“Build the Nest, the Birds Will Come:” Apple, Foxconn and China

 

It is an understatement to call a smartphone “a handheld device.” They pack the power of modern computing in a tiny case that fits your palm (even though you would need a hand the size of a racquet to hold the later models). Apple’s iPhone is the unsurpassed leader and pioneer in both design and quality, so much so that technology writer Rick Jaroslowski once wondered about those who chose smartphones of other brands “for whatever reason.”

That reason is probably price. Other smartphones are cheaper. Yet the iPhone is a huge commercial and marketing success. An in-depth report in The New York Times explores the reasons behind it.

A 32-gigabyte iPhone 7 costs approximately $400 to produce. Its retail price in the United States is $649. Thus, the paper reports, “Apple manages to earn 90 percent of the profits in the smartphone industry worldwide, even though it accounts for only 12 percent of the sales, according to Strategy Analytics, a research firm.”

It is a brilliant coup. Apple thus attains profit margins consistent with a monopoly without, even by far, a stranglehold on the market.

Foxconn, the company that makes half the iPhones shipped globally to the specifications set by Apple, is a key that explains it. Its ambitious founder, Taiwanese businessman Terry Gou, built up this gigantic conglomerate from very humble origins in Taipei by dint of technical perfectionism and a knack for bonding with influential industry and political leaders.

Gou’s strong relations with Chinese officials allowed him to build a complex that employs 400,000 people, who work, live and, not seldom, die tragically (suicides there had reached alarming rates, something The New York Times story fails to mention) at the Foxconn factory-city in Zhengzhou, a hard-hit region in central China. Many of them earn $1.90 an hour.

At Foxconn, this army of proletarians build iPhones at the rate of 350 units per minute. That comes to more than half a million per day. Those scales are unusual even for the most successful private companies. Only governments normally can muster this kind of power.

And indeed, it is so. The whole operation, and the margins, would be challenging, if not impossible, without an extremely generous package of incentives and tax breaks by China’s Communist rulers. The local government of Zhengzhou ticked “all the right boxes,” as one consultant put it, to lure Foxconn. In the words of Li Ziqiang, a Zhengzhou official, “There’s an old saying in China: ‘If you build the nest, the birds will come.’ And now, they’re coming.”

The deal involves what China calls “bonded zones,” areas that Chinese law deems foreign soil only for customs and taxing purposes. Thus, a “made in China” iPhone is sold to Chinese consumers as an imported product, and they pay about $100 dollars more for it than they would in the United States. All this is done by electronic transactions that label the device an export as soon as it leaves the Foxconn factory and an import when its loaded into a truck heading to Shanghai, Apple’s distribution hub in China. Those trucks, with their $27 million merchandise, are escorted by armed protection. The rest go straight to the airport, into a Boeing 747, a Jumbo that will fly the cargo – at a great cost-effective rate – to Anchorage, Alaska.

The dormitory buildings, the city, the roads, the taxes, and the modern airport at Zhengzhou were all built at Chinese tax-payers expense, who are footing the incentive bill for Foxconn and Apple. What a wonderful example of the benefits of cooperation between capitalist companies and communist regimes. No wonder Mao doesn’t look amused on the large portrait that presides over Tiananmen Square in Beijing.

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