Why the U.S. Fell Behind In Phone Manufacturing
Made in China, it's a common phrase we see on everything from clothes to electronics China controls the market and while that's today's reality it has not always been the case the United States is to be a global leader in manufacturing but in 2010 China passed the U.S a manufacturing output and has seen massive growth ever since going from 3.5 in 1990 to 30.5 percent in 2021 with the US now ranking behind China at 16.8 percent of global manufacturing output however in light of supply chain issues highlighted by the covid-19 pandemic a push to bring manufacturing home to America returned stamping products made in America made in America made in the USA revitalization of American manufacturing while some Industries like the semiconductor industry and the battery Market are scrambling to build new factories across the U.S tech Giants are not making.
the same effort to do that CNBC wanted to find out why Tech Giants aren't making smartphones in America we visited one company which is manufacturing a phone in the U.S to explore what it would take for more phones to be made in the states foreign the history of manufacturing technology in the U.S dates back decades way before smartphones even existed the whole concept of manufacturing in the U.S was very strong through about the mid-1960s we fundamentally gave manufacturing away in the 60s and 70s and in that time frame Japan expanded China expanded a lot of the other Asian countries expanded today the supply chain for smartphone manufacturing lives outside of the U.S and big tech companies are heavily involved apple and alphabet hire and send thousands of employees abroad to oversee manufacturing prior to covet.
it was very common to send Engineers like myself maybe 10 20 40 engineers at a time to the factory to support prototyping builds to do that learning and finding and fixing of issues and be in the right place at the right time in fact in 2019 Apple was United airline's biggest customer buying 50 business class seats from San Francisco to Shanghai daily accounting for 150 million dollars in annual revenue for United this is one reason Anna Katrina said let's keep founded instrumental the startup aims to reduce waste in the manufacturing process by making it easier to oversee production remotely.
I started instrumental with my co-founder Sam because we felt like data provided an opportunity to be leveraged to solve these problems much faster and maybe I wouldn't have to as an engineer go to China every several weeks for many weeks at a time to find these issues and try to be in the right place at the right time as new technologies Like Instrumental emerge to make it easier to manufacture abroad there isn't much incentive for companies to move factories to America Apple has moved some iPhone production to India amidst coveted lockdowns in China and Rising tensions between Washington and Beijing one estimate predicts one out of four iPhones will be made in India by 2025.
so why not move some production to the us as well back in 2012 Apple CEO Tim Cook made this point the Consumer Electronics and so it's not a matter of bringing it back it's a matter of starting it here then in 2017 he followed up telling Fortune it's an issue of Highly skilled labor there's a confusion about China that uh and let me at least give you my opinion the the popular conception is that companies come to China because of low labor costs I'm not sure what part of China they go to but the truth is China stopped being the low labor cost country many years ago and that is not the reason to come to China from a supply point of view the reason is because of the skill and the the quantity of skill in one location and the type of skill.
It is Well if a population of 1.4 billion China does have the most undergrads getting science and engineering degrees globally but in reality there's still a difference in the class of Labor the U.S federal minimum wage is 7.25 and while China has no set national minimum wage in the city of Zhengzhou where Foxconn's largest iPhone plan is located the hourly minimum wage is 19.61 or less than three dollars we don't know exactly how much the factory workers are making but in the early days they had a wage that was much better than they were making out in the fields now as the demand for their products and their talent has because they've gotten more experience.
their wages have gone up even more and many of the workers who are in the factories are moving into what we would call their version of what we would call middle class now Falcon did not respond to a request for a comment and apple did not provide a comment on iPhone worker wages either I would say that there is still a cost of Labor concern for a building here in the U.S but I do agree with what Tim Cook is saying that there is also an expertise that makes China very attractive there is a lot of skill and a lot of local supply chain for where all the parts are going to come from to build such a complex product that makes it a very appealing place to build.
