andhowitmayevolveinthefuture.
Consequently, whereas Foxconn is a Taiwanese firm, themajority of this paper is
aboutdoingbusiness inChinabecause6ofthe7Foxconnfinalassemblyfacilitiesworking
forApplearesituatedinChina.Moregenerally,19ofthe22Foxconnplantsworkingforthe
multinationalaresituatedinthatcountry.Indeed,asnotedabove,FoxconnusesChinaasits
mainmanufacturingbase.
Finally, throughout the paper, we will consider Taiwan as a country independent
fromChina.
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4.ApplicationoftheOLI-Framework
The eclectic paradigm, or in other words the OLI framework, could be used to
understandwhyAppledecidedtoformanagreementwithFoxconnratherthaninternalise
Apple’sproduction.
TheOLIframeworkreferstothreeadvantagesthatexplainwhyafirmwouldengage
in international business through FDI instead of externalising through outsourcing or
licensing. More precisely, according to Dunning, a firm will engage in international
production if ithas(1)ownership-specificadvantages, (2) if it internalisestheuseofthese
ownership-specificadvantages,and(3)ifthecompanylocatesitsassetsinacountrywhereit
benefitsfromlocationspecificadvantages(Dricken,P.(1998)).
4.1 Ownershipspecificadvantages
Ownershipspecificadvantages(O)refertothefirm’suniqueabilitiesoritspossession
ofspecificassetsthatarenotownedbycompetitorsandthatarenoteasilyimitated.TheO
explains the ‘why’ofmultinationalactivities.Theseassetscouldrefer totangibles (natural
endowments, manpower and capital), and to intangibles or capabilities (technology and
information, managerial, marketing and entrepreneurial skills, organizational system and
accesstointermediateorfinalgoodsmarkets)(Dunning,J.(1993)).
Apple typically has unique assets that allow it to market internationally without
fearing any imitation from the competitors. In other words, Apple has competitive
advantagesthatarecrucialtocompetinginternationally.
First,Appleisaninnovativefirmthatregularlylauncheswell-designedbreakthrough
products.Intherankingofthetop700R&DinvestorsintheworldreleasedbytheEuropean
Commission,Appleranked109thin2004.Today,thefirmisconsideredtobeoneofthebest
16
performing R&D investors, and one of themost innovative firms in theworld. Their high
quality products typically offer rich functionality, and, ease of use (European Commission
(2014)).
ThebestpracticesofApplecanalsobeconsideredasaspecificownershipadvantage.
‘Best practices’ include Apple’s production management, organisation and marketing
system,andorganisationofwork.Forinstance,Apple’stypicalstrategyconsistsoffocusing
on a few product lines and avoiding customisation as much as possible (Satariano, A., &
Burrows,P.(2011)).Also,theyhaveaparticularsupplychainwheretheycontrolnearlyevery
part. The financial success of Apple is inseparable from its globally dispersed network of
supplierandfinalassemblers(Lu,C.(2014)).
Even ifbestpracticescanbe legally imitated itwillnotbeeasytodo.Actually,you
can acquire it only with experience. In other words, the teams working for Apple have
acquired assets that cannot be imitatedwithout experience. This concept is developed in
moredetailinanothersection.
Another specific ownership advantage of Apple is indubitably its brand power. As
mentionedabove,Appleisabrandadmiredworldwide.Thispopularityincombinationwith
their large market share, provides leverage in negotiations. Thus, the risks of the
concentrating manufacturing parts in a few locations are counterbalanced by this
‘negotiationpower’.Moreover,bybuyingfromtheircontractors inmassivevolume,Apple
benefits fromeconomiesof scale,gainingdiscountsonparts,manufacturingcapacity,and
airfreights(Chan,J.,Pun,N.,&Selden,M.(2013)).
4.2 Locationspecificadvantages
Thespecificassetscitedabovecanbedependentofacertainlocation,whichbrings
ustothesecondpillaroftheparadigm.Locationspecificadvantages(L)explainthe‘where’
ofproduction.Lconsistsoffactorspresent inspecific locations,thatareavailabletoevery
firmand canonlybeused in those locations (Dricken,P. (1998); pp. 187).Apple’sdealwith
Foxconn,amajorityofwhoseplantsaresituatedinChina,maybepredicatedonL.Wecan
17
distinguishthreetypesofadvantagesofdoingbusinessinChina,(1)economicadvantages,
(2)socialandculturaladvantages,and(3)politicaladvantages(Hill,C.W.L.(2014)).
Beforedevelopingthesethreetypesofadvantage,itisimportanttorecallthatApple
decidedtooutsourcetheproductionandfinalassemblyof itsproduct in2004.So,wewill
analysetheselocationadvantagesbyconsideringthecontextofthemarketin2004.
4.2.1 Economicadvantages
The first economic advantageofmovingproduction toChina is thequality of their
factors of production. Theworkforce is particularly attractive, due to its differences from
thatoftheUnitedStatesandmanyothercountries.Infact,theChineseworkersareknown
toworkharderandmorequicklythantheirAmericancounterparts.Theyworkmanymore
hoursandevenaccept living inclosequarters.Theirhigherproductivity levelscanalsobe
attributedtoChineseculturalviewsonwork.ThesefactorsmayexplainwhyAppledecided
toassemblethemajorityof its finalproducts inChineseplants—flexibilityandrapidityare
veryimportantfactorsforApple’ssuccess.
Another important point is the cost of these factors of production. Labour costs in
China are clearly much lower than in the United States. However, they represent a very
smallproportionofthetotalvalueofAppleproductsaswewillseeinthesecondpartofthis
paper(Hill,C.W.L.(2014);pp.33).
Thesizeofthemarketisalsoanessentialpointwhenchoosingalocationinwhichto
dobusiness.Chinaisasizeableterritorycharacterisedbyanenormouspopulation.Figure2
illustratesthepopulationevolutioninChinawithintherelevanttimeframeof2004.Therise
experiencedeachyearisnotnegligibleandrepresentsmillionsofpeople.
18
Figure2:Chinesepopulationevolution
Year Totalpopulation(year-end)
2001 1276270000
2002 1284530000
2003 1292270000
2004 1299880000
2005 1307560000
2006 1314480000
2007 1321290000
2008 1328020000
Source:NationalBureauofStatisticsofChina(2015).
However,itisthenumberofworkeravailablethatissignificantforApple.Chinadid
notbecomethe‘factoryoftheworld’bychance.Infact,Chinapossessesanabundanceof
semi-skilledworkers,which is an attractive factorwhen choosing anoutsourcing location.
Figure3highlightsthehugeactivepopulation,inthetimeframeof2004(OECDstatisticsportal
(2002)).
Figure3:Chineseactivepopulation
Year Activepopulation
2001 735540448
2002 742455842
2003 749740411
2004 756305157
2005 762608154
2006 767136988
2007 772098426
2008 776125592
Source:TheWorldBank(2016,b)
19
Besides the immenseactivepopulation, the largestproportionof thepopulation is
alsosituatedintheeasternhalfofthecountry.Only6%ofthepopulationissituatedinother
partsduetothearidityandthemountains(Naughton,B.(2007);pp.19).Therefore,aswecan
seeinthefigure4,alargenumberofindividualsarehighlyconcentratedintheeasternand
central cities. The figure5,wediscuss justafter, shows that themajorityof Foxconn final
assemblyplantsaresituatedinthesemostconcentratedprovinces.
Figure4:Chineseprovincespopulationconcentration
Source:Naughton,B.(2007)
Beforelookingatthespecific investmentzones,cities,andregionsthatmakeChina
soattractive to foreignbusiness, it is important to keep inmind that19ChineseFoxconn
factorieswork forApple.Among them,sixare responsible for the finalAssemblyofApple
products.
SevenaresituatedintheGuandongprovince,moreprecisely,inFoshanandShenzen
coastal cities; two of these factories are working on the final assembly. Four plants are
20
situatedinHebei,Jiangsu,andZhejiangcoastalprovinces.Fiveothersarenearby inShanxi
andHenanprovinces;includingtwofinalassemblyfacilities.Amongthetwoplantssituated
in Sichuan province, one is also responsible for the final assembly. Two plants are also
situated in Taiwan. Finally, the Foxconn plant that deals with the final assembly of
accessories is situated in an export-processing zone in Shanghai (Apple (2016, b)). For a
cleareroverview, refer to figure5.Starsare randomlyputted in theprovinces, theaimof
thisfigureisespeciallytohaveabroadpictureofplants’locations.
Figure5:LocationofFoxconnfactoriesworkingforApple
Source:Apple(2016,b)
Aspreviouslysaidinthemethodology,intheframeworkofthisthesisweespecially
focus on the final assembly of Apple products. Therefore, final assembly facilities are
representedinthefigure5bybiggerstars.
21
InrespectoftheChina’svastsizeandabundant labourforce,twomainregionsare
particularlyattractivetomakebusinessandattractedFoxconnplantsworkingforApple.
ThefirstregionistheGuangdong’sPearlRiverDeltawithitsproximitytoHongKong
and international trade.Foxconnhas sevenplants (outof19) in this region, including two
finalassemblyfacilities.Theplantsarerepresentedbyredstarsinthefigure5.Thisregionis
the primary manufacturing centre for consumer electronics. It contains convenient
infrastructures suchas aport toexport and import goodsall over theworld, expressway,
mainroad,andarailway(Torrens,C.(2010)).However,thisregionhasbecomeavictimofits
ownsuccess,and isnowconfrontedwiththehigherwagesand improved livingconditions
that lead firms to find other low cost places to manufacture products. This is further
discussedinascenariowithinthesecondpartofthispaper.
Another appealing region is the Yangtze River Delta, which includes the city of
Shanghai.Foxconnisalsosituatedinthisregion,whereonefinalassemblyplantisworking
forApple.Thisoneplantisrepresentedbyabluestarinthefigure5.Thisisageographically
strategic position on the coast with one of the best transport networks in the country,
including a port. Shanghai’swealth has emanatedoutwards to smaller cities, creating the
manufacturingclustersthatarecrucialtobeingamajorhub(Torrens,C.(2010)).
Such‘spatialclusters’canleadtoeconomiesofscale.AccordingtoAlfredWeber,the
geographyofanindustrytypicallydependson(1)thetransportcostsandlabourcosts,and
(2)theforcesofagglomeration.Thelatterisrelatedtothespatialconcentrationofeconomic
activities in a single location that lead to external economies of scale. When producers,
suppliers,orconsumersarelocatedinthesamearea,itcouldincreaseeconomiesofspecific
firmlocatedthere(Dricken,P.(1998);pp.75).Foxconn’s locationprovidesaclearadvantage
becausemany factories thatproducecomponents forAppleproductsare situatednext to
Foxconn’ assembly plant (Hill, C. W.L. (2014); Torrens, C. (2010); pp. 57). In fact, of Apple’s
supplierlist,45suppliersarelocatedinDongguan—oneofthelargestcomputerproduction
basesinChinathatissituatedintheYangtzeRiverDelta(Apple(2016,a)).
22
TherapidgrowthoftheseregionsandofotherChina’scoastalprovinceshasledtoa
gapbetweeneastandwest.ItiswhytheChinesegovernmentseta‘developthewest’policy
in2000 todevelopwesternand centralChina. The state sent financial capital andhuman
resources to some of these regions until it became beneficial for companies to move
production in these regions due to cheaper land and labour, and various government
incentives.Despitetheseregions’disadvantages,suchas longtransportdistanceforgoods
andweakinfrastructure,somecitiesbecameveryattractive.Amongtheseregions,Foxconn
setupfourplantsintheprovinceofShaanxiandSichuan(Chan,J.,Pun,N.,&Selden,M.(2013);
Torrens,C.(2010);pp.65).Theseonesareshowedinthefigure5byorangestars.
In 1980, China also started developing investment zones following the ‘Open-door
policy’; these were characterised by China’s desire to open its economy to FDI. These
investmentzonesclearlyplayedacrucialroleinthegrowthofChina’seconomyandbecame
attractiveplacesforbusiness.Anumberofinvestmentzonesthatcouldexplainthelocation
ofsomeFoxconnfinalassemblyfirmsfollows.
Firstly, China set up four Special Economic Zones (SEZ) in 1984 in order to attract United
States, Japanese, and European investments. One zone was created in Shenzhen, a city
where Foxconn established a big part of its plants (red stars). Secondly, they started
developing Economic and Technological Development Zones (ETDZs) in 1988. These zones
aimedatencouragingforeigninvestorstobringmoretechnologyintoChina.Todate,there
are54ETDZs,mostnotably inChengdu,Shanghai,ZhengzhouandTaiyuanwhereFoxconn
firmsare located.Then,theycreatedForeignTradeZones (FTZs)toprovidemoreeffective
importandexportinfrastructurestobringinrawmaterialsandexportfinishedproducts.FTZ
offersduty-free importandstorageofmachinery,equipment, rawmaterials,amongother
things.SixteenportsreceivedFTZstatus,includingtheportofShanghaiandShenzenwhich
could benefit Apple when working with Foxconn. A Foxconn plant is also situated in an
ExportProcessingZone (EPZ) inShanghai.Thesezonesexisteduntil2000,andaretodayof
the number of 25. It is an export enclave with special investment and trade incentives,
wherecertainlegislationisexempted.Also,thesezonescontainthesignificantinfrastructure
andservicesneeded formanufacturingactivities, suchas roads,power supplies, transport
facilitiesand low-cost/rentbuildings (Dricken,P. (1998);pp.130).Theprincipaladvantageof
EPZs is that companies do not pay VAT because goods are defined as exports (Torrens, C.
23
(2010)). Thegovernmentalsoput inplaceHighTechnologyDevelopmentZones (HTDZs) to
attractforeignhigh-techcompanies.OneFoxconnfactoryissituatedininZhongshan.
In sum, theseexternallyoriented locationsoffermanyadvantages that canexplain
why Apple decided tomake an alliancewith Foxconn. In fact, by being situated in these
zones,Foxconnbenefitsfrommoderninfrastructure,easilyaccessiblemainports,increased
flexibility regarding the government, and ultimately, Foxconn can benefit from clusters.
Nevertheless,thegrowingsuccessofthesezonescaneventuallyleadtorisingcosts.Forthis
reason, as explained previously, Foxconn decided to establish plants in the centre of the
country.However,theserisingcostsarestillamajorproblemtodayandthereforetheyare
discussedlaterinascenario(Torrens,C.(2010)).
On a macro-level, the geographical situation of China in the world is also an
important factor to consider. In fact, even if the globalisation and the improvement in
technologymakeitmucheasiertodaytotravelacrosscountriesandtotransportgoods,itis
stillessentialtoworkwithfactoriesthatarewellsituated.Atafirstglance,Chinaissituated
inthecentreoftheworld,andcanbeeasilyaccessedbyplaneandbyboat.Moreover,we
observed that themajority ofApple’ suppliers are situated inAsia. This is particularly the
caseinChina(seefigure6),whichcouldexplainthedecisionofAppletooutsourcethefinal
assemblyofitsproducttoFoxconn.Indeed,theFoxconnfinalassemblyplantsareproximate
tomostofthesuppliersthatwouldfacilitatethetransportationanddecreasecosts.
24
Figure6:Applesuppliersthroughouttheworld
Source:Apple(2016,b)
Whenlookingforalocationtooutsourcethemanufacturingandthefinalassemblyof
yourproducts, it isalso importantto lookatmorespecificpracticalaspects.Thetransport
andtelecommunicationnetworksarenotably importantfactorstotake intoaccountwhen
choosingbusinesspartners.
WhenAppledecidedtooutsourceitsmanufacturingactivitiesinChina,theycertainly
consideredtheimpactontheirdistributionnetwork.Applekepttheircentralwarehousein
ElkGroveinCaliforniatodealwithretailstoresanddistributors internationally.Moreover,
AppleproductsaredirectlysenttoonlineconsumersfromChina,viaUPSandFedEx(Lu,C.
