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Analyzing the odds of an Apple manufacturing move

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Analyzing the odds of an Apple manufacturing move

In 1984, Apple Inc. co-founder Steve Jobs proudly noted that the company's Mac computers were made in America.

But two decades later, as Apple rose to become the world's most valuable company, largely on the strength of sales from iPods and iPhones manufactured in China, the famously prickly CEO struck a different tone.

"Those jobs aren't coming back," he told President Barack Obama at a dinner in 2011.

President-elect Donald Trump has pointed to Apple as one of the companies that he would like to see shift more production to the U.S., reportedly speaking to CEO Tim Cook about government incentives that might entice the company to do so. Yet Apple executives have said little publicly about the company's plans, and some supply chain experts say such a big change to Apple's extensive manufacturing and supply infrastructure seems unlikely.

"I think it is a pipe dream," said Seamus Grimes, an emeritus professor of geography at the National University of Ireland Galway who has studied Apple's supply chain. Grimes said an Apple executive in Shanghai told him last spring that it was "very unlikely" that Apple would shift its vast network of suppliers and assembly plants away from China.

Grimes also noted that Apple's global suppliers, particularly the Taiwanese manufacturer Hon Hai Precision Industry Co. Ltd., known as Foxconn Technology, play an integral role in how the company's iPhones and iPads are made.

Foxconn "employ[s] more than a million people and they respond very rapidly to the needs of companies like Apple," he said. "There's no way that you can employ 50,000 engineers in the United States. They're just not available."

Apple's "free ride" in China hard to beat

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In a 2016 paper, Grimes and Yutao Sun, a professor of management and economics at Dailan University of Technology in China, analyzed Apple's 2015 supplier report. They found that while many suppliers of core components in products such as the iPhone were located outside of China, much of the final assembly took place in the country.

The company listed 198 suppliers and 759 subsidiaries, with 44.2% located in China. Of the subsidiaries, 28.5% were located in the U.S., and 6.5% were in Europe, the researchers found. When it came to assembling the products, however, 69.3% of the companies involved were located in China.

In addition to the speculation about the prospect of Apple moving manufacturing to the U.S., there have been reports indicating that the company may be turning more to India.

India represents a largely untapped market for phone makers, said Vivek Wadhwa, a professor at Carnegie Mellon University's Silicon Valley campus, estimating that a billion new phones could be sold across the country over the next five years. However, the price of Apple's phones couple prove a hurdle for many consumers in the country, and Apple has not been able to get the Indian government to relax a requirement for foreign companies that want to open retail stores to source 30% of their materials domestically.

Wadhwa said India may take a tougher approach than China to negotiations with Apple.

"I think the Indian government will end up making some concessions, but they're not going to get the free ride they had in China," he said in an interview. "China bent over backwards and gave them all sorts of breaks; they threw billions at it so they could bring Apple there."

The domestic sourcing requirements are a key part of India Prime Minister Narendra Modi's "Make in India" initiative. Other technology firms, such as the Chinese phone maker Xiaomi, have indicated that they will follow India's domestic sourcing requirement without applying for an exemption.

"Apple doesn't understand the Indian market, that people want quality products but they don't want to spend a lot of money on them," Wadhwa said.

Robotic workers' cost-saving appeal

In an effort to move manufacturing while keeping costs down, Apple could employ robotic workers to perform some of the phone assembly. That approach would work equally well in the disparate U.S. and Indian markets, Wadhwa said.

"Until about a year ago, it wasn't practical to bring manufacturing back, because the robots of three or four years ago weren't advanced enough to do circuit board assembly. If you had brought manufacturing back [to the U.S. then], you would have to hire tens of thousands of people, and where can you go and hire tens of thousands of people in America? You couldn't get people to work two shifts like in China, so it was not possible or practical," he said.

"Manufacturing is really assembly now ... all they're really doing is slapping the products together," Wadhwa said. "[Robots] work equally hard; they do the same exact thing."

A move to robot workers would also be a nod to Apple's past.

NeXT Computer, which Apple later purchased, touted its innovations in automation at a factory in Fremont, Calif., in the late 1980s. "I am as proud of the factory as I am of the computer," Jobs, who was running NeXT at the time after being forced out at Apple, told Fortune Magazine in 1990.

In November 2016, Trump said the new automation technologies could be part of his manufacturing plan, telling The New York Times "we'll make the robots too." He added that Apple CEO Cook told Trump he "understand[s]" the president-elect's goal of opening a "big plant … or many big plants" in the United States.

Cook, however, has not spoken of those goals publicly. In a December 2015 "60 Minutes" interview, Cook said the primary reason for manufacturing in China was not the country's low wages but "skill."

"You can take every tool and die maker in the United States and probably put them in a room that we're currently sitting in," Cook told interviewer Charlie Rose. "In China, you would have to have multiple football fields."

Overall, Apple's modern U.S. presence remains slim. While it does have U.S. suppliers for the iPhone, such as glassmaker Corning, only its Mac Pro computers are manufactured domestically, at a plant in Austin, Texas. The computers represented 11% of Apple's net sales in 2016, the company said in its fiscal fourth-quarter financial report. By contrast, the iPhone represented 63% of total sales.

As Trump comes into office, Grimes said the new U.S. president may have to reconcile his plans with the complex reality of the global supply chain.

"The United States remains a very important market, but where the growth is happening is in emerging countries," he said. "There are many reasons not to try and shift the whole evolution of the value chain that has been developing over 20 or 30 years back to square one."