Apple said in a statement to CNBC that all of our products are designed and engineered here and they all include components manufactured in America for example iPhone glass is made in Kentucky and lasers that enable face ID are built in the US too it also said just last year we announced 430 billion dollars in new Investments across the country including our work with more than 9 000 suppliers across all 50 states.
in 2012 Google purchased Motorola for 12.5 billion dollars a year later it opened the US's only smartphone manufacturing plant in Fort Worth Texas with plans to make the Moto X the factory was part of Motorola's plan to build an American-made low-cost smartphone but about a year after it opened the plant shut down citing High domestic operating costs and low consumer demand Google sold Motorola to Lenovo for a multi-billion dollar loss some experts say Motorola's U.S failure shows that the cost of Labor and the lack of skill in the U.S is why.
Manufacturing in the country is not cost-effective Alan Young a former Falcon executive and author of the book flying eagle brought up this point during a visit to the White House in 2017 with then chairman of Foxconn Terry go Foxconn is Apple's largest supplier and the world's largest electronic manufacturer chairman go Terry made it very clear uh the core skills and the capabilities of making phones manufacturing Electronics have moved to Asia and for it to come back to U.S.
it would be difficult though not impossible but it would take a while it won't be easy and that's a reality however purism is one American company that has been able to do what many are gallingly impossible so this is actually where we're going to do a manufacturing for the Librium 5 USA we're going to do the printed circuit board to printed circuit board assembly we started the company in 2014 doing Manufacturing in the United States of America purism's a hardware manufacturer as well as software so we do laptops mini PCS and also a phone that run the same operating system that we authored perms offers a range of consumer electronics including the Librium 5 USA phone which costs two thousand dollars.
it's the only smartphone in the world with the made in USA stamp the FTC actually has a very strict definition of what made in USA is or assembled in the USA the Librium 5 USA is manufactured in the United States of America we actually have a label and a sticker we put on their made in USA Electronics so that we're actually showcasing that we are indeed qualified by the FTC definition of made in USA for a full phone the foot here and its Carlsbad California Factory peers and sources all components of the Librium 5 USA phone domestically with the exception of the chassis and the Wi-Fi card overall what we're looking at is the all the electronics are manufactured at our facility the chassis the specific components are called integrated circuits.
those can come from outside of the country as a one example our nxp CPU is manufactured in South Korea and then we import that specific chip and then we use that on our board that we do all the manufacturing but the company also sells the Librium 5 phone which is mass produced in China for thirteen hundred dollars it's 700 cheaper than the American-made model Weaver says he hopes to expand the line of products the company makes in the US for us obviously the US is the one we're expanding most and it's going to even spill over to doing other products in the United States as well like our laptop and mini PCS and potentially even servers.
there is also a potential for us to even get into chip manufacturing Weaver said the company is profitable but we asked how this is possible with the higher labor costs for the us-made model actual physical labor costs are clearly more than in China we're able to sell at a price point where we don't have to pram our costs so far down so that allows us to pay people really well and take care of the employees and have secure supply chain and everything else purism initially started through a crowd funding initiative now the company says it sold tens of thousands of phones overall we're a multi-million dollar company we've seen growth triple digits a year over year since we started our margins are healthy which allows us to continue to pay people really well and also allows us to scale up the business.
Piers have said almost one third of its Revenue comes from the American-made Libra 5 USA model but Weaver said labor hasn't been an issue for the company the key piece that you're looking at is there's actually not a lot of physical labor that goes into producing a phone it's more mechanical labor the actual machines and so Machine versus machine it's equal to do U.S manufacturing on the same machine in the U.S versus a machine in China so in the end you're looking at a a number of U.S jobs that could be you know that assembly line operator final fulfillment but Machine versus machine is still equal but do Americans want these jobs anytime we post a job at all we're goanna we get 100 applicants so from line operators to assembly workers right we're talking well over uh ten dollars over minimum wage for a lot of those positions.
however not everyone agrees this business model will be successful in the states bijou Chen a professor at the USC Marshall School of Business says these jobs are not coming back I don't see in the U.S that's the rose rows of workers you know sitting in front of the desk assemble the small forms I don't see that happen these type of jobs are not coming back to the U.S like these I'm talking about the labor intensive manufacturing job there's actually lots of manufacturing jobs that are being made and here in the US they're just not assembly jobs they are data analysis jobs engineering jobs.