(2014)). Therefore, the transport network is vital to ensure a good flow of products
throughouttheworld.Chinaoffersanenvironmentsuitedtothetransportofgoods.Infact,
investment zones, as explained above, possess the necessary infrastructures needed for
exportsandimports.Theroadnetworkhasrapidlygrown,andthestateisstilldevelopingits
transportnetworkinordertoreachallpointsofthecountryandstillattractforeignfirms.By
2004, China had developed a national network of express highways that already reached
34,300 kilometres. The country also had 507 airports in 2013 (Central Intelligence Agency
25
(2016,a)).However,thedevelopmentoftransportationnetworkleadstogrowingtrafficand
congestion.
Moreover, the government has succeeded in creating communication networks for
most coastal provinces and major cities, including the ones where Foxconn plants are
situated.China’stelecommunicationsinfrastructurehasgrownextremelyrapidly.Peoplein
China can easily be contacted via the Internet or by phone. By the end of 2004,
approximatively 25% of the Chinese population had a mobile phone. Today, fixed-line
telephone networks covers roughly 80% of the population and more than 95% of the
population has a mobile phone (Trends Tendances (2016); Naughton, B. (2007); pp.344).
RegardingthenumberofInternetusers,itgrowsfrom22millionInternetusersin2000to94
millionin2004.Today,721millionChinesecanaccesstheInternetathome(Internetlivestats
(2016)).
Electricitysupplyisalsoimportantifwewanttobeasefficientaspossible.InChina,
state investments inpowerplantsandenergydistributioncontinuously increase.Thestate
hasincreasedthesizeofthenationalpowergridandreducedenergyshortages(Torrens,C.
(2010);pp.89). In fact, foran ideaof thegrowth,electricityoutput increased11%annually
between1998and2004(Naughton,B.(2007);pp.341).Wecanconsidertheactualefficiency
of electric infrastructures by looking at two indexes. First, there is the SAIDI index, or in
otherwordstheSystemAverageInterruptionDurationIndex.Secondly,theSAIFI index,or
theSystemAverageInterruptionFrequencyIndexcanbeconsidered.Inthefollowingtable
thescoreoftheseindexesforsomecountriesisdepicted.Weselectedthesestatesbecause
theyarepotential future locations forApple finalassembly facilities,which isdiscussed in
thesecondpartofthispaper.WealsoincludetheBelgiumindicesforcomparison.
26
Figure7:SAIDIandSAIFIindexes
SAIDI SAIFI
China 0,4 0,2
Taiwan 0,3 0,3
Thailand 0,8 1,6
Vietnam 21,4 10,8
Belgium 0,6 0,5
Jakarta(Indonesia) 3,9 2,5
Mumbai(India) 2,2 4,0
Source:WorldBankGroup(2016)
Notably,Chinaenjoysexcellentelectricalinfrastructures.Theindicesareevenbetter
thanthoseofBelgium.Insum,electricityshortagesareveryshortandhappenrarely,which
isanotheradvantageofChinaandperhapsanotherreasonwhyAppledecidedtooutsource
itsfinalassemblyinthatcountry.
4.2.2 Socialandculturaladvantages
Social and cultural advantages can also influence the international decisions by a
multinational. The culture of a country is a system of values and norms that are shared
amongagroupofpeople.Whendoingbusinessinanothercountryitisvitallyimportantto
understandthecultureandthewaypeopleworkbecauseitcouldimpactbusinessstrategy
andthecostofdoingbusinessinacountry(Hill,C.W.L.(2014)).
First,thesocialstructureofChinesesocietyisorientedtowardcollectivism(Torrens,C.
(2010),pp.141).Thismeansthatitwouldbedifficulttofindpeoplewhoareentrepreneurial,
willacceptresponsibilities,andmakeindividualdecisions.Itisimportanttokeepitinmind
whendecidingtodobusinessinChina.Moreover,thisisasocietywhereauthorityisrarely
questioned.Finally,itisimportanttoaccountforChinesenationalism.Thelanguagespoken
in China is also of importance. Even if English remains the universal business language,
27
speakingthelocal languagecouldalwaysbeadvantageous.However, inChina,theculture,
language,businesspracticeandbehaviourofpeoplevarywidelyfromregiontoregion.
Social stability and securitywithin China could also be an important factor to take
into consideration. The Ministry of Public Security on ‘mass incidents’ and ‘public order
disturbances’showedasteadyincreaseinunrestfromthemid-1990stothemid-2000s.This
isillustratedinthefigure8(2001dataarenotavailable).
Figure8:Chinesesocialprotests
Source:ScotTanner,M.(2005)
Social stability is a major challenge in China, especially regarding labour unrest.
Conditions in factories have become more dire; people work overtime in unsafe
environmentsbecausemanufacturerswanttocutcostsasmuchaspossible.Thisunresthas
clearlybecomeaprobleminChinaasworkershavebeguntocomplainandstrike(Gobel,C.,
&Ong, L. (2012)). The communist party is losingmore andmoreof its legitimacy. Indeed,
according to the CIA, the instability crisis happening in China is in part due to a crisis of
legitimacy(EliMargolis,J.(2012)).
Therefore, Apple’s risk increases when it outsources manufacturing to a company
whoseworkingcultureplacesalowpriorityonworker’srightsandsafety.Indeed,aswewill
see in the second part of this paper, Foxconn does not respect all working conditions
standards. However, these movements are not yet particularly impactful, and if workers
bring complaints, it generally only impacts the company concerned rather than making
28
waves in thewider industry.Despite these social disturbances, China remains a politically
stablecountryaswewillseeinthenextsection.
4.2.3 Politicaladvantages
Finally, we assert that Apple decided to work with Foxconn to gain political
advantageinChina.
Governments have many tools at their disposal to control and stimulate the
economicactivityoftheircountry.Amongthesepoliciesaretradepolicies,policiestoward
foreign investment, and industry policies. Trade policies include policies toward imports
(tariffandnon-tariffbarriers)andexports.Thesecanplayanimportantrolewhendefining
thelocationofassemblyofthefinalproductbecausesuchcostscouldconsiderablyinfluence
themarginofacompany.Foreigninvestmentpoliciesaimtocontroloutwardandtheinward
FDI.Manyactionscanbeundertakeninordertocontroltheseflows.However,Appledidnot
makeFDIregardingthefinalassemblyofitsproductinChina,thustherulesregardingthese
techniquesarenotconsideredatlengthinthispaper.Nationalgovernmentscanalsoissue
industry policies including fiscal incentives (state ownership of production assets, merger
andcompetitionpolicies,company legislation,taxationpolicies, labourregulation,national
technical and product standards, environmental regulations and health and safety
regulation)andpolicieswherethegovernmentprovidescapitalgrantsorloans(investment
incentives, labour policies, technology policies, small firm policies, state procurement
policies,policiestoencouragerestructuringandpoliciestopromoteinvestment)(Dricken,P.
(1998);pp.90).
Given these instruments that can be used by the state, we can now consider the
evolutionofChinaandmajormarketreformsinmoredetail.
AmajoreventinthedevelopmentofChinawasitsaccessiontotheWTOin2001.The
WTO is an international organisation that deals with the rules of trade between nations
(WorldTradeOrganization(2016,b)).China’smembershipledtomanychangesintradepolicy.
By2007,Chinacutimporttariffsdownconsiderably.Suchtariffcutsareclearlyanadvantage
forFoxconn—thatmadefinalassembly—andthereforeforApple.However,Appledecided
29
tobeginoutsourcingin2004,thusthischangedidnotappeartoexplainnorinfluencetheir
decision.Itisthesameregardingthe2007introductionoftheEnterpriseIncometaxlaw,the
LabourcontractlawandtheAnti-MonopolyLaw.Inordertosetpublicadministrationwithin
atransparent legalframework,China introducedtheAdministrativeLicensingLawin2004.
Thelawclarifiedinvestmentproceduresandtherolesandauthorityofthedifferentofficial
bodies.Despitethesenewlaws,localprotectionismstillexists,especiallyininlandareasand
smallertowns.Moreover,therearestilldifferencesbetweennationalandlocalregulations
thatcouldbedisadvantageousforforeignfirmsdoingbusinessinChina(Torrens,C.(2010)).
WhendoingbusinessinChina,thereisalsoahighriskofcorruption,wherethe2004
corruptionperceptions index rankedChina at 3.4on an index rangingbetween10 (highly
clean)and0(highlycorrupted).Suchcorruptionweakensthecapacityofthestatetoenforce
anefficientcompetitionpolicy.
Another negative point regarding China is the abusive protection of the state. The
governmentmay treat its national champions favourably in order to transform them into
multinationals.Tofurtherthisagenda,thegovernmentoftenattacksforeignmultinationals
operating in China. Such government crackdowns can consist of prosecution for bribery,
distribution of fines, or shaming campaigns. Notably, the government appears to have
perpetratedthelatteragainstApple(Defraigne,J-C.(2014)).Indeed,in2013,aChinesenews
agency asserted that Apple was immoral in selling devices through which consumers’
personaldatacouldpotentiallybeextracted.Anothersourcepublishedthepotentialthreat
of the iPhone regarding national security. The state-run China Central Television also
shamed Apple and accusing them of providing different after-sales services domestically
thanabroad(Jourdan,A.(2013)).SuchstatementscouldbeathreatforAppleandmayhave
animpactonitssalesdespiteTimCook’spublicexcuses.ChinaCentralTelevisionwenteven
furtherbypayingChinesecelebritiestoblastAppleonWeibo,theequivalentofTwitter in
China. Such practices are very common in China. The state published foreign companies’
malpractices to create the impression that these firms cannot be trusted. In sum, these
attacksfromthestateareclearlyadrawbackofdoingbusinessinChina.
30
More positively, the Chinese government announced its plan to reform and
restructure the economy. They notably put in place the ‘Nationalmedium and long term
program for science and technology development’ from 2006-2020. This came into force
after Apple’s decision to outsource to China, thus it did not influence their decision.
However, China clearlywants tomove from ‘made inChina’ to ‘innovated inChina’what
could impact the future alliance Apple-Foxconn.We will investigate it later in a scenario
(Course:‘Economicsofglobalinnovation’atKatholiekeUniversiteitLeuvenin2016).
TheIPrulesenactedinChinaarealsoofgreatimportancewhenchoosingthecountry
wheretooutsourcethefinalassemblyofyourproducts.Wewilldevelopitinthethirdpart
oftheOLIframeworkaboutinternalization.
Last but not least, thepolitical stability of China is also of importance. That factor
couldbedecisivewhenchoosinga locationtomakebusiness.TheWorldwideGovernance
IndicatorsisarankingaboutthepoliticalstabilityandtheabsenceofViolence/Terrorismina
country.Therangeissituatedbetween0(thelowest)to100(thehighest).Wewill lookat
the same countries taken before in order to have a point of comparison between these
ones.
Figure9:Worldwidegovernanceindicators
Countries 2004Rank
China 32.21
Taiwan 64.42
Thailand 23.08
Vietnam 50.96
Belgium 71.63
India 13,46
Indonesia 4,33
Source:WorldBankGroup(2015)
31
Togainabroaderoverviewofthestateofpeaceworldwide,the2015GlobalPeace
Index classifies countries into five categories. Fig 10 illustrates the stability of East-Asian
countries.
Figure10:2015globalpeaceindex
Source:GlobalPeaceIndex(2015)
Chinaappearstosufferfromalowstateofpeace,positionedat124thoutof162.Yet
even ifmany other countries aremore stable and safe than China, China does not suffer
fromattacksthatmightblockthecountryandhindertheflowofAppleproductsthroughout
theworld.
4.3 Internalisationadvantages
Finally, we identify the internalisation advantages (I) that explain the ‘how’ of
involvement.ThisthirdadvantageoftheOLIframeworkemphasiseswhyacompanymakes
32
FDI, whether by acquiring a foreign firm or bymaking Greenfield investments. However,
despitetheadvantagesofmakingFDI,Appledecidedtooutsourcetheproductionandthe
finalassemblyofitsproductsinChinaandthusnottomakeinternalization(TheWorldBank
(2016,a)).
OnereasonwhyApplemayhavedecidedtoestablishanoutsourcingcontractwith
Foxconn,ratherthanmakingFDIcouldbelinkedtothenegotiationpowerthatAppleenjoys.
Appleischaracterisedbytheirverystrongsupplychain.Theycontrolnearlyeverybranchof
thesupplychain,andcaneasilyobtainwhattheywantfromsuppliersduetothevolumeof
producttheyrequire.
Secondly,byoutsourcingtheproductionandthefinalassemblyofAppleproductsto
Foxconn,Applegainsstrategic flexibility.On theonehand,manyFoxconnplantswork for
Apple, which ensures a flexible supply chain and faster adaptation to meet changing
demand.Ontheotherhand,ChinesefirmsaremuchmoreflexiblethanAmericanones,and
FoxconnthereforerespondsveryquicklytorequestsfromApple(Hill,C.W.L.(2014)).Infact,
as the workforce availability is much higher, companies can reassemble workers or
engineers you need much faster. Additionally, labour laws allow companies to retain
workers overnight and 12 hours a day. Thus, factories can produce much more Apple
product,muchquickerthaniftheywereinAmerica(Teagarden,M.(2016)).
For example, one Foxconn factory can employ 230,000 assembly lineworkers and
each line can make 72,000 iPhones per day (FinancesOnline (n.a.)). The biggest Longhua
factorycanevenproduce137,000iPhonesevery24hours(Ngai,P.,&Chan,J.(2012)).Inorder
toguide the200,000assembly-lineworkersneeded tobuild the iPhone,more than8,700
engineersarerequired.Whereitwouldhavetakenninemonthstofindthatmanyengineers
inAmerica,itonlytook15daysinChina(Hill,C.W.L.(2014)).
FoxconnhasadoptedaproductionmodelapparentlybasedonclassicTaylorism.The
productionprocess isverysimpleandeveryworkercanperformtaskswithouthavingany
trainingorspecificknowledge(Chan,J.(2013)).Thisstrategicflexibilityisofgreatimportance
to Apple. Indeed, meeting demand on a day-to-day basis is essential for the company,
33
especiallysincethedeathofSteveJobs,replacedbyTimCookin2011.Whenaproductgoes
onsaleinretailstores,Appletracksthedemandineachstore,ateachhouroftheday,and
adjustsproduction ifnecessary.TheCEOTimCookemphasizesthe importanceofavoiding
as much sitting inventory as possible. He famously held that ‘nobody wants to buy sour
milk’.
As a result of thismotto,Apple’s networkof suppliers is alwaysunderpressure to
respectdeadlines and toproduce thequantity requiredasquickly aspossible. In fact,we
knowthatworkers inFoxconntypicallyoperateexcessiveovertime inorder to respondto
the demand of Apple. These suppliers are continuously under pressure and adapt
themselves to respond to the needs of Apple. The CEO’s special assistant Louis Woo in
Foxconnexplainsthatthecompanyhastwochoiceswhenfacingsuddenlyahigherdemand.
They canhiremorepeopleor let actualworkersdoovertime. The secondoption is often
chosenbecauseitisnoteasytohiremanypeopleinashortperiodoftime(Chan,J.,Pun,N.,
& Selden, M. (2013)). It emphasises the strategic flexibility that such network allows, and
more precisely why Apple decided to outsource assembly to Foxconn. Therefore, a
competitive advantage of Foxconn is its ability tomaintain flexibility (respect the delivery
time), which ensures a certain ‘security’ for Apple. In other words, they are demand-
responsive,whichiscrucialtoApple’sstrategy.However,thisparticularityofFoxconnleads
to controversial problemswith regard to working conditions, which are addressed in the
nextsectionofthispaper.
By outsourcing manufacturing of its product, Apple can also maintain a ‘simple’
organizational structure and therefore can effectively prioritise its different activities to
focusonthemostimportantones(Hill,C.W.L.(2014)).Highvalue-addactivitiesarealldone
intheUS,includingmarketing,productdesign/development,andsoftwareengineering.
Moreover,outsourcingtoChinaratherthanmakingFDIwillenablethecompanyto
avoidhighoperatingcosts.Infact,foreigncompaniesthatestablishthemselvesinChinaare
muchmorescrutinisedthanChinesefirms.Theymustmaintaininternationalstandardssuch
astax,labour,healthandsafety,whichyieldshighercosts(Torrens,C.(2010)).Furthermore,
localChinesefirmsoftenenjoycloselinkstolocalgovernmentofficials,whichcouldalsobe
34
beneficial. Foxconn, for example, typically has an alliance with the Chinese state. In
particular, local government courts Foxconn to encourage them to build new factories in
order to boost GDP growth in their specific region. Foxconn has received extensive land,
infrastructural support and labour from the state.Oftenas a result of such ties,domestic
competition inChinaisachallengeforforeigninvestors.Thus, it iseasiertochoosealocal
partneralreadyestablished inthecountry.Local firmsgrowrapidlyandclimbthe learning
curvequickly,whichisanessentialadvantageovercompetitors.
