Onshored, Outsourced, Overhyped

Apple CEO Tim Cook recently discussed plans to bring some Mac manufacturing to the US in 2013. Much of the coverage has focused on the labor aspects of this move – what it says about wages for American workers versus Chinese workers.

While labor costs are surely one part of any decision to move manufacturing, I haven’t seen enough exploration of other aspects, particularly as they relate to the specifics of Mac manufacture.

Tim Cook has repeatedly stated that labor costs are a relatively minor part of the decision to locate in China. Despite being an avowed Apple fanboi, the lefty in in me knows to take anything a CEO says about labor with a grain of salt. If labor in China was double the cost of labor in California, you can be certain that any other logistical issues would be dealt with. However, it’s clear that there are many more issues at play, and the importance of labor cost disparities will be increasingly diminished over time.

While the people sitting on the assembly lines in Foxconn factories doing the day-to-day manufacturing represent relatively unskilled labor, Apple has pointed out in the past that their manufacturing operations in China rely on a huge number of on the ground engineers. These are the sorts of people that develop the manufacturing process, figure out quality control, and make sure that Apple can build tens of millions of iPhones and iPads each quarter.

So, what’s changed? Has the US suddenly trained the number of engineers necessary to run these types of operations domestically? Has some great leap in manufacturing changed that dynamic? I think not. So what other reasons would Apple have to move some manufacturing back to the US, and how could it be feasible?

First, it’s important to note that Tim Cook explicitly said “an existing Mac product line” will be the target of the on-shoring move. (It’s worth noting, though not relevant here, that Mr. Cook also made it clear that Apple won’t be running this operation directly, but will be funding manufacturing partners, as they have in China.) The iOS devices ship in such massive scale that it seems unlikely that the end-to-end manufacturing capabilities (everything from making the cardboard boxes to the earbuds) will be available outside China anytime soon. So, which Mac makes the most sense to move back to the US?

Proudly trading my fanboi hat for my lefty hat, I’m going to operate on the assumption that even Apple doesn’t make decisions like this for altruistic reasons. There’s a business case that’s been made, and that’s what is being acted on. With that in mind, we can review the broad categories of existing product lines and make some determinations.

First, let’s take the laptop lines. To my mind, the laptop lines, and in the particular the Air line, have more in common with the iPad and iPhone lines than with the desktop Mac lines. They’re manufactured in similar ways, with relatively few customization options, are relatively compact, and ship in huge numbers. To me, if the plan were to move Macbook production to the US, we would also hear about similar plans for the iOS device line – it would indicate a dramatic shift in the manufacturing processes in use.

The Mac Mini is, in many ways, a screenless Macbook. It’s a candidate, but given the low profile of the device it seems unlikely.

We’ve already seen indications that some iMacs are being assembled in the US. If you’re not familiar with the differences between Assembled in the USA and Made in the USA, it’s worth taking a moment to read up. While there’s some gray-area here, the assembly of some iMacs in the US seems unlikely to be the end goal. The central feature of the iMac – its gorgeous, large LCD – is unlikely to be made in the US anytime soon. LCD fabrication facilities are long term investments, and it appears that Apple has recently made large investments in LCD manufacturing facilities overseas. The late 2012 iMacs also rely on specialized welding technology for the manufacture of the enclosure. Because this process requires substantial capital investment, which has clearly taken place in China, it’s safe to guess that they won’t be scrapping that investment in 2013 for a domestic move.

That leaves us with the near-dead, oft-forgotten Mac Pro line. We know that something Mac Pro-ish is coming in 2013. Why does the Mac Pro make sense to manufacture domestically?

First, it’s a low-volume product. It’s likely to stay a low-volume product. The market for trucks is unlikely to change substantially in the near future.

The Mac Pro is the only “traditionally” manufactured product in the Apple line. Because of the larger enclosure, the build process is closer to the assembly of a Dell or HP tower than to the assembly of a Mac Mini. This dramatically reduces the scale of the engineering problems that need to be solved for volume manufacture. Components are mounted in an enclosure and connected with cables. The Mac Pro also uses far more “off the shelf” components than any other Apple product. CPUs come from Intel (made, largely, in the US). Graphics cards come from either AMD or nVidia. Commercial spinning disk drives, standard-sized RAM, and full-size power supplies round out the product. While we can’t guess what the future Mac Pro will look like, it seems unlikely to deviate all that radically. The Mac Pro doesn’t include a screen. The components it does use from overseas are compact and easy to transport, and are manufactured by existing, known suppliers.

Domestic manufacturing of the Mac Pro also has a variety of logistical benefits. The small volume means ramping an all-new manufacturing operation from zero is reasonably achievable. The reduced seasonal variability of the Mac Pro line means the more rigid American labor market is less of an issue.

The Mac Pro is by far the bulkiest product in the Apple line. Approximately 540 Mac Pros can fit in a standard 40 foot shipping container. Shipping costs have been relatively volatile in 2012, due to global economic uncertainties and carryover capacity oversupply from the 2008 financial collapse. At the moment, the cost to move a 40 foot container from Shanghai to the West Coast is approximately $2000. While $4 per unit represents a relatively small cost in overall purchase price terms, this represents a large fixed cost on this product line as compared to other Apple products. For comparison, the same shipping container can hold more than 120,000 iPhone 5 boxes, representing just one penny per iPhone.

The Mac Pro is also (I believe) the product most likely to be custom-configured. Buyers have far more customization options, from drives to ram to more esoteric options like fibre channel cards. Customized products represent inventory risks. By moving manufacturing to the United States, Apple can likely reduce inventory costs associated with caching configurations. They could, conceivably, move to a just-in-time approach, wherein your specific Mac Pro doesn’t start down the line until the purchase has occurred, without having to rely on air freight from Asia.

There are a variety of intangible benefits as well – for example, having product manufacture in the US may make it easier to keep manufacturing decisions a secret.

If this is accurate, and we see a domestically manufactured Mac Pro in 2013, I think it’s likely we’ll see a gradual shift in other Mac products, beginning with the iMac and ending with (least likely) the laptops. Given the current landscape, it continues to be exceedingly unlikely that your iPhone will have “Made in the USA” stamped on it any time soon.

So, does the shift of some manufacturing to the US represent a change in heart at Apple? Is it suddenly responding to those who say they’d happily pay more for a domestically manufactured product? Is it about creating jobs in the US? I suspect not. It’s business.

8 thoughts on “Onshored, Outsourced, Overhyped

  1. T-Shirts. It’s the clothing. Plenty of US clothing manufacturers ramping up right now. They are going to have organic cotton t-shirts with an Apple on the front made in the USA. For all of the lefty fanbois to feel even better about their Apple fandom (religion?)

  2. Mac Pros are also a system that has more build to order customization options that others in the Apple lineup. Manufacturing them in the USA means less time from BTO order to delivery.

    • Agreed – one item I didn’t get into, because I don’t think it’s fully understood, is how BTO works on Mac Pros. My understanding/inference is that they manufacture a set of base configurations (CPU counts and speed), ship them over here and warehouse them, then have a second set of hands in the US to install ram/drives/etc.

      Again, not certain that’s how it works, just what I’ve heard – so, they’d save a whole round of labor (potentially) by doing the build here.

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