I definitely think there are compelling cases where you can build highly complex products here in the US it's usually at much lower volumes it's not a million a day smaller companies are often deciding to build locally so what will it take to bring foam manufacturing to the US not only do we need to rebuild the human infrastructure you also need to components to be made nearby somewhere in the ecosystem needs to be there America doesn't have this ecosystem here right because we have not been manufacturing forms for years right and so the supply chain doesn't exist here.
in the U.S they they are in Asia right in China in Vietnam other countries so to rebuild those things or take time and take a cost very expensive it doesn't make any sense but in light of recent support from the U.S government to transform the American manufacturing ecosystem the U.S is taking steps to assure some manufacturing jobs in August 2022 President Biden signed the chips and science act the bipartisan Bill includes 52 billion to U.S based companies to produce semiconductors with 39 billion in manufacturing incentives America finally is making policy at the federal state and local level to level the playing field beforehand it was just difficult because regulations and red tapes were plenty taxes were high and cost was very high.
I would say it would be very challenging to build a complex electronic device like a phone here in the US it's absolutely can be profitable to build products here in the U.S but it's got to be the right product and have the right Technology support around that product in 2017 the White House announced fox Conn's plan to open a massive LCD screen manufacturing facility in Wisconsin I let the project flying eagle which was slated to invest up to 10 billion dollars in creating 13 000 jobs in the state of Wisconsin but Foxconn has massively scaled back on that promise in 2021 the company anticipated creating less than 1500 of the initial 13 000 jobs promised and cut its Investments to 672 million Foxconn bid off more than they could chew at that particular stage of their history dealing with everything from the regulatory side the environmental side.
the actual buildings of the the facilities and then even possibly getting the right kind of people needed to do it that was just not reality in the short time frame they promised two key elements that actually affect the project were the market condition and also the investment climate in our case for LCD manufacturing the prices drop and got cut by half and if you ask manufacturers would they still build a project or build a factory if the end products now sold 50 off I think they have to pause and really take a long hard look for strategically to do that but if the world's largest electronic manufacturer could succeed in Wisconsin with LCD screens and if Motorola failed at making phones in the country after only a year it seems highly unlikely that we will see any other attempts to make smartphones in the US anytime soon.
I can't comment on whether Apple asked foghorn to manufacture iPhone in the United States but I'm sure when the clients of fox gone asked the company to consider manufacturing a particular product in the United States the company will be ready as to why it's necessary to build phones in the U.S purism's president Kyle Rankin says it's largely due to security concerns and data protection at purism we think data is uranium so we treat it like a radioactive substance where we collect as little of it as humanly possible manufacturing things in the USA avoids risk from some other government or overseas or something tampering with it every extra link you add to the supply chain is an extra opportunity for someone to inject themselves in that supply chain and tamper with things.
if China continues to be a security threat more and more of the U.S companies and the international companies are going to move manufacturing outside of China and we're already seeing that happen but Professor Chen says it's really not necessary we eat strawberry we eat tomatoes but we don't grow tomatoes we don't grow strawberries it's the same thing we can consume iPhone for any smartphone without manufacturing the smartphone these phones can be manufactured in Vietnam in China in different other countries regardless of where it aspens the need for manufacturing phones is only going to grow other companies.
they continue to fall back on it's just too hard to do in the United States as almost a talking point as opposed to actually looking into how it would be able to get done it can clearly get done and there's a huge Market opportunity and it's just cheaper for those companies to Offshore those jobs and continue to import from other countries there is a reason why those companies manufacturing product in China by combining the labor costs and the supply chain and productivity China is still the most efficient place to produce whether a phone or TV or computer should be made in the U.S.
it's going to be up to the companies meaning the supply chain including Fox one and the clients to decide but ultimately is the end use customers who is going to decide and the customer is going to decide when go to the shop or go online and make the purchase and make the decision with the credit cards.