WecanalsoseeApple’soutsourcingchoicefromanotherperspective.Asmentioned
above,Apple is a very innovative firm that invests a largepartof its revenue intoR&D in
ordertobethemostinnovativeandoutpacetheircompetitors.Thechoicetooutsourcethe
productionandtheassemblyofitsgoodsisthereforeawaytokeepmoremoneytoinvestin
R&D. In fact, as previously said, investing in FDI would lead to higher organizational and
operatingcosts(Lo,C-P.(2011);pp.163-169).
AnotherimportantfactorthatcouldexplainthedecisionofAppletooutsourcerather
thaninternaliseistheexistenceofstrongIPprotection.Withoutit,thecompanywouldrun
the risk of its profit expropriation. In China,many laws have been set up to protect IP in
order toattract foreignbusiness. IP lawswereradically reformedunder thereignofDeng
Xiaoping in the late 1970s when he decided to open China to the outside world. A new
patentlawwasnotablyenactedin1984.In1985,ChinaaccededtotheParisConventionfor
theProtectionof IntellectualProperty.TheyalsosignedtheMadridTrademarkAgreement
in 1989 and acceded to the Patent Cooperation Treaty in 1994 (Devonshire, C., Scott, A.,&
Woollard,S.(2011)).
Nevertheless,despitethenumerouslawsensuringIPprotection,andtheaccessionof
China to WTO in 2001, Chinese IP protection remains a major challenge. Intellectual
property rights remain subject to continual violations and laws are hardly enforced.
Counterfeitoperationsarethusveryfrequent.For instance, in2004,90%ofChinesedaily-
use goodswere counterfeited (Torrens, C. (2010); pp. 98).Also, in 2003, 60%of counterfeit
goodsseizedintheEuropeanUnionweremadeinChina(Gipouloux,F.(2005)).Accordingto
35
the World Intellectual Property Organization, China is one of the worst counterfeiting
offendersinAsia.
China finally made improvements in legislation and enforcement for two reasons.
First,theyfacedmountingpressuretoofferprotectiontonationalbrands.Second,bybeing
a member of the WTO, they were more heavily scrutinised internationally to respect
requirementsoftheWTO’sTRIPS—theTrade-RelatedAspectsofIntellectualPropertyRights
thatcame intoeffect in1995 (WorldTradeOrganization (2016,a)).Nevertheless,despite the
new laws and regulations establishedby the state, enforcement bodies donot truly have
enoughpower,funding,credibilitynorincentivetoactagainstviolators.
Despite the weak IP protection in China, it is possible to justify why Apple still
decided tooutsource itsproductionand final assembly to Foxconn. First,we can suppose
that the majority of counterfeit products would not look exactly like Apple products.
Counterfeitscanbesimilarinappearance,butthecomponentsused,thefunctionalities,the
design, and so forth cannot be the same as Apple products. This is mainly because best
practices of Apple are difficult to imitate, and are specific ownership advantages that
Chinese or even Taiwanese companies will not be able to easily reproduce. In fact, the
engineersworkingforAppleintheUnitedStateswhodealwithhighvalue-addedactivities
can be said to have gained a certain experience that cannot be replicated. Apple also
benefits from negotiation power, having many partners, and a very strong supply chain.
Thus, from this point of view, Apple need notworry as itwould be nearly impossible for
ChinesecounterpartstobuildanempiretorivalApple’s.Eveniftheelectronicssectorisvery
competitive,andmarketshareisincreasinglycapturedbyotherfirmssuchasSamsungand
low-cost smartphone makers, Apple has its own strategy that differentiates it from the
crowd.Also,Applebenefitsfrommanypatentsandtrademarks(Apple(2016,a)).
Nevertheless, the most crucial element of Apple’s outsourcing success is the IP
protectioninTaiwanbecauseassaidaboveFoxconnisaTaiwanesefirmthatputthebulkof
itsmanufacturinginChina.TheR&D,thecontract,thespecificationsgivenbyApple,andthe
plans were shared in Taiwan. It is therefore in that country that IP protection should be
enforcedbecauseitistheTaiwanesefirmthathasthecontrolofApple’stradesecrets.Itis
36
thentheresponsibilityofFoxconntoprotectAppleinChina.IfaproblemhappensinChina
and if secrets or information are disclosed, Foxconn would be accountable. Choosing
FoxconnisavoteofconfidencefortheIPprotection,whichsuggeststhatthedealwouldnot
resultindivulgencesthatwouldhinderApple’business.
First,TaiwanhasalsobeenpartoftheWTOsince2002,whichmeansthattheyare
expected to comply with the TRIP agreement. They also adopted laws to strengthen IP
protection, considerably reducing piracy and counterfeiting to render Taiwan more
attractive tobusinesses. The Taiwan’s Trade SecretsAct alsoprovidesprotection to trade
secretsthatbelongstoTaiwancitizensandtocitizensofWTOmembercountries,including
theUnitedStates.Finally,theTradeandInvestmentFrameworkAgreementbetweenTaiwan
andtheUnitedStatesalsoensureintellectualpropertyprotections.Taiwancommitsnotto
violateanAmericanpatent(AmericanInstituteinTaiwan(2010)).
Moreover, it is in the interestof theTaiwanesegovernment toguarantee rights to
AppleasTaiwanishardlyrecognisedasacountrybythemajorityofthenationsintheworld.
For themoment, it enjoys a robust unofficial relationship with the United States, where
AmericaisTaiwan’s largestforeigninvestor(U.S.DepartmentofState(2015)).Therefore, it is
desirable forTaiwan toprotect a famousAmerican firm. Indeed, if a state-basedproblem
appeared,theUnitedStateswouldlikelysideagainstTaiwantodefendApple,whichwould
bepoliticallydisadvantageousforTaiwan.
BymakingadealwithFoxconn,Applelikelyestablishedacontractthatisfavourable
totheirbusiness,andsufficientlyprotectiveoftheirintellectualproperty.
Lastly,thetransactioncostscertainlyimpactedthedecisiontooutsourcetoFoxconn
ratherthanmakingaFDI.Thesecostsrepresentthecostofmakingadealwithacompany.
Put simply, this is ‘the cost related to exchanges of goods and information’ (Suemastsu, C.
(2014)).
Today, information processing is, more than ever before, at the centre of every
business. Software and intellectual property have also taken onmore significant roles in
every society. In fact, since markets globalise and integrate, companies have started
37
spreadingtheiractivitiesaroundtheworld;doingsocreatesmorecomplexcommunication
and increasesglobalcompetition. Therefore, thetransactioncost theory isarelevantand
important concept for the actual business environment in which we currently operate
(Suemastsu,C.(2014)).
Therearemanydefinitionsofwhata ‘transactioncost’ is,butwewill focusonthe
mostimportantdefinitions.First,transactioncostcouldbethecostofconcludingacontract
and, in case of litigation problems, the costs of resolving suits. Second, the term may
represent the cost linked tomoral hazard. Finally, the transaction costs may include the
qualitycontrolandthemeasuresundertakenintheoutsourcingentity.
Wecannowapply this theory to therelationshipbetweenAppleandFoxconn.We
hypothesisethattheAmericanfirmdecidedtooutsourceitsproductioninpartbecauseof
therelativelysmalltransactioncostsinvolvedinthemove.
The first reason for the low transaction costs between Apple and Foxconn is the
appearance of the Internet. Before the 1990s, it was quite uncommon to outsource
manufacturing to Chinese firms—transaction costs were too high. When a partner was
chosen, the foreign company was required to investigate the credibility of its quality,
delivery,anditstrustworthiness.Then,theforeigncompanyalsohadtoplanaprotocolfor
solving eventual problems with that Chinese partner. Indeed, foreign firms have their
customsandthustheyarerisksofdoingbusiness inanothercountry.Thus,outsourcing in
Chinawas tooexpensivedue to transaction costs.However,with thedevelopmentof the
Internet and of new technologies, communication become much easier, which brought
transactioncostsdown(Suemastsu,C.(2014)).
Secondly, costs linked to moral hazard are mainly avoided. Foxconn is keen on
satisfyingApple’severyneed inordertobuildtrust. Indoingso,FoxconnconvincedApple
thattheyarenotopportunistic,butratherarecapableofatrustingrelationship.Infact,by
satisfyingtheneedsofApple,Foxconnalsodemonstratesthatitisaseriousandastablefirm
(Suemastsu,C.(2014)).WhenAppledecidedtocollaboratewithFoxconn,italsolookedatthe
reputationof Foxconn. TheTaiwanese firmwas founded in1974, and thereforehad long-
38
termclientsandacertainhistory.FoxconnispartofHonHaiIndustrygroupthatwasyetthe
largestmanufacturersofelectronics.In2002,thegrouphadaturnoverof5billiondollars—
proof of their success (Bethesda (2003)).Moreover, as noted in the introduction, Hon Hai
workswith otherwell-knownmultinationals like Sony, Hewlett-Packard, Dell, Nokia (until
2001),Motorola,Huawei,andCisco.Furthermore,thereisnoevidenceofscandalsormajor
problems between the Taiwanese firm and one of its partners. This is further proof of
Foxconn’s reliability. This trusting relationship allows Apple to leave a large part of the
assembly of the final product to Foxconn, which allows both firms to benefit from
economiesofscaleandthustoenjoywidermargins.
The contract between both firms may also have played a role in this trusting
relationship by forcing Foxconn to respect Apple’s product specifications. Without a
sufficiently watertight contract, Foxconn would possibly have cut corners on the
manufacturingprocesstodrivetheirownprofitsattheexpenseofquality.Thus,wesuppose
that the contractwas sufficiently thorough, and that standards agreed under the original
termsofthepartnershipwillberespected.However,aswediscusslater,thecontractmade
betweenbothfirms isconfidentialand it isdifficult toevaluate its termsandtheeventual
qualitycontrolsestablished.
Nevertheless, contracting to outsource the production of Apple productsmay not
have been so simple. The partners must negotiate and agree on the conditions of the
transaction. They must agree on specifications, prices, deliveries, contingencies and so
forth—the process takes time and money. Apple had to clearly explain its expectations
about the final products, the payment, among other things. They must also decide on
protocolformistakesandproblems.IfFoxconnrejectsApple’sproposedmethodofproblem
solving,itcouldleadtolegalproceedings.
By choosing to work with Foxconn, Apple also had to consider the intellectual
property laws in Taiwan andChina. If the lawswere notwell established, costly litigation
mightarise.Aspreviouslydiscussed,whileIPprotectioninChinaisweak,weconcludethat
Appleissufficientlyprotected.
39
Inconclusion,theDunning’stheoryemphasisesthatafirmwillengageitsproduction
internationallyonly if threeadvantages/conditionshold.However,Appledoesnotentirely
follow this paradigm. They possess sustainable specific ownership advantages (O) and
benefitfromspecific locationadvantages(L),buttheydonot internalisetheproductionof
theirgoods.
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5.Scenarios
Different scenarios involving the evolution of the alliance between Apple and
Foxconnarenowdeveloped.
5.1 ScenarioI:Consequencesofbadworkingconditions
scandals
This first scenario will be linked to working conditions in Foxconn plants. Many
articles, riots, complaints, lawsuits, scandals happened in 2010 after a series of suicides.
Sincethatperiod,Foxconn,andotherChinesefirms,areattheforefront.Beforelookingat
thepossiblefutureconsequencesofthissituation,thispaperwillfirstintroducethecontext
andmainreasonsfortheseemployeesuicides.
Asexplainedabove,Foxconntriestobeasflexibleaspossibleandtoadaptitselfto
Apple’sdemands,eventothedetrimentofsafetyandgoodworkingconditions. In fact, in
2010,eighteenworkersagedbetween17and25yearsoldattemptedsuicideattheFoxconn
production facilities, including sixteen in Foxconn Longhua, in Shenzen (see Annex 2).
Fourteenindividualsdidnotsurvive(Brown,G.(2010);Ngai,P.,&Chan,J.(2012)).Despitethese
poor working conditions and the labor contract law released in 2008, local government
continues tosupportFoxconn, ignoring theenforcementof labor lawsand incitingworker
grievance and feelings of desperation. Production workers are clearly pushed to their
physicalandpsychological limits.Manycontroversialproblemsstillexist inFoxconnplants.
ThefollowingareobservationsmadedespitethedifficultyofenteringFoxconnfirmsthatare
controlled24hoursperday.
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Foxconnplantsareorganisedthroughahighlycentralisedandhierarchicalproduction
system in which workers are subjected to very strict discipline. As noted in figure 11,
Foxconnmanagementhierarchycontainsthirteenlevels(Ngai,P.,&Chan,J.(2012)).
Figure11:Foxconnmanagementhierarchy
Source:Ngai,P.,&Chan,J.(2012)
Typically, seniormanagers formulate rules and standards, and lower level staff are
chargedwithexecutingthem;lowerlevelstaffareunderconstantpressuretobeasefficient
as possible. They repeat a simple task endlessly, and are pushed to complete their task
quickly. Workers appear to lose their freedom when working in Foxconn manufacturing
centres.Theyareconstantlysupervised:forinstance,toentertheworkshoptheymustpass
throughlayersofelectronicgatesandinspectionsystems.Whentheyareworking,theyare
always checked, and if they do notwork fast enough or if they talk in the line, they are
punished in public or insulted. The line leaders treat workers harshly in order to reach
productivitytargets.Workersshouldalsobeattentivetosupervisors’speechesaboutrules,
targetstoachieveandsoforth.Somecomparethesecampusesto‘concentrationcamps’of
labour(Chan, J. (2013); Ngai, P., & Chan, J. (n.a.)). On the walls of the factory, slogans from
Foxconn’CEO,TerryGoudeclare:
43
Aharshenvironmentisagoodthing
Executionistheintegrationofspeed,accuracyandprecision
Production operators are typically young migrants coming from the countryside.
Therefore, they work and live on the campuses. The living space is as controlled as the
workshop and every activity (e.g. eating and drinking, sleeping, and washing) is strictly
scheduled.Moreover,dormitoriesarenoisyroomsunsuitabletorest,wheretheonlyprivate
spaceforworkersistheirbed.Workersshouldalsofrequentlychangeofdormitoryinorder
tobreakupevery social links theymayhavecreatedwith their roommates. It isaway to
avoid any collective action against Foxconn. Workers just do not have any social and
personallifeandsuchenvironmentfacilitatesflexibleproductionthroughimposingovertime
workbecausedormitoriesandsweatshopsareveryclosetoeachother.Someworkersjust
donotsupportallthispressureandisolationandfinallyquitorattendedsuicide(Ngai,P.,&
Chan,J.(n.a)).
Workersarealsoputtedagainstoneanother inorder to increaseproductivity.The
workers who produce faster and who are disciplined receive production bonuses.
Nonetheless, the bonus will be reduced if they do not clock enough overtimework. The
pressure appears to be unbearable. In some factories, there is also a system of points.
Workers lose one point when they make mistakes, and they are fired when their count
reacheszero(Chan,J.,&Ngai,P.(n.a.)).
Asidefromtheconstantsupervisionandpressure,workersarealsosubjecttowork
hoursmuchhigherthanthelegalmaximum.Theytypicallywork12-hoursshifts,andthefirm
triestopersuadeworkersthroughpropagandathatsuccessandgrowthofthecompanyare
onlypossible iftheyworkdiligently(Ngai,P.,&Chan,J.(2012)).Someslogansthatareoften
hungonthewallsinclude:
“Hearttoheart,FoxconnandIgrowtogether”
“Valueefficiencyeveryminute,everysecond”
“Achievegoals,otherwisethesunwillnolongerrise”
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Therefore, despite the rules stipulated by labour law about overtime,most of the
workersarerequiredtoclockapproximately80hoursofovertimeworkeachmonthinstead
ofthe36hourlegalmaximum.Employeesareexhaustedandonlyhavefewdayspermonth
torest.Moreover,duringtheworkday,theyareallowedonlyshortpauses,andiftheydo
notreachtheirexpectedtarget,theymaybecompellednottotakeabreak(Chan,J.(2013)).
Despitetheselonghoursofdemandingandrepetitivework,employeesreceive low
wagescomparedtootherworkersincitiesandthehigherlevelmanagersinFoxconn(Ngai,
P.,&Chan,J.(n.a.)).
Employeesalsofacehealthandsafetyrisks.Deadlyexplosionsarecommonplaceand
workersarealsooftenexposedtopoisonouschemicals.AccordingtoasurveyfromtheFair
LaborAssociation, 43%ofworkers experiencedan accident in their campus. So there is a
patentlackofsafetyandsecurity(Nuttall,C.,&Waters,R.(2012)).
Another striking fact is the super-exploitation of students. Many students, mostly
agedbetween16and18,mustworkforFoxconnasinternsattherequestoftheirschool.In
reality, it is the government that encourages such internship because, as noted above,
governmentsareinclosecollaborationwithFoxconn.Infact,localgovernmentsviefiercely
for the opportunity to host Foxconn plants because the plants increase local economic
growth, therefore leading to student work. Such an arrangement is also beneficial for
Foxconnbecauseinternsarenotconsideredtoberealemployees,andthereforelabourlaw
neednotbeappliedinthesamewaytointerns(Ngai,P.,&Chan,J.(2012)).Moreover,despite
theiryoungageandthemaximumeight-hourworkdaystipulatedbytheEducationMinistry,
thechildrenoftenperformexcessiveovertimework.Furthermore,theworktheydoisoften
absolutely outside of scope of their studies, and therefore offers them little education.
These ‘student internships’ are arguably away to implement ‘student labour’. Foxconn is
alsoparticularlykeentohirechildrenbecausetheyareeasilyinfluencedandcontrolled,and
becausetheyrequirelowerwagesthanadults.Whereaswomenwerethepreferredtarget
oftheTaiwanesefirmyearsago,nowchildrenaremoresoughtafterasaworkforce(Brown,
G.(2010)).
45
After the suicide scandal in 2010, conditions in Chinese factories became amajor
issueforApple.TheAmericanmultinationalappearedtotakeparticularinterestinthetopic
becauseofthemediaattentionthatlabourconditionsgarnered.AftertheFoxconnscandal,
Apple began focusingmore on respect for their Supplier Code of Conduct (SCC). The SCC
contains expectations about labour and human rights, health and safety, environment,
ethics andmanagement commitment (Apple (2016, c)).Apple tried improving theirpublicly
perceived transparency by publishing the list of their 200 major suppliers. They also
dedicatedasignificantportionoftheirwebsitetotheir‘supplierresponsibility’.Infact,when
browsingit,theirsloganis immediatelyapparent: ‘Thereisarightwaytomakeproduct. It
startswiththerightsofthepeoplewhomakethem’ (Apple(2016,c)).Moreover,aswecan
seeinthefigure12,thenumberofworldwideauditsconductedbythecompanyhassteadily
risensincethesuicidescandalof2010-2011.Theauditsareinplacetoensuretherespectof
theirSupplierCodeofConduct.
Figure12:Appleannualaudits
Source:Apple(2016,d)
According to their 2016 progress report, Apple conducted 633 audits in 2015,
covering more than 1.6 million workers. When violations are discovered, the company
purports to work closely with themanagement of the concerned company to help them
improvetheconditionsofworkers.Applealsoclaimsthattheylimitworktonomorethan
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60 hours a week, with amandatory day of rest once every seven days. The reports also
highlight that 95%of audited suppliers had complied in 2015. Apple has also emphasised
thattheydonottolerateunderage labour,and iftheyfindchildworkers,theywill require
thatthesuppliersreturnthechildrentotheirhomes,payfortheireducationataschool,and
continuetoprovideincomeforbasicneeds.Since2007,Applehasalsotrainedworkersall
over theworld in understanding laws, health and safety regulations, aswell as theApple
CodeofConduct.By2015,9.25millionworkershadreceived‘rightstraining’(Apple(2016,d);
Nuttall,C.,&Waters,R.(2012)).
ApplealsojoinedtheFairLaborAssociationin2012.Thelatterconductedanauditthesame
year in order to assess labour conditions in Foxconn facilities producing Apple products.
They noticed at least 50 serious non-compliances with Apple’s Code of Conduct and the
Chineselabour law,andproposedreforms.However,thesereformswerenevereffectively
implemented.ItissuggestedthatApplemainlyjoinedtheFairLaborAssociationtoimprove
theirpublicimage(FairLaborAssociation(2012)(ChinaLaborWatch(2015);Newton,J.(2012)).
Appletriestomaintainawholesomeandrespectfulimage.Infact,theSupplierCode
of Conduct is cited as a reason why people want to buy Apple products. If potential
consumers feel that Apple is a sleazy company that employs workers under abusive
conditions,theyarenotaslikelytoacceptpayingsuchhighpricesfortheirproducts(Ozimek,
A.(2012)).However,behindthescenes,thingsarenotasperfectasApplemayclaim.Infact,
Appleregularlyclaimsthattheymonitorsuppliers’compliancewiththeircode,buttheydo
notactuallyexerciseefficientcontrollingoverthiscompliance.Manyrulesarenotrespected
atplants,forinstance,overtimehoursoftenexceed60hours.Appleturnssufficientprofits
to improveworkers’ treatment.However,Apple is actuallypartly toblame for thesepoor
workingconditionsbecauseoftheconstantpressuretheyexertontheirsuppliers. Indeed,
asexplained inthefirstpartofthispaper,Foxconnhashadtoadapt itsproductiontothe
demandoftheAmericanfirm,andsometimesdemandissohighthattheproductioncannot
bemetwithout violating alreadyweakworkplace standards. Apple should therefore take
more responsibility, and should consider codes of responsible ordering practices. It is not
sufficient to simply make public commitments, and stick to its own code of conduct;
however, companies such as Apple appear to be most concerned with finding low-cost
47
producers in order tomaximise their profitwhile balancing their public image (Newton, J.
(2012)).
Foxconn has made some improvements and changes following the wave of the scandal.
First, they installed safetynets inall campusesanddormitorieswereallwire-grilled.They
alsoorganisedlabourunionelectionsin2013forthefirsttime.Theseunionelectionswere
generally controlled by management and by the local government (Hille, K., & Jacob, R.
(2013)). Moreover, they made some improvements regarding dormitories, restricted
overtime to no more than 60 hours, and also started increasing wages—although these
improvementswereespecially focusedontheLonghuaplants,wheremediaattentionwas
focused. After the wave of suicides, Foxconn also changed its hiring methods. All job
applicantshad to completeapsychological test inorder toavoidhiringpeoplewithmore
fragile spirits. The company also attempted to make workers sign a no-suicide ‘consent
letter’inordertolimitFoxconn’liabilityincaseofsuicideandtomakeworkersresponsible.
However, this no-suicide pledge was intensely criticised, and Foxconn finally dropped it
(Chan,J.(2013)).
Thestatedidnot takespecificmeasures,evenafter thesesuicides.Theypublicised
generalstatements,butthespecificmeasuresundertakenwereneverdisclosed.Moreover,
rather than looking for the reasons for these suicides, local-level Chinese officials instead
bannedallnegativereportingaboutFoxconn.AMay2010releasedstatedthat‘forthefront
pagesofnewswebsitesandnewscenterpages,blogs,micro-blogs,thereshouldbenonews
related to Foxconn except from official sources’. It might be surmised that the state
prioritisedprotectingFoxconnoverprotectionoftheworkers(Chan,J.(2013)).
Yet,evenifthestateandlocalgovernmentignorethesefacts,socialunrestinChina
has increased at an alarming rate, in part due to the growing access to communication
technology (Gobel, C., & Ong, L. (2012)). Current workers have greater access to news and
information, and thereforeexpectmore, andask formoreacceptableworking conditions.
This increasingawareness iswhyworkershavebegundemandinghigherwagesandbetter
working conditionsby stealingproducts, implementing slow-downsor ceasing toworking,
forming strikes, and sabotaging. Inotherwords, theworkershaveaworkplacebargaining
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powerbecauseiftheydecidetostopworking,forinstance,itwillhaveanimpactonamuch
largerscalethanontheirproductionlinealone(Chan,J.,Pun,N.,&Selden,M.(2013)). Inthe
faceoflabourshortagesandoftheseprotests,Foxconnfinallyhadtorespondbyimproving
workingconditionsandbyraisingwages.Despiteimprovementsandactionsundertaken,the
situation is far from being perfect—workers do not work in perfectly fair conditions. For
instance,despitetheadomadeaboutlabourunionelectionsorganisedinFoxconnfactories,
the Fair LaborAssociation felt that theunion failed to truly representworkers (Hille, K.,&
Jacob,R.(2013)).
Overall, the Foxconn scandal had two important consequences. First, Foxconn and
Apple were brought into the spotlight, and media began scrutinising working condition
standards.Second,followingrisinglevelsofworkerprotests,Foxconnwagesstartedrising.
For instance, in Longhua (Shenzen) where Apple products are manufactured, salaries
increasedfrom$152to$320(ChinaLaborWatch(2015)).Foxconnnowpaysbetterthanmany
similar employees. Salaries also increased because of the Chinese transition phase. From
2008 to 2012, China’s minimum wage levels have registered an average 12.6% annual
growth(Chan,J.(2013)).Thefollowingscenariodiscussestherisingwagesfurther.
ApplebeganshiftingitsproductiontoPegatronin2011inordertosecureproduction
capacityandtoavoidrisinglabourcost(Chan,J.,Pun,N.,&Selden,M.(2013)).Thismovewas
also attributable to Apple’s new CEO, Tim Cook, who placed a greater premium on risk
diversification. Pegatron Corp (Pegatron) is a Taiwanese firm that existed since 2008 and
benefits themost fromthe locationchange.Pegatron’s corebusiness is theproductionof
computers and related components, and they have many locations in mainland China
(Pegatron(n.a.)).PegatronwasfirstresponsiblefortheproductionofApple’smoreperipheral
products, and finally started producing core products of the brand like the iPhone 6, the
iPhone5C,and the iPadMini (Dou,E. (2014)). TheybecameoneofApple’smain suppliers.
ApplestartedshiftingitsproductiontoPegatronbecauseofthelowerlabourcosts.Evenifit
representsonlyasmallpartoftheoverallcosts(seefollowingparagraph)thesavingswere
notnegligible.Infact,whencomparingall-inlabourcostsinPegatronShanghaiandFoxconn
Longhua,thesavingsareparticularlyapparent.PegatronShanghaiisasubsidiaryofPegatron
Group that has more than 80,000 workers; almost all of these workers work on the
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manufacturingofAppleproducts(Chan,J.,Pun,N.,&Selden,M.(2013)).Therefore,bytaking
intoaccountall-inlaborcosts(bonuses,subsidies,hiringcosts),in2014,PegatronShanghai
still possessed an 8% cost advantage over Foxconn Longhua, translating into a 61million
dollarannualadvantage.Moreprecisely,thereisa21%differenceinbasepayalone(China
Labor Watch (2015)). Pegatron has the ability to hire an enormous number of dispatch
workerswhoaretempworkers.Thesetempworkerscostlessmoneybecausethecompany
doesnotpaythemfullbenefits,anddoesnothavetopaywagestotheminthelowseason.
Moreover,whenApple startedworkingwith the firm,Pegatronwas receiving little
attentionfromthemediacomparedtoFoxconn.Evennow,aGooglesearchwiththeterms
‘Foxconn worker’ returns 433,000 results compared to only 126,000 results involving
‘Pegatronworker’.However,thistrendcouldrapidlychangeandPegatronbecamemoreand
moreinthespotlightbecauseitisoneofthebiggestApplecontractors.
As we will see later in this scenario, Apple also starts working with other final
assemblycontractors.
AsforFoxconn,theyreactedtothesechangesbymovingapartoftheirproductionto
Brazil,Mexico,EasternEurope,andVietnam.Notably,anApplefinalassemblyfacilitycharge
oftheproductionof iPhoneand iPad issituated inBrazil.Foxconnalsomovedsomeof its
plantsinmainlandChina,includinginSichuanandHenanprovinceswheretheyestablished
factories towork forApple.Thesemovesbenefitted from lower laborcosts, tax,and land
costs.Despitethedistancefromthesea,andotherdisadvantagescited inthefirstpartof
this thesis, Foxconn convinced some of its suppliers to follow them. Moreover, these
locations contained plenty of available skilled labour, which was essential for Foxconn in
ordertorespondquicklytoApple’sdemand(Hille,K.(2010,a)).
We may wonder whether these poor working conditions will impact Apple and
Foxconn alliance.Would it impact Apple supply chain? Would Apple have to change the
supplierstheyworkwith?WouldtheystopworkingwithFoxconn?Wouldtheylossclients?
Would they losemoney?Would their imagebe impacted?Wecandevelop threepossible
futurescenariosabouthowthesituationmayevolve.
50
5.1.1AppleandFoxconnalliancemaystayunchangeddespiterisinglabour
costs
Apple may continue working with Foxconn despite rising labour costs due to
mountingprotestsfromworkers,andotherexternalpressures.
We can hypothesise that it will not be too disadvantageous for Apple, and that it
won’tincitethemtostopworkingwithFoxconn.Infact,Appleisaverysuccessfulcompany
thatisabletocapturealargepartofthevalueofitsproducts.Assaidabove,ithasatypical
valuechain,andhasthiscapacitytoputpressureonallsuppliersandmanufacturersinorder
toproduce thepartsas fastaspossible,at the lowest costpossible.Aswecansee in the
figure13,theprofitmarginofApplerepresentsthebiggestpartofthevaluedistributionfor
theiPhone.TheChineselabourcostsrepresentonly1.8%and2%ofthetotalvalue,whichis
borderlinenegligiblecomparedtotherestofthedistribution.
Figure13:ValuedistributionoftheiPhonein2010
Source:Worstall,T.(2011)
Chinalabourcost1,79% NonChinalabour
cost3,78%
Appleprofit58,21%
NonApleUSprofits2,39%
EUprofits1,09%
Taiwanprofits0,50%
Japanprofits0,50%
S.Koeraprofits4,68%
Unidenrfiedprofits5,27% Costofinput
materials21,79%
51
Moreover, it is important to keep in mind that Foxconn has already moved plants in
mainlandChina.Asexplainedabove, Foxconnmoved inpart tobenefit from lower labour
costs. The companywill perhaps continuemoving plants into these provinces in order to
benefitfromcostadvantagesandtosatisfyApple.However,thesebenefitswillcertainlybe
temporary,andwageswilleventuallyincrease.Foxconnalsomovedapartofitsproduction
toBrazilwheretheiPhone6isassembled.
IfrisinglabourcosthindersApple,theymayreacttothisby,forinstance,increasing
the final priceof their products. Therefore, rising labor costs arenot a decisive factor for
Apple.Eveniftheyarekeenondecreasingtheircostsasmuchaspossible,risinglabourcosts
areunlikelytomotivatethemtoendtheiralliancewithFoxconn.
5.1.2AppleandFoxconnalliancemayonedaybebrokentoprotectApple
brandimage
ApplemaychangeitswayofworkinganditscontractwithFoxconnduetoremaining
conditionproblemsifpeoplematter.Threeevolutionsmaybehighlighted.
Peoplemaynot careverymuch,andApplemaymaintain itsworldwide reputation
andcontinueworkingwithFoxconn.Thesituationwillthereforecontinueasitis,andApple
willsimplycarryonmakingauditsandimplementingotherplanstomaintainarespectable
reputation.Forthemoment, thisscenarioseemstobeplausible. In fact,by lookingat the
netsalesevolutionofAppleinthefigure14,wenoticeaconstantgrowthacrossyears.
52
Figure14:Apple'snetsalesevolution(inmillion)
Source:UnitedStatessecuritiesandexchangecommission(2015)
However,thesituationinChinesefactoriescanstarttonegativelyimpacttheimage
of Apple. In fact, even if todaymost people do notworry about howApple products are
built,thebalancemaytipintheotherdirectionassomecitizensrealisethattherearemajor
issues behind the manufacturing of these products. Manifestations of such a change in
consumerfocusalreadytookplacetodenouncepoorworkingconditionsofApple’supplier
plants.Forinstance,inFebruary2012,aconsumerorganisationorganiseddemonstrationsin
frontofApplestoresinNewYork,London,Sydneyandotherbigcitiesintheworld.Onthe
12thJune2016,ontheinternationaldayagainstchildrenwork,demonstrationsalsooccurred
in front of Apple Stores. Associations also circulated petitions to put pressure on the
multinational.
Thepowerofmediashouldnotbeneglected.Ifacampaignerdecidestolatchontoa
company,informationcanberapidlyspreadaroundtheworldbymeanoftheInternet.One
day, Apple may be subjected to the same scrutiny as Nike. In the 1990s the company
became in the spotlight followingbadworking conditions in their sweatshop.Even if they
were not the worst in the sector, they had to change of partners and to completely
restructuretheirsupplychain throughout theworld.Theynotablystoppedworkingwitha
plantinCambodiawhereinvestigatorsfoundchildlabouraswellaswith11otherfactories
infourothercountries.Followingthesescandals,theyalsoestablishedaverystrictCodeof
Conductandadoptedotherstrictstandards(Skapinker,M.(2002);Graham,J.(2000)).Ifsucha
108,249
156,508170,91 182,795
233,715
2011 2012 2013 2014 2015
53
situation shouldmaterialise, Applewill need to restructure their supply chain,whichmay
impacttheirrelationwithFoxconn.
Itisdifficulttoknowwhichofthesesituationsismostlikelytohappen.Today,things
canchangesorapidlythatbothmaybeequally likelytooccur.However,weconsiderthat
thesecondscenarioisparticularlyrelevanttothecurrentperspective.Peoplebecomemore
andmoresensitivetohumanrightsandchildren’srights; therefore,workingwithFoxconn
degradesApple’simageandtheyrisklosingclients.Ontheonehand,theywanttobeseen
as company that respects all of its employees and it suppliers’workers. However, on the
otherhand,Appleseekstomaintain itshighmarginsandtohavevery flexiblecontractors
like Foxconn. These two mentalities are contradictory, which may start to disturb Apple
customers.WemaythereforeexpectthatonedayitwillbeintheinterestofAppletoendits
relationship with Foxconn. It seems likely that the relationship would end rather than
changesubstantiallybecauseFoxconnisaTaiwanesefirmwithaveryspecificmentalitythat
isunlikelytotransformradically.CuttingtieswillensureApple’srelationshipwithitsactual
customers. Even if it is costly, itmaybeworthwhile for their long-termsuccess (J.Ottman
consulting(2011)).
Nevertheless,changedoesnotseemtobeApple’spriorityforthemoment.Indeed,
the scenario where Apple stops working with Foxconn is less likely to happen now for
severalreasons.
Foxconn recently hired 130,000 additional workers for the final assembly of the
iPhone 6.Moreover, Foxconn is the sole assembler of the iPhone 6 Plus and seem to be
involvedinthefutureproductionoftheiPhone7(Hough,J.(2015)).Infact,themanufacturer
began hiring more people because the manufacture of this new iPhone will be more
complex than other Apple products (Heisler, Y. (2016)). All of these facts contribute to the
suggestionthattherelationshipbetweenFoxconnandApplewillnotyetdisappear.
It isalsocrucial toconsider thatApple isa listedcompany,and theprimarygoal is
thereforearguablytomaximiseshareholdervalue.EvenifitcouldbebeneficialforAppleto
end its collaborationwith Foxconn inorder tohaveabetterpublic imageand to keep its
clients,itmaycostagreatdeal,andshareholdersmaybereluctanttoapprovethenecessary
expenditurebecausebenefitswillonlycrystalliseinthelongterm.
54
5.1.3Applemayincreaseitsmanufacturingnetworktodiversifyrisksand
avoidrisingcosts
AnotherlikelyscenarioisthatApplewillexpanditsmanufacturingnetworkinorder
todiversifyrisksandavoidrisingwages.Manypermutationsarepossible.Asnotedabove,
Apple hasworkedwith firms other than Foxconn for the final assembly of their products
over the last several years (see Annex 1). Three eventualities are therefore possible: (1)
Applewillpossiblyreinforcetheiralliancewiththesenewfirms,(2)theymayworkwithnew
manufacturesand/or(2)movetheirproductiontoothercountries.
First, Apple may strengthen their alliance with Pegatron, their second largest
manufacturer.Aspreviously stated, they started shiftingapartof theirproduction to this
manufacturer in2011.Over theyears,Apple shiftedmoreandmore itsproduction to the
manufacturer. In fact, the latter recently hired 130,000 additional workers for the final
assemblyoftheiPhone6.Nevertheless,evenifAppleoutsourcesahugepartofitsproduct
to Pegatron, it is important to keep inmind that this Taiwanesemanufacturer also fields
problemswithworkingconditions.Evenifthecompanyisunderlesspublicscrutinyforthe
moment,theyhavealreadyhadproblemswithmedia.In2014forinstance,afteranarticle
bytheBBC,Pegatronquicklyreducedtheirworkers’workinghours.TheChinaLaborWatch
stillobservedmanyissuesin2015.Theyclaimthat52%ofworkerscompletedmorethan90
hours of overtime per month—which clearly exceeds 60 hours. Additionally, dormitories
were foundtocontainmore than tenworkers,whereasApplestandards restrictdorms to
eightpeople(ChinaLaborWatch&Framtiden(2015)).Therefore,workingwithPegatronmight
amounttocommutingtheproblemofworkingconditionstoalatertime(ChinaLaborWatch
(2015)).Whenthemediapublishesarticlesaboutworkingconditionproblems,Pegatronwill
needtoreactandmakeimprovements,asFoxconndid.
QuantaCompany is also a big supplier ofApple. This is a Taiwanese firm thatwas
established in 1988 and is specialised in computer hardware. It is the world’s largest
notebookcontractmanufacturer.Amongthe18finalassemblyfacilitiesworkingforApplein
2015, threeof thembelongtoQuantaCompany.Quanta is inchargeof theproductionof
55
MacsandiPads.TheyalsomanufacturetheiWatch,themorerecentproductofApple.They
are the solemanufacturer of this newproduct. This privilige could be proof thatApple is
strengtheningitslinkswiththecompanyandthatthealliancebetweenbothcompanieswill
not end anytime soon (Apple (2016, d)). Moreover, the company also moved factories in
mainlandandwesternprovincesinordertoavoidrisinglaborcosts,whichispositivepoint
forApple.
However,thecompanyalsoencounteredproblemswithworkingconditions.In2014,
China LaborWatch undertook a survey in a Quanta Company factory that manufactures
computersforSony,Dell,HPandApple.Theydiscovered15setsofviolation.Workersmust
workovertime,manysalariesareunpaid,andthe lackofsecurity in factories issignificant
(ChinaLaborWatch(2014)).
As notable in the Annex 1, Apple also started working with Wistron Corporation,
CompalElectronics, InvenecApplicationCorporation,andBYDCompany.Thesecompanies
areallsituatedinChina,andareresponsibleforthefinalassemblyofAppleproducts.Apple
may thereforealso reinforce its relationshipswith these firms in the future.However,we
willnotdevelopthisconcernfurtherbecausewedonothaveenoughresourcesandtimeto
explainaccuratelythefuturepossibleevolutionsofeachcompany.
ThemajorityoffinalassemblyfirmsworkingforApplearelocatedinChinaandhave
theTaiwanesenationality.Overtheyears,Appleseemstohavebroadeneditsnetworkwith
Taiwanese firms. However, it is important to highlight the reason for this Taiwanese
predominance.TaiwanhasalwaysbeenaheadofChinaregardingtechnology.But inafew
years,ChinesecompanieswillcertainlycatchupTaiwanesefirms.Therefore,itisimportant
tokeepitinmindthatApplemightstartworkingwithChinesefirms,whichcouldimpactits
alliancewithFoxconn.Asdiscussinthelimitationpartofthepaper,itmaybeinterestingto
makefurtherresearchaboutit.
Apple may also start outsourcing to a country other than China.We develop this
concerninthefollowingscenario.ApplealsoshiftedapartoftheirproductionintheUnited
States,whichisdiscussedinthescenario5.
56
In sum, this scenario is likely to be realised. Apple will certainly expand its
collaborationwithdifferentfirmsandthereforedecreaseitsdependenceonFoxconn,while
continuing working with the latter. Foxconn is already losing Apple orders. In 2015, they
received69%ofordersfromtheAmericanmultinational,comparedto87%in2014(Colleau,
A. (2015)). To react to this decline and recover their loss of revenue, Foxconn started
diversifyingtheiractivitiesandcustomerbase.Towardsthisaim,theyboughtthecompany
Sharp in early 2016. This companywas specialised in theproductionof screens, including
thoseofiPadsandiMacs.ThefiguresindicatethatAppleisdecreasingitscollaborationwith
Foxconnwithoutendingitsalliancewiththefirm.
5.2 ScenarioII:ConsequencesofChinatransitionphase
China’seconomyhaschangedoverthepast30yearsfromacentrallyplannedsystem
toamoredynamicmarket-basedeconomywheretwo-thirdsofeconomicactivity is inthe
handsof private enterprises. For the last several years, Chinahasbeen radically changing
andfocusingmoreonitsdomesticpopulation.Thecountry isthoughttobe inatransition
phase and is changing its economic model in the direction of a liberalisation of their
economy.Infact,theydecreasetheirexportations,theirFDIandrefocusmoreandmoreon
theinternalconsumptions.Theyshifttoamoreconsumer-driveneconomy.
First, new government policies favoured household income growth, improved the social
safety net, and supported the expansion of the service sector and private enterprises. It
createdmore and better-paid jobs (McKinsey & Company (2013)). Manufacturing wages in
Chinaremainedrelativelylowfrom1980to2005andcontinuedrisingsincethatperiod,as
depicted in figure 15. In otherwords, figure 15 illustrates the risingwages from 2005 to
2015.
57
Figure15:Averagewageperyear(inYuan)
Source:TradingEconomics(2015);NationalBureauofStatisticsofChina(2015)
This increase of Chinese salaries has led to the emergence of the Chinesemiddle
class.Themiddleclassgrewsteadilyinallofthecountry’smajorcities,aswellasinsomeof
itssmallerones.(Barton,D.,Chen,Y.,&Jin,A.(2013)).Thedevelopmentofthismiddle-income
consumer segment will radically change China. Indeed, by having bigger wages, Chinese
workers consume more, profiting from a higher purchasing power. This means that
consumers will be able to buy more services and goods. These economic factors
considerablyalter thementalityof residents,andallowChina to recentreon itsdomestic
population.Wherepeopleoncesimplewantedtoearnmoneyinordertoeatandtosupport
their family, Chinese today have disposable income, and therefore higher expectations of
theirexpenditures(TheEconomist(2016)).
AnotherimportantfactorthatcharacterisedChina’stransitionphaseisthedeclining
numberofmigrantworkers.ThisconcernisinpartduetothechangeinChinesementality.
Before,eldersandchildrenlivedinthecountryside,andtheotherfamilymembersmovedto
thecities inordertofinanciallysupporttheir family.Today,youngworkerstendtostayat
homeor next to their village. This trend clearly has an impact on the number ofmigrant
workers(FinancialTimes(2016)).Moreover,thisdeclineoftheurbanlabourpoolisalsodueto
theincreasinglyagingpopulation.In1980,only5%oftheChinesepopulationwere65years
0
10000
20000
30000
40000
50000
60000
70000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
58
oldormore.Weexpectthispercentagetoincreaseupto24%in2050.Figure16showsthe
structureoftheChinesepopulationuntil2030.
Figure16:Chinesepopulationstructure(inmillion)
Source:Gipouloux,F.(2005)
Olderworkerswhoarenear retirementagealsooften return to their family in the
countrysidebecause itbecomes toodifficult for themto find jobs incities.Big companies
prefertohireyoungpeople,andotheravailablejobsaretoodifficultfortheseolderpeople.
Thisslowintheurbanlabourpoolgrowthwillincitecompaniestoincreasetheirproductivity
throughtraining,automation,moreflexibleproduction,andenhancedemployeeloyalty.
Followingthesetransitions,Chinaislosingmoreandmoreitsstatusasthe‘workshop
oftheworld’.Thisisclearlydesiredbythestateastheylaunchedthe‘Nationalmediumand
long term program for science and technology development’ from 2006-2020. In other
words,Chinaintendstoshifttheirrolefrom‘madeinChina’to‘innovatedinChina’(Course:
‘Economicsofglobalinnovation’atKatholiekeUniversiteitLeuvenin2016).
Insum,thetransitionphasehappeninginChinaismainlycharacterisedbytheriseof
salaries, the expansion of the middle class, and the decrease in migrant workers and,
therefore,intheavailableworkforce.Toexplainthissecondscenario,wefocusonthefirst
27,7
66,7
5,6
26,7
66,6
6,7
23
70,2
7
17,9
64,5
17,6
0-14 15-64 65+
1990 1995 2000 2030
59
and third change. Thepossible consequencesof themiddle class expansion are explained
hereafterinthescenario4.
Before developing future possible evolutions of these two major changes, an
important consequence of this transition phase should be highlighted. The days of cheap
landandlabor incoastalcities,especially inGuandong,arewaningandbusinesses located
there have begunmoving into mainland China. Foxconn, following the example of many
othermultinationals,hasshiftedpartofAppleproductionfromShenzhentocentralChina,in
Henan and Sichuan province (Hille, K. (2010, b)). They invested in these provinces to avoid
rising laborcostsanddemographicchanges.Moreover,asnoted inthefirstscenario, they
also switched production locations to escape Shenzen suicide scandals, and the resultant
higher wages. Nevertheless, cost advantages in these provinces do not exceed 10%.
Moreover, by going to a new location, the company lost the concentration of suppliers,
logistics,andservicesthatGuandongprovincesofferedthem.
Capitalising on these challenges to China’s characterisation as ‘workshop of the
world’, thegoalof thegovernmentappears tobe tomove fromthepreviouscheap labor
export model to one based on innovation, domestic consumption, and services. More
specifically,theywanttoreinventindustryinthePearlRiverDeltaandChinatorankasone
of theworld’smost innovative countries by 2020 (Balding, C. (2016)). This province is now
attractingnewkindofbusinessesandfirmslocatingtherewouldbebenefittedbyreplacing
partofworkersbyrobots(wediscussthefuturepossibleconsequencesofrobotsinanother
scenario). Therefore, Chinese migrant workers mostly would return to the countryside.
Guandong is now attracting talents and entrepreneurial startups. Today some 8000
technologicalcompanieshavebeensetupinthecity,andthePearlRiverDeltaisbecoming
thenew‘Siliconvalley’(Bloomberg(2016)).Insum,theChinesetransitionhasahugeimpact
onmanyfirmslocatedthere,includingFoxconn.TheshiftofAppleproductioninBraziland
othercountriesisprobablyalsolinkedtothistransition.
Wecannowlookatpossiblefurtherconsequencesofthistransitionphaseandmore
particularly of the rising salaries and the decreasing number ofmigrant Chineseworkers.
What are the possible evolutions of the relation between Apple and Foxconn?Will other
countriesbecomemoreprofitablethanChina?WillApplestopworkingwithFoxconn?
60
5.2.1TheendofAppleandFoxconnrelationship
First, following the growing salaries in coastal and Eastern provinces, Apple may
decidetoenditscollaborationwithFoxconn.Wealreadydevelopthiseventualityinthefirst
scenarioandconcludethatthelikelihoodofthisevolutionissmall,atleastintheshortterm.
Infact,Appleseemstoengage itselfwiththefirmbyawardingthemtheproductionof its
mostrecentproducts.Asmentionedabove,Foxconnisalsoimplementinginitiativestoavoid
risingwagesbybuildingplantsinmainlandChina.Finally,labourcostsrepresentaverysmall
partofApplemargin.Applehasabigprofitmargin thatnever fellabove19.53%andthat
even reached 2.66% in 2012 (YCharts (2016)). It is defined as the proportion of revenues
remaining after paying operating costs like wages, raw materials and administrative
expenses (Chan, J.,Pun,N.,&Selden,M. (2013)).Therefore, fromthisperspective, itwillnot
incitethemtostopworkingwithFoxconn.
5.2.2Applemayincreaseitsmanufacturingnetwork
Apple may expand its collaboration with other manufacturers to depend less on
Foxconn. We also saw before that this process has begun, and we concluded that this
evolutionislikelytohappen.Byfindingotherpartners,Applecandiversifyitsriskandavoid
higherworkersalaries.
5.2.3ApplemayshiftfinalassemblyoutofChina
Appleproducts’finalassemblymaybeshiftedawayfromChina.Atthemoment,two
final assembly facilities are situated in the United States, one is situated in Ireland, and
anotherisinBrazil(seeAnnex1).Applemaycontinueshiftingproductionabroadindifferent
ways. First, by working with Foxconn, facilities may be built in—or relocated to—other
countries.Secondly,Applemayfindotherpartnersthathaveplantssituatedelsewherethan
China inordertoescapetheactualtransition.Finally, theymayalsorelocateapartofthe
production to the United States. We develop this last eventuality hereafter in another
scenario.
61
BeforelookingatthepotentialfutureApplemanufacturers,wewillfirstlookattwo
factorsthatareessentialwhenchoosinga location inwhichtodobusiness.Thesereasons
maybedecisiveandmaydeterminetheattractivenessofacountryinwhichtosituatethe
finalassemblyofproducts.
First,aswesawinthefirstpartofthispaper,workforceavailabilityisessentialwhen
lookingforalocationinwhichtodobusiness.ItisanimportantreasonwhyChinabecame
the‘factoryoftheworld’.Infact,thehugenumberofmigrantworkerswholefttheirvillage
to gowork in the cities led to China’swealth explosion. Therefore, another countrymay
have this potential. As we can see in figure 17, many countries in South East Asia are
inhabitedbyalargenumberofruralresidents.
Figure17:Ruralresidentsin2015(inmillion)
Source:FinancialTimes(2016)
Allofthesecountriesclearlyholdacertainpotential.However,themostpromising
countryisIndia,whoseruralpopulationin2015was863million.Thiscountrymayreplicate
Chinaandbecomethenewworkshopoftheworld.
62 80 96 105 115 118
863
62
Another important factor to look at is the average salaries in these countries. The
risingwagesinChinaisamajorconsequenceofitstransition;theaverageincomesinsome
oftheseAsiancountriesareclearlylowerthaninChina.
Figure18:Averagemonthlywagesin2013(inUS$)
Source:InternationallabourorganizationregionalofficeforAsiaandthePacific(2014)
Nevertheless, these two factorsarenotenough todeterminewhethera country is
suitable to manufacture products, and whether it is more attractive than China. As we
develop in the first part of this paper, many other characteristics are determinative and
shouldalsobetakenintoaccount.However,intheframeworkofthispaperwedonothave
enoughtimetodevelopallofthespecialfeaturesofeachpotentialcountry.Therefore,we
will focusonaselectfewwhereAppleproductsarealreadyassembled,orwheretheyare
themostlikelytobeassembled.
Beforedevelopingpossibleevolutions, it is importanttokeepinmindthatFoxconn
has already set up plants in countries other than China and Taiwan. One of the plants,
situated in Brazil, is already working for Apple. The other plants are situated in Mexico,
EasternEurope,andVietnam.Theymayestablishotherplantsorexpandexistingones.Ifthe
company continues its worldwide expansion, it may ensure a certain stability in its
relationship with Apple. In fact, if Foxconn locates its final assembly facilities in more
73121
183 197 215
391
613
63
favourablecountriesthanChina,andifitshiftedAppleproductionthere,itmaybebeneficial
for Apple. It will be a way to counter the transition phase of China and to decrease
transportation costs, import taxes, as well as respond more quickly to Apple customer
demand.Consequently,Applewouldnothave compelling incentives to stopworkingwith
themanufacturer.
We now look at possible future locations of final assembly facilitieswhether it be
ownedbyFoxconnorbyanotherfirm.
In2014FoxconnannounceditsdesiretoinvestinJakarta,oneofthebiggestcityof
Indonesia. First, the investment allowed them to depend less onChina,where the labour
costadvantagesaredecreasing.Second,IndonesiaholdsacertainpotentialforApple.Apple
canselltheirproductsinthatcountry,despitepovertyandthevastnessofthearchipelago.
Indeed,thewealthierconsumersarehighlyconcentratedinandaroundJakarta,thecapital,
andthenumberof thesepeoplethatwillspendmoneyongoodsotherthannecessities is
expected to rise from 45 million to 145 million by 2030 (Bland, B. (2014)). Foxconn is
projectedtoinvest1billioninordertoestablishR&D,productionandfinalassemblyinthe
country. Nevertheless, they did not officially claim the construction of these plants, and
negotiations with the Indonesian state are still happening. Moreover, a specific law in
Indonesia thatwill takeeffect in 2017may influence their decision.Companiesproducing
smartphonesinthecountrywillberequiredtoproducesomepartslocally.Itcouldrestrain
Foxconnto locate factories in Indonesia (Danubrata,E.,&Christina,B. (2015)).Therefore, for
the moment, we cannot ensure that Foxconn will establish final assembly facilities in
Indonesia. We are not in a position to say if negotiations with the state will end in an
agreementornot.
Tim Cook, the Apple’ CEO, visited India inMay 2016 in order to look at potential
projectsthatcouldbeundertakenthere.Accordingtounofficialinformation,heisplanning
tomeettheIndianPrimeMinistertotalkaboutbringingassemblyandmanufacturingtothe
country aswell as opening the first Apple Stores in India. Such amove facilitates iPhone
promotioninthecountry.Thisprojectmaymakesenseandcouldlikelyberealisedformany
reasons.Asidefromthehugenumberofruralresidentsandthelowaveragewage,Indiais
64
becoming themost desirable outsourcing destination of firms because the country offers
manyotheradvantages.
First,theyhaveahugenumberofavailableworkforcethatisqualifiedandavailable
every day 24/24 hours (Boillot, J-J. (2005)).Moreover, India is geographically well situated
nexttoChina,wherethebulkofApplesuppliersaresituated.Theyarealsoamemberofthe
WTOwhichoffersthesameadvantagesascitedaboveforChina.
Indiaisalsotheworld’ssecond-largestsmartphonebasewith222millionusers,whichonly
represents 17%of thepopulation.Moreover, itsmiddle class is expected toquadruple to
200millionby2020. It couldbecome theworld’s largest class consumermarketby2030.
Somepeopleevensay that ‘India is thenextChina’.Therefore, Indiahasahugepotential
thatshouldnotbeneglected.
However,Indiahasmajorchallengestodealwith.First,waterandenergyshortages
as well as increasingly overloaded roads and telecommunication networks are major
drawbacks. Environmental problemsmay also become difficult to manage. Besides these
general disadvantages, Indian productivity is also disadvantageous when analysing the
appeal of India as a manufacturing base. Physical productivity of Indian workers is far
inferiortoChineseproductivity.Thelatterarefarmorerapidintheassemblyofparts.It is
an important factor to keep in mind when choosing India as a new location for
manufacturing. However, robots may possibly counterbalance this lack of physical
productivity.
Fromanotherperspective,Indianconsumersarealsoverypricesensitiveandarenot
generallywillingtopayforiPhones.WhileApple’smostaffordablephonestartsat399$,the
average saleprice in India for smartphone isprojected todecline to102$by2018 (Rai, S.
(2016)).Alittle-knownIndiancompanyevenhasplanstosellasmartphoneat4$.Applehas
therefore been less successful in India than itsmajor competitors. Indeed, as depicted in
figure19,itsmarketshareissmallatonly3%.WecanexpectAppletotakeinitiativesinthe
nearfutureinordertorecoverthisdelaycomparedtoitscompetitors,andtobenefitfrom
thefuturepotentialofIndia.Appleproductsmaybecome‘madeinIndia’.
65
Figure19:Indiansmartphonemarketshare
Source:Culpan,T.(2016)
Thirdly,ifAppleestablishesitsownstoresinIndia,thelawrequiresthatatleast30%
oftheproducts’componentsbeproducedlocally,inordertoboosttheeconomy.
In sum, despite these challenges, India has great potential. Nevertheless, for the
moment, Foxconnexecutivesdonotplanonestablishingassembly facilities there. Froma
broaderperspective,themanufacturingofiPhonesandtheestablishmentofApplestoresis
stilluncertain.AppleproductsmayonedaybeassembledinIndia,byFoxconnorbyanother
company,butwecannotbesureofthiswithcurrentdata.
FoxconnisalreadysituatedinVietnam.Theymayexpandtheirplantsthereandshift
a part of Apple production. Other manufacturers may also be situated there. Indeed,
Vietnamisagrowingmarket. In2014,theynotablybecamethebiggestAsianexportersto
theUnitedStates.Vietnam isattractingmoreandmoremanufacturingplants. Samsung is
notably situated there to make the final assembly of its smartphones. Vietnam is also
characterizedbyayoungpopulation(Cheok,M.(2016)).
As already mentioned, an Apple final assembly facility owned by Foxconn is also
situatedinBrazil.Thisproductionbasemaybeexpandedinthefuturebecausethecountry’s
Apple3%
Samsung37%
Intex15%
Lenovo13%
Lava9%
Micromax23%
66
marketdemonstratespotential.Applemayalsobeinterestedinothercontractorssituated
there.ManyelectronicfirmssuchasSamsung,Lenovo,Ericssonandsofortharealsolocated
in Brazil. One positive factor for Brazil is its massive domestic market. Over the years,
consumershaveexperiencedrisingincomesandgreateraccesstocredit.Wecantherefore
expect an explosive growth of the country’s middle class. Nevertheless, they are major
challenges in Brazil regarding infrastructure problems, high tax (including hefty import
taxes), and red tape. For instance, Apple products that are imported in Brazil tend to be
twicethepriceoftheirUSequivalents.Thisispartofwhywedepictedthesamephenomena
asinIndia.Evenifthepotentialishuge,Applehasverylittlemarketshare—littlemorethan
1%. Therefore, we can expect the final assembly of Apple products to be shifted to that
country inordertoavoidthesehugetaxesandthereforetocapturea largerproportionof
the demand (Pearson, S., (2012)). Foxconn published its ambitions in 2013 to expand its
Brazilian plants. Nevertheless, we should keep in mind that Foxconn’s structure is highly
autocratic, and applying it to other culturesmay cause clashes. Indeed, Brazilians have a
differentwayofworkingthanChineseworkers,andattemptingtoimplementsuchaharsh
environmentmayleadtodissatisfactionandprotests.
Insum,Indonesia,India,VietnamandBrazilarepotentialcountriesthatmayoneday
replaceChinaasmanufacturingcapitals,orsimplybecomethelocationoffutureApplefinal
assemblyfacilities.
5.3 ScenarioIII:Thegrowinguseofrobots
Aspreviouslystated,Chinaisintransition,andhasencounteredrisingsalariesanda
decliningnumberofmigrantworkers.AconsequenceofthesechangesinChinesecostsand
demographyisthegrowinguseofrobots.Foxconnisoneofthesefirmsthathaveinstalled
suchenginestofacecurrenttransitions.
Every activity does not have the potential to be automated. For Foxconn, the
majorityofmanufacturingactivitiesaresplitupintodifferenttasksthatarepredictableand
simple to execute. Such tasks could easily be replaced by robots. Indeed, according to a
67
report fromMcKinsey&Company the technical feasibilityofautomation forapredictable
physical task isabout78%,comparedto25%forunpredictableones.Moreprecisely, they
ranked the technical feasibility of automation of many types of activities including
predictablephysicalworkinthemanufacturingsectorthathasatechnicalfeasibilityof90%
(Chui,M.,Manyika,J.,&Miremade,M.(2016)).ItexplainsinpartwhyFoxconnhadthisabilityto
automatepartofitsactivities.
Foxconnalsostartusingrobotsforotherreasons.Whiletheydoputrobotsintheir
plantsinordertobemoreflexibleandtorespondquickertothedemandofApple,theyalso
dosotofaceworkers’shortageandhighersalaries.Asnotedabove,coastalcities,especially
in Guandong province, are particularly hit by this transition. Indeed, many companies
upgradedtheirplantsbyreplacingworkerswithrobots.Itallowedthemtocuttheircostsby
nearly 10%. In Dongguan for instance, 43,684 workers were replaced by robots in 2015
(BloombegNews (2016)). The governmentplayed amajor role in that shift andencouraged
companiestoreplacehumanworkerswithrobotsbygivingthemfinancialincentives.These
companies are called the “dark factories”. Indeed, they do not need lights any longer
becauseonlyrobotsworkontheproductionline.
Moreprecisely,Foxconnrecentlydeployed10,000FoxbotstoassembletheiPhone6
(CompareCamp (2014)). 60,000 workers were also recently replaced by robots in another
plant.Thecompanyhasalsoinvested10milliondollarsinaventureforresearchinrobotics
andmanufacturing.Foxconn’CEO,TerryGou,notablyclaimedsomemonthsago:"Weare
applying robotics engineering andother innovativemanufacturing technologies to replace
repetitive tasks previously done by employees, and through training, also enable our
employeestofocusonhighervalue-addedelementsinthemanufacturingprocess,suchas
research and development, process control and quality control”. It is clearly just the
beginningandmanyotherworkerswillstillbereplaced.
Following this growing use of robots, we can wonder what could be the future
consequencesofthistrendontherelationbetweenAppleandFoxconn(Wakefield,J.(2016)).
68
Wedonot think thiswillnegatively impact therelationshipbetweenboth firms. In
fact,byestablishingrobots,Foxconncanmitigaterisingwagesandlabourshortages,andcan
thereforeensureastablerelationshipwithApple.Moreover,byusingsuchengines,Foxconn
isstillflexible,whichisessentialforApple.Italsomeansthattheywillbelessresponsiblefor
workerssocialandworklifeandthattheywillhavelessriskofworkingconditionscandals.
Consequently, the growing importance of robots in Chinawill not impact the relationship
betweenthetwofirmsandwilljustconfirmwhatwesaidabove—Applewillnotyetendits
alliancewiththefamousTaiwanesefirm.
5.4 ScenarioIV:ThegrowingimportanceoftheChinese
consumermarket
ThisscenariostatesthatApplemaycontinueworkingwithFoxconntostaycloseto
the Chinesemarket. Indeed, it may be beneficial for Apple to stay in China because the
Chinesemarketisbecomingmoreandmoreattractive.
Chinahas a very promising consumerbase, in part becauseof the growingmiddle
class. In fact, as explained above, this class is in full emergence. Before going intomore
detail,itisimportanttodefinewhatexactlyamiddleclassis.Therearevariousdefinitions,
but in the framework of this paper,wewill use a definition utilised bymany businesses:
‘peopleearningbetween$10USDand$100USDperday’.AccordingtoareportbyErnst&
Young, themiddleclass inAsiaPacificwill growby66% from2009 to2030 (Ernst&Young
(2013)).ThemiddleclassgrowthinChinaisrepresentedinthepicture20.
69
Figure20:Shareofthepopulationthatisinthemiddleclass
Source:Ernst&Young(2013)
In other words, the Chinese middle class is becoming as important as that of
Germany,Italy,andFrancetogether(Thomas,P-H.(2016)).
Asthemiddleclasshasrisen,privateconsumptioninChinahasgrownandpeopleare
morewillingtopayapremiumforquality.Consumersceasetobuyjustnecessities,andare
more likely tobuy laptops, smartphones,andcameras.Therefore, itmaybebeneficial for
Apple,whoseproductsarequiteexpensiveandluxurious.
This Chinesemiddle classmay also be divided into different generations, including
theGeneration2.Thisgeneration is typicallycomposedof teenagersandyoungpeople in
theirearly20s.Todate,theyarethemostwesternizedinChina.Generation2wantstotry
newthingsandtobuyexpensiveproductsasstatussymbols.Theyarealsoveryloyaltothe
brandsthattheytrust.Therefore,thisspecificclassmayalsobeverybeneficialforAppleand
itcouldbeareasonforthebrandtostayclosetothismarket (Barton,D.,Chen,Y.,&Jin,A.
(2013)).
The emergence of e-commerce also plays a role and made Chinese market more
attractiveforApple.Infact,aspreviouslymentionedinthefirstpartofthepaper,withmore
11%
42%
72%
2009 2020 2030
70
than 700 million Internet users, China is a very attractive market in which to sell Apple
products.Moreprecisely,68%ofthemiddleclasshasaccesstotheInternet(Barton,D.,Chen,
Y.,&Jin,A.(2013)).
Apple implemented an aggressive strategy in order to increase the number of
iPhonessoldinChina(Culpan,T.,&Higgins,T.(2015)).Chinaclearlybecomesamajormarket
forApplethatcouldnotbeneglected.Bysimplylookingatthe2015annualreportofApple,
itisstrikingthattheChinesemarkethasagrowingimportancetoApple.Figure21showsthe
netsalesevolutionbyoperatingsegment.(ChinarepresentsChina,HongKongandTaiwan)
Figure21:Netsalesevolutionbyoperatingsegment(inmillion)
Source:UnitedStatessecuritiesandexchangecommission(2015)
In2012,Chinawasthethird largestmarketforApple,andaccountedfor13%ofall
sales. That year, the American firm sold two million iPhone 5s in China during the first
weekend it was available.More than 17,000 outletswere already selling Apple products.
Then,itdoesnotstoprising.TimCookevensaidin2013thatheexpectedChinatoreplace
North America as Apple’s largest source of revenue (RTE News (2013)). In 2014, Apple
completedadealwiththeworld’s largestmobilecarrier,ChinaMobile,tosell its iPhone5
acrossmainland China. The company hasmore than 760million subscribers (Guglielmo, C.
0
10
20
30
40
50
60
70
80
90
100
Americas Europe China Japan RestofAsiaPaciMic
2013
2014
2015
71
(2013)).SuchasdealisawayforAppletobringtheirproductstoChinesecustomers.Chinais
indubitablyextremelyimportantforApple.In2015,itbecamethesecondlargestmarketfor
Appleandaccountedfor25%oftotalsales.From2014to2015,sales increasedby84%.It
overtakesEuropethatfallto22%.
In sum, following the rising Chinesemiddle class, and the growing sales in China,
Apple may simply stay in the country to be closer to its customers. Indeed, it may be
beneficialtomakefinalassemblyofproductsinChina,especiallyforgoodssoldtoChinese
customers. Therefore, this scenario may lead to three evolutions. First, the relationship
betweenApple and Foxconnmay remain stable and continue as it is. Second, Applemay
continueworkingwithFoxconn,butmayonlyleavethemresponsibleforChineseconsumer
products.Finally,ApplemaysimplyfindanothermanufacturerinChina.Thisscenariostates
thatApplewillcertainlycontinueoutsourcingpartofitsfinalassemblyinChina—itisonlyits
relationshipwithFoxconnthatmaynotbeguaranteed.
5.5 ScenarioV:ApplejobsbroughtbackintheUnitedStates
Asexplainedinthefirstpartofthispaper,Applehasaspecificsupplychaindispersed
allovertheworld—Appleproductsaccountforthousandsofmanufacturingjobs.However,
amongthe700,000peopleworkingforApplethroughouttheworld,fewofthemworkinthe
UnitedStates.WhetherornotthesejobsmightreturntotheUSbecameacrucialquestion
in2008,afterthefinancialcrisis,whenmanyAmericanlosttheirjobs.Indeed,aswecansee
inFigure22, theunemployment rate in theUnitedStates reached9.8% in2010. (It is the
ratetakenonthe1stofJanuary)
72
Figure22:Americanunemploymentrate
Source:BureauofLaborStatistics(2016);CentralIntelligenceAgency(2016,b)
Nowadays, unemployment has returned to a rate around 5%. It is a good score
compared toothercountries, likeBelgiumorFrance.Nevertheless,wemaystillwonder if
jobswillonedayreturntotheUnitedStates.Itcouldbebeneficialforthecountryandstill
decreaseunemploymentrates.
Atthemoment,twofinalassemblyfacilitiesarealreadysituatedintheUnitedStates.
ThecompanyFlextronicsisresponsibleforthemanufacturingofMacandQuantaComputer
(Apple (2016, d)). More precisely, Apple returnedMac production to the United States in
2013.They invested100milliondollars todoso,and theseMacsareclearly labelledwith
‘assembledintheUSA’(Smith,J.(2012)).
Wemaythereforewonder if thisscenario is likely tohappenand ifApplemayone
day decrease its orders to Foxconn to switch them in America.When examining possible
evolutions of this scenario, three casesmay be highlighted.On the one hand, it could be
disadvantageousforthemultinationaltobringproductionandassemblybackinAmerica.In
thatcase,ApplewouldkeeptheseactivitiesinChinatobenefitfromactualadvantages.We
4,7 4,6 5
7,8
9,89,1
8,3 8
6,65,7
4,9
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
73
emphasize themost importantdifferencesbetweenbothcountries thatmakeChinamore
attractive.Secondly, itcouldbeonthecontrarybeneficial forApple torelocatepartof its
activities in America to enjoy some advantages. Lastly, Apple may relocate part of its
production in that countrywithout having any choice. Theymay be forced following new
regulations.
5.5.1Apple’sjobskeptinAsiancountries
Today, since the industrial revolution, transportation costs have decreased and
transportationmeansaremorediversified.Itiseasiertoproducepartsinthemostsuitable
locations, and supply chains continue fracturing. However, distance remains less
advantageous for two reasons. First, it is beneficial to be situated in an agglomeration of
talentedindividualsandspecificfactories.Aswediscussinthefirstpartofthispaper,many
Foxconnplantsare situated in suchclusters in theGuandongprovince. Therefore,moving
theproductionoutofthesespecificzonestoAmericawillbedisadvantageousforFoxconn
and thus for Apple. Theywill lose benefits in the form of time andmoney, among other
advantages.Moreover, it is important to limit thedistancebetweenplantsbecausecloser
plantsareabletooperatemoreefficientlybyensuringcoordinationofproductionprocesses.
PlantslocatedinAmericawillbefarfromtheAsianmarketwherethebulkoftheproduction
isdone.Thesetwopointsand,thehangingtransportationandcommunicationtechnologies
curb temptation to shift, and instead keep manufacturing in Asia (The Economist (2012)).
These characteristics explain the first possible scenario, which states that Applemay not
bring production back to the United States. Other factors may also explain such an
eventuality.
Aspreviouslymentionedinthefirstpartofthisthesis,Chinaalsohasmanylocation-
specificadvantagesthatareessentialforAppleandnotofferedbyAmerica.Thefirstcrucial
determinant that makes China more attractive than the United States is the workers’
salaries. Figure 23 illustrates the gap between wages in these two countries. American
wagesare221.7%higherthancomparableChinesewages(Numbeo(2016)).
74
Figure23:Averagemonthlydisposablesalary(netaftertax)(in$)
Source:Numbeo(2016)
ThespeedandtheflexibilityofferedbyChinesefactoriesarealsounique.Itprovides
astrategicflexibilitytoApplethatwouldnotbeavailabletothecompanyifproductionwas
moved to America. Indeed, Chinese employees work an average of 12 hours per day,
whereas theirAmericancounterpartsworkabout8.6hours (Kavoussi,B. (2012)). Indeed,as
previously stated in the first part of this paper, Chineseworkers have a certainmentality
that leads them to bemore productive than Americanworkers. For example, they easily
acceptovertimework,average12-hourshifts,andliveindormitories.
TheChineseworkerproductivity indexmayalsobeconsidered.Nevertheless,when
lookingfornationalindex,theAmericanworkerproductivityishigherbecausetheseindexes
taketheaverageofworkerproductivityeverywhereontheterritory.Therefore,theChinese
index is clearly lowerbecausemanyprovincesarestillunder-developed inChinaandmiss
currenttechnologies.Indeed,manyprovincesarestillverylatecomparetocoastalprovinces
and it decreases average national worker productivity index. Consequently, to be more
precise, itwouldbe interestingtofindworkerproductivity indexperprovincebecausethe
oneofcoastalChineseprovincewouldcertainlybehigherthaninAmerica.Insum,goingin
America may not be very advantageous from the point of view of worker productivity
because,inChina,Foxconnplantsarealreadysituatedinthemostadvancedprovincesthat
disposed from current technologies and where worker productivity is much higher than
elsewhereinthecountry(Accenture(2016)).
2858,09
888,43
UnitedStates China
75
As explained in the first parton this thesis,Applehas aparticularly specific supply
chain,andtheycontrolnearlyeverypartit.Theirsupplychainisflexible,andprovidesApple
theabilitytoquicklyobtainthequantityofproductsthattheydesire.Indeed,aspreviously
mentioned, Foxconn satisfies every desire of Apple, which is in part thanks to Apple’s
negotiationpower.Therefore, fromaflexibilitypointofview,returningback intheUnited
Stateswill not bemore advantageous forApple because the company already has a very
efficientsupplychain.Nevertheless,itisgenerallymorebeneficialformultinationalstobring
partoftheirproductionbacktotheirhomecountryinordertospeeduptheirsupplychain
and establish a quicker flow of products to respond in a timely manner to consumer
demand.
Insum,itisclearthatattractingApplemanufacturingtoAmericaisnotjustamatter
of reducing labour costs in the United States. Many other factors, including ones cited
above,arealsoas important.Moreover, itwouldbecostlytoreplicatetheconvenienceof
the entire Chinese supply chain if jobs are brought back in America.Multinationals today
primarilyconsidermovesthatareoptimalforprofits.Appledoesnothavetheobligationto
solve America’s unemployment problems, and prefers to keep this money to invest in
innovationandotherprojects.Therefore,fromthesepointsofview,thescenariothatjobs
willcomebackintheUnitedStatesislesslikelytoreflectreality.Applewillalmostcertainly
continuemanufacturingthebulkofitsproductsabroad,andwilllikelykeepthehighvalue-
added activities at ‘home’. In 2012, Steve Jobs informedBarackObama that jobswill not
comebacktoAmerica(TheEconomist(2012);Duhigg,C.,&Bradsher,K.(2012)).Theproduction
theyrecentlybroughtbackwaslikelytoberootedinbrandimageconcernsasitappearsto
representonlyasmallfractionoftheentiremanufacturingprocess.
5.5.2VoluntarydecisionofAppletobringjobsbackintheUnitedStates
The second possibility regarding this scenario is linked to the potential benefits of
bringingproductionback to theUnitedStates.Thesebenefitsmaybevarious, sowehave
chosentoenumerateonlythemoststriking.
76
First, theUnitedStates isoneof the16 countries in theworld thatdonot require
timeoffeachweek.ItmaybebeneficialforApple,andhelpthemachieveacertainflexibility
bymakingAmericanworkerswork every day. In China, rules require a certain amount of
timeoffeachweek (Gilson,D. (2011)).Nevertheless,aspreviously stated, theaveragedaily
hoursofworkinChinaismuchhigherthaninAmerica.Therefore,thisregulationdoesnot
seemcompellingenough to justifyApple’sdecision to returnmanufacturing to theUnited
States.
Another, more relevant, characteristic is the safety regulation in America. Indeed,
theserulesregardingsecurityinworkplacesarestricterthaninChina.Therefore,evenifit
wouldbecostlier toApple, itwouldbeaway toavoid scandalsaboutworking conditions
andemployeesuicidesasithappenedinFoxconnin2010.
Moreover,theloweremployeeturnoverintheUnitedStatesmaybeanadvantageof
shiftingproductiontothatcountry.Indeed,theaverageretirementrateis65.5yearsoldin
Americaand51.2yearsinChina.ItmeansthattheemployeeturnoverinChinaishigher.On
the other hand, Chinese plants encounter toughworking conditions that exhaustworkers
and lead tomany resignations,whichcompounds the turnover rate.Thishigh turnoverof
Chineseworkers at Foxconn factoriesmakes their plants less stable. However, this is not
veryrelevantinthecaseofApplebecauseChinahasatremendouslylargepoolofavailable
workforcethatcounterbalancesthisyoungretirementrate(Kavoussi,B.(2012)).Nevertheless,
a characteristic of the actual transitionphase inChina is thedecliningnumberofmigrant
workers. Therefore, having a stable pool of labour may be an attractive point towards
returningfinalassemblytotheUnitedStates.
It may also be advantageous for Apple to locate its activities in America in
anticipation of future possible regulations regarding the production of components. The
American government may decide to impose requirements that the production of some
partsmustbecompletedinAmerica. ItwouldthereforebeadvantageousforAppleifthey
arealreadysituatedcorrectly.
77
Apple may bring jobs back to the United States in order to avoid heavy taxes on
transportation. We will discuss this motivation in the following scenario related to
environmentconcerns.
ApplemayalsoeventuallyhaveanewCEO thatwillbe temptedtobringback jobs
becauseofamoreconservativemind.
Finally,ApplemayalsorelocateitsproductioninAmericatobenefitfromsubsidies.
The American state may offer heavy subsidies to Apple to incite the firm to relocate its
production in itshomecountry. Itwouldbenefit low-skillworkersandbedisadvantageous
for richerpeoplewhowillhave topaymore taxes.Such initiativemaydecrease the rising
incomeinequality.However,itwouldbeveryexpensiveandcontroversial.
5.5.3InvoluntarydecisionofAppletobringjobsbackintheUnitedStates
Apple may move the rest of its production and assembly to the United States
becauseofnewregulationsorchangesthatmayforcethemtochangetheirwayofworking.
Inthisrespect,wedevelopthemostrelevantpossibilitiesasfollows.
First,itisimportanttokeepinmindthatAmericanshaveaprotectionistmind,which
is reflected in the twocandidates for the2016presidentialelectionsof theUnitedStates.
Donald Trump mentioned his desire to bring jobs back home if he becomes the new
president of theUnited States. According to him, since China joined theWTO,Americans
closedmore than 50,000 factories and lost tens ofmillions of jobs. Therefore, he said he
wantstofightfortheAmericanbusinessbyreclaimingmillionsofAmericanjobsandreviving
American manufacturing (Trump Pence (2016)). On the other hand, the second candidate,
Hillary Clinton, also has protectionist ideas. Shementioned its desire to remove America
fromtheWTO(Navarro,P.(2016)).
Therefore,changesmaybeinitiatedbygovernmentandprotectionistideasmayone
dayhavemajor implications forApple’s supply chain. The futurepresidentmaydecide to
establish new regulations to oblige Americanmultinationals to bring production activities
back in the country. He or she may also decide to leave the WTO. The United States’
78
continuedparticipationintheWTOisnotnecessarilyguaranteedandsuchadecisionmaybe
decisiveforApple.
Aspreviouslymentioned,theAmericangovernmentmayalsoobligetheproduction
ofsomepartstobedoneinAmerica.SuchacasewillforceAppletobringjobsbackinUSA.
Insum,itisdifficulttostatewhichoftheseevolutionsmayhappenbecauseeachone
maybe likely.But it shows that the relationbetweenAppleandFoxconnmayonedaybe
impacted.
5.6 ScenarioVI:Consequencesofthegrowingenvironmental
concerns
Amajorchallengeinsocietyiscombattingclimatechange.Indeed,forthelastseveral
years,humansand firmshaveproducedmoreandmoregreenhousegases (CO2,CH4,N2O
and so forth), which reinforces the greenhouse gas effect. It is especially the CO2
concentration that exponentially rises. This leads to an increase in the average earth
temperature,withmajorconsequences.Therearemorefloods,someregionsbecomevery
arid, the polar ice caps are melting, the temperature of oceans is rising, the snow is
disappearing,andthesealevelisincreasing.Climatechangehasbecomeamajorchallenge
thatsocietyshouldgrapplewith(Course:‘EnergieTechnologie’atKatholiekeUniversiteitLeuven
in2016).Internationalagreementsarethereforeinplacetoapproachthisproblem.Themost
famousistheKyotoProtocolthatislinkedtotheUnitedNationsFrameworkConventionon
Climate Change. It came into force in 2005 andmust set internationally binding emission
reductiontargets.Chinaispartofthischart(UnitedNations(2014)).
Asexplainedinthemethodology,wedecidedtodiscussthischallengebecauseChina
isamajorplayerinthisglobalwarmingproblem.Therefore,itmayimpactthefirmslocated
there, includingFoxconn,andtherefore itmaychangetherelationbetweenthe latterand
Apple.Itisparticularlyrelevanttodevelopthisscenariofortworeasons.
79
First,therapideconomicexpansionofChinaovertheselastfewyearsledtogrowing
pollution.Theybecamethefirst-largestsourceofgreenhousegases(GHG),aftertheUnited
States(seefigure23).Actionsshouldbeundertakentocontrolthisgrowthbecauseitdoes
notonlyhaveanimpactonChina,butalsoworldwide.
Figure24:TotalGHGEmisisonspercountryin2012(inMtCO2)
Source:CAITClimateDataExplorer(2012)
WhereasChina’senergyefficiencyisimprovedyearonyear,theyremainarelatively
energy-intensive economy, and their total carbon emissions grow continuously. The
fundamentalprobleminChinaistheirdependenceoncoaltoproduceenergy.Thisenergy
source releasesmuchmore CO2 than gas. They should therefore improve their efficiency
regarding coal usage and try to control their pollution as much as possible (Naughton, B.
(2007)).Moreover, if the situation is not brought under control, the public health will be
deteriorated.Thestatesshouldthereforeconsiderasolution,atleastforitspopulation.
Secondly,climatechangehasbecomeacrucialtopicthesedaysthatisparticularlyin
the spotlight in many countries. It becomes an important value for many people in the
world.Wenotably heard a great deal about theCOP21 that tookplace in Paris last year.
Therefore,itmayfurtherpressuretheChinesegovernmenttoimprovethesituationandto
implementmoreaggressivemeasures.
10684,29
5822,87
4122,642887,08
2254,47 1981
China UnitedStates
EU(28) India Russia Indonesia
80
Resulting fromthesechanges, theChinese stateput inplace specific regulations in
ordertocontrolCO2emissions,toimprovethequalityofairandsoforth.Companiesmust
nowsubmittostronglawsandtaxes.Moreprecisely,thecommunistpartyofChinarevised
theenvironmentalprotectionlawin2014.Itwillenterintoforcein2015.Inaddition,they
passed about 30 new laws, 90 administrative regulations and a number of environmental
standards. Through all these new regulations, basics rules have been added to heighten
consequences for violating China’s environmental laws (they increased penalties if a
company does not respect rules), to expand the scope of projects subjected to
environmentalstandards,andtoallownongovernmentalorganizationstotake legalaction
againstpolluters.TheNationalPeople’sCongressalsorevisedtheLawonthePreventionand
TreatmentofAirPollutionandtheLawonthePreventionandTreatmentofWaterPollution
(Falk,R.,&Wee,J.(2014);LibraryofCongress(2014)).
Wemightwonderwhattheconsequencesoftheserisingpollutionconcernsare.Will
pollutionproblemsandnewlawsimpacttherelationbetweenAppleandFoxconn?
First,wecanexpectAppletofindotheralternativesthanFoxconninordertoavoid
risingcostsandconstraintslinkedtonewstrictenvironmentalregulations.
Fromabroaderperspective,otherevolutionsmayalsobepossible,butwedecided
to focus on the one that seemed important. Apple could begin completing part of its
productionoutofChina inordertoavoidtransportation,andcosts linkedto it. Infact, for
themoment, the bulk of Apple production and final assembly is performed in China, and
productsarethenshippedallovertheworld.However,itisdetrimentaltotheenvironment
to transport thesegoods. Indeed, rawmaterialsare sent toChina, then finalproductsare
shippedallaroundtheworld,thenwastesisoftensendbacktoAsiancountriesandsoforth.
Sucha‘disposable’supplychainisdisastrousfortheplanet.Therearealsostrikingproblems
with containers. It is cheaper for Apple and many other companies to throw empty
containersandtorebuildnewonesinChina;however,thisisalsohighlydetrimentaltothe
ecology.
Manyotherexamplescouldbehighlighted,butthemostimportantmatterhereisto
understand the challenges that transportation and pollution create. We expect states to
81
create new regulations in order to incite firms to participate in short supply chain rather
than locatingactivitiesallover theworld. If statesdo soand start taxing transport,Apple
may have to change its way of working. Therefore, it will impact the relationship with
Foxconn because Apple may only produce products dedicated to the Chinese market in
China.ProductionofEuropeangoodsmaybecompletedinEurope,andAmericanproducts
manufacturingmayreturntotheUnitedStates. It isaneventualitythatweshouldkeepin
mind(InterviewwithBernardPaqueonthe22/07/2016)
83
6.Limitationsofthispaperandfurtherresearch
In addition to reading international press articles to develop the first part of this
paper,furtherresearchandtimemayhavebeenusefultoamorecompleteelaborationof
thissection.Indeed,indescribingthereasonsforthealliancebetweenAppleandFoxconn,
further information may have been useful to gather to develop some parts. Part of the
limitingfactoronthisinformationwasconfidentiality.Itwouldlikelybeimpossibletofind—
inthepublicdomain—theexactclausesstipulatedinthecontractbetweenbothfirms.For
instance, regarding quality control, we do not know exactly how Apple ensures that
manufacturers respect its product specifications. As Apple prefers to keep its operations
confidential, including itscollaborationwithFoxconn,wewould likelyneedmoretimeand
opportunitytointerviewAppleemployeesandotherthirdpartiesifwewanttoincreasethe
accuracyandcompletenessofourpaper.
As we saw inmany scenarios, Foxconn started shifting its activities into countries
otherthanChina.Indeed,aspreviouslynoted,Chinaislosingmoreandmoreofitsstatusas
the ‘sweatshopof theworld’. Thecountry isnotasattractiveasbefore,especiallydue to
risingsalaries.WenoticedthatsomecountriesmightbecomegoodalternativesforAppleto
outsourcetheirproductfinalassembly.Weenumeratedmajorreasonsfortheseshiftsand
thepotential advantagesof these countries.However, information about these countries’
attractiveness and weaknesses could be further developed—we only noticed the most
importantones.Withmoretimeandresources,wewouldconductfurtherresearchoneach
of thesecountries inordertothoroughlyunderstandtheirevolution. In fact,aswesaw in
the first part of this paper there are somemonetary factors to look at when choosing a
location in which to do business. Therefore, with more time, it would be interesting to
furtherdevelopanalysesof these countries, aswell asother countries. In future,wemay
look at eventual clusters, specific infrastructures, regulations, intellectual property rights,
locationsandsoforth.
84
Wealsodiscussed theother final assembly contractorsworking forApple, and the
possible evolutions of their relationswith theAmerican company.However, as previously
notedinthefirstscenario,wedonothaveenoughtimeandresourcestotalkaboutallofthe
suppliersthattheyworkwith.Indeed,Appleworkswithsevenfinalassemblycontractorsin
China,andweonlydiscussedtwoofthem:PegatronCorporationandQuantaComputer.We
preferfocusingontheseinordertobethemostaccuratepossible,especiallybecausethese
two companies are themost important suppliers after Foxconn. Nevertheless, withmore
timeandresources,wecoulddevelopotherpossibleevolutionsbetweenAppleand these
otherfinalassemblycontractors.
In the fifth scenario, we discuss the advantages of doing business in China and in
America. Nevertheless, we only focused on the most relevant. With more time and
resourceswemay analyse other advantages of both countries, for instance theAmerican
regulations.
Finally, in the framework of this thesis, we developed six scenarios regarding the
futureevolutionsofthealliancebetweenAppleandFoxconn.Asexplainedinthebeginning
ofthispaper,wechosetodiscussthesescenariosforspecificreasons.However,withmore
timeandresources,wecoulddevelopotherscenariosthataresubtlerandthatmayrequire
moreinvestigationtogatherdata.
For instance, itmaybe interesting to look at the evolutionof intellectual property
rights, as well as other important laws. A change in Chinese, Taiwanese, or American
regulationsmayinfluencetherelationshipbetweenAppleandFoxconn.Wedidnotdevelop
thisaspectofthetopicbecause informationaboutregulatorychanges isdifficulttogather
and the number of existing regulations is huge, so analysis ofwhich regulationwould be
mostlikelytochange,andinwhichperiodoftime,wouldaddexcessivecomplexityforthe
confinesofthisthesis.
Moreover, over the last several years, low-cost smartphonemakers have become
more and more dominant, with rising market share worldwide. Therefore, we may also
developa scenario regarding thispossibility,andconsequences itmayhave forAppleand
Foxconn.Wedidnotdevelop sucha scenario in thispaperbecause it seems less likely to
85
happen.Indeed,Applehasmanyownership-specificadvantages,includingitspowerbrand,
thatmakethefirmveryspecial.WethinkthatAppleiscompetinginadifferentmarketthan
the low-cost smartphone markers. Ultimately, the latter have different competitive
advantagesthanAppleanddonotproposethesamekindofproductsasApple.Therefore,
at first glance, these new players in the smartphone market are not threats to Apple.
However, with more time, it may be interesting to develop and analyse this situation
thoroughlyandconsidertheconsequencesitmayhaveforApple’sbrand.
Overthecourseofthisthesis,wediscussedthepotentialcountrieswhereApplemay
shift the finalassemblyof itsproducts tobenefit fromdifferentadvantages.Wealsonote
potentialTaiwanese firms (PegatronandQuantaComputer) thatmaybecomea threat for
FoxconnandthatarecurrentlyinchargeofAppleproducts’assembly.Nevertheless,itmay
havebeeninterestingtoadditionallyinvestigatepotentialChinesefirmsthatmaybecomea
threat to Foxconn. At themoment, none of the final assembly contractors have Chinese
nationality; the majority are Taiwanese. Therefore, we may wonder whether potential
Chinese firmsmayeventually startassemblingAppleproducts, andeven replaceFoxconn.
WedidnotdevelopthisscenariobecauseinformationaboutpotentialChinesefirmthatmay
assembleAppleproducts isnoteasytofindandrequiresthoroughanalysis.Therefore,we
preferred not develop it, rather than discussing it quickly and without enough tangible
information.
87
7.Conclusion
Inthefirstpartofthispaper,weusedtheOLIframeworkinordertounderstandthe
reasonsbehindthealliancebetweenAppleandFoxconn.WeconcludethatAppleisaspecial
companythatcandifferentiateitselffromthecrowd—indeed,theyhavespecificownership
advantages. Then, we also investigated the reasons why they decided to make the final
assemblyoftheirproductsinChinaratherthanelsewhere.Chinaisaparticularlyattractive
country in which to do business. Indeed, the country possessesmany particularities that
ultimately transformed the country into ‘the factory of theworld’. Finally,we discovered
thatAppledecidedtooutsource the finalassemblyof itsproducts rather thanmakingFDI
becausethetransactioncostswerenottoohigh,andFoxconnwasacrediblefirm.
Inthesecondpartofthispaper,wedevelopsixscenariosaboutpossibleevolutions
ofthealliancebetweenFoxconnandApple.Toconcludethisthesis,wereturntothemost
likelyevolutions.
Regarding the first scenario, the most likely evolution is that Apple will continue
expandingitsmanufacturingnetwork.Indeed,themultinationalalreadystartedoutsourcing
final assembly to new firms like Pegatron, Quanta Computer, and so forth. Following
scandalsaboutworkingconditions,andtheadventofcustomerswhocaremoreandmore
abouthumanrightsandrisingsalaries,weexpectthisevolutiontobethemostrelevantand
themostlikelytohappen.ThesituationwhereApplejustceasestoworkwithFoxconnisless
logicalforthemomentbecauseontheonehand,wagesrepresentaverysmallpartofApple
productstotalvalue,andontheotherhand,Foxconnundertookdifferentmeasurestofight
scandalsandrisingsalaries.Moreover,Appleseemstooutsourcethefinalassemblyofthe
futureiPhone7toFoxconnwhatensuresashort-termrelationshipwiththelatter.
ThesecondscenariooutlinedthreemajorChinesechanges,(1)therisingsalaries,(2)
thedecreaseinavailableworkforceand(3)therapidexpansionoftheChinesemiddleclass.
88
Twoevolutionsseemthemostlikelytohappen.First,asinthescenariocitedbefore,Apple
will likely continue expanding its network and finding new collaborators to work with in
order todiversify its risksand toavoid risingwages. Second,Applewill certainly continue
shiftingpartoffinalassemblyelsewherethanChina.Wediscussedfourpotentialcountries,
Indonesia, India, Vietnam and Brazil. Even if they all have specifics advantages and
drawbacks, we want to highlight the attractiveness of India. This country offers small
salaries,ahugepoolofavailableworkers,andarisingmiddleclass.Wemaythereforeone
dayexpectpartApplefinalassemblyfacilitiestobeshiftedthere.
Moreover,wemayexpectpartoftheproductiontobesentbackinAmerica.Itisnot
inourpowertostatethata returnof jobswouldbecompulsory,butweshouldkeepthis
eventuality in mind because it is likely to happen. As we saw in the fifth and the sixth
scenario,evenif itmaycosta lotofmoneytoApple,theymaynothaveachoice. Indeed,
thefutureAmericanpresidentmaydecidetobringalljobsbackfromoverseas.Futuretaxes
on transportation and pollution may additionally make it too expensive to manufacture
Apple products abroad and to send them back to every consumer location. In such a
situation,partofthefinalassemblymaybeshiftedawayfromChina,andthealliancewith
Foxconn may therefore be impacted. Such a shift could also happen if new Chinese
environmentalregulationsbecometooimposing.
In the third scenario,we discuss the expansion of robots in Chinese coastal cities.
Foxconn isnoexceptiontotherule,andautomatedpartof itsactivities.Nevertheless,we
conclude that this automation will not radically impact the relation between Apple and
Foxconn.On the contrary, automationwill reinforce thealliancebetweenbothbecause it
willbeawayforFoxconntoensureacertainflexibilitythatwillhelpthemrespondtothe
needsanddesiresofApple,aswellasfightingagainstrisingsalariesanddecliningavailability
ofworkers.
The fourth scenario supports our vision that Apple may not totally end its
collaborationwithFoxconn—atleast intheshortterm.Indeed,besidesthegrowinguseof
robotswhich isbeneficial for theAmericanmultinational, theChinesemarket isbecoming
more andmore attractive for Apple. Chinawill likely soon become the largest of Apple’s
89
markets.Therefore,itwillalsobebeneficialforthefirmtocontinueworkingwithFoxconnin
ordertostayclosetothispromisingmarket.Bykeepingmanufacturinginalargeconsumer
market,theywillavoidsignificanttransportationcosts,logisticcosts,taxes,andsoforth.
Insum,intheshorttermwethinktherelationshipbetweenAppleandFoxconnwill
persistbutwilldecreaseacrossyears. Indeed,webelieveAppletocontinuediversifyingits
finalassemblycontractornetworkbystrengthening itsrelationwith itsotherpartnersand
by finding new contractors. We especially think that these partners will more and more
possessplantselsewherethaninChina.Therefore,thealliancebetweenAppleandFoxconn
willnotbebrokenyetbutacrossyearsthisrelationshipwilldiminishandAppleproductfinal
assemblywillbemoreanmoredoneabroad.Moreprecisely,weexpectAppleproductsto
beproducedindifferentcountriesdependingonthemarketwheretheywillbesold.Infact,
tax on transportation and pollution and the transition phase in Chinawill gradually push
Appletochangeitssupplychain.
91
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9.Annexes
Annex1:Apple’sfinalassemblyfacilities
Finalassemblyfacilities
Location
Products
AppleInc. Ireland MacBYDCompany China AccessoriesCompalElectronicsInc. China iPadFlextronics USA MacFoxconn China iPhone,iPodFoxconn China Mac,iPad,AccessoriesFoxconn China iPadFoxconn China AccessoriesFoxconn China iPhoneFoxconn China iPhoneFoxconn Brazil iPhone,iPadInvenecAppliancesCorporation
China iPod
PegatronCorporation China iPhonePegatronCorporation China iPhone,iPadQuantaComputerInc. China Mac,WatchQuantaComputerInc. China iPode,WatchQuantaComputerInc. USA MacWistronCorporation China iPhone
Source:Apple(2016,c)