[StBernard] How U.S. Lost Out on iPhone Work

[Westley Annis]

How U.S. Lost Out on iPhone Work
By CHARLES DUHIGG and KEITH BRADSHER
When Barack Obama joined Silicon Valley’s top luminaries for dinner in
California last February, each guest was asked to come with a question for
the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an
inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today,
few are. Almost all of the 70 million iPhones, 30 million iPads and 59
million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said,
according to another dinner guest.

The president’s question touched upon a central conviction at Apple. It
isn’t just that workers are cheaper abroad. Rather, Apple’s executives
believe the vast scale of overseas factories as well as the flexibility,
diligence and industrial skills of foreign workers have so outpaced their
American counterparts that “Made in the U.S.A.” is no longer a viable option
for most Apple products.

Apple has become one of the best-known, most admired and most imitated
companies on earth, in part through an unrelenting mastery of global
operations. Last year, it earned over $400,000 in profit per employee, more
than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Mr. Obama as well as economists and policy makers is
that Apple — and many of its high-technology peers — are not nearly as avid
in creating American jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a
small fraction of the over 400,000 American workers at General Motors in the
1950s, or the hundreds of thousands at General Electric in the 1980s. Many
more people work for Apple’s contractors: an additional 700,000 people
engineer, build and assemble iPads, iPhones and Apple’s other products. But
almost none of them work in the United States. Instead, they work for
foreign companies in Asia, Europe and elsewhere, at factories that almost
all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the
U.S. now,” said Jared Bernstein, who until last year was an economic adviser
to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Apple executives say that going overseas, at this point, is their only
option. One former executive described how the company relied upon a Chinese
factory to revamp iPhone manufacturing just weeks before the device was due
on shelves. Apple had redesigned the iPhone’s screen at the last minute,
forcing an assembly line overhaul. New screens began arriving at the plant
near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories,
according to the executive. Each employee was given a biscuit and a cup of
tea, guided to a workstation and within half an hour started a 12-hour shift
fitting glass screens into beveled frames. Within 96 hours, the plant was
producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no
American plant that can match that.”

Similar stories could be told about almost any electronics company — and
outsourcing has also become common in hundreds of industries, including
accounting, legal services, banking, auto manufacturing and pharmaceuticals.

But while Apple is far from alone, it offers a window into why the success
of some prominent companies has not translated into large numbers of
domestic jobs. What’s more, the company’s decisions pose broader questions
about what corporate America owes Americans as the global and national
economies are increasingly intertwined.

“Companies once felt an obligation to support American workers, even when it
wasn’t the best financial choice,” said Betsey Stevenson, the chief
economist at the Labor Department until last September. “That’s disappeared.
Profits and efficiency have trumped generosity.”

Companies and other economists say that notion is naïve. Though Americans
are among the most educated workers in the world, the nation has stopped
training enough people in the mid-level skills that factories need,
executives say.

To thrive, companies argue they need to move work where it can generate
enough profits to keep paying for innovation. Doing otherwise risks losing
even more American jobs over time, as evidenced by the legions of once-proud
domestic manufacturers — including G.M. and others — that have shrunk as
nimble competitors have emerged.

Apple was provided with extensive summaries of The New York Times’s
reporting for this article, but the company, which has a reputation for
secrecy, declined to comment.

This article is based on interviews with more than three dozen current and
former Apple employees and contractors — many of whom requested anonymity to
protect their jobs — as well as economists, manufacturing experts,
international trade specialists, technology analysts, academic researchers,
employees at Apple’s suppliers, competitors and corporate partners, and
government officials.

Privately, Apple executives say the world is now such a changed place that
it is a mistake to measure a company’s contribution simply by tallying its
employees — though they note that Apple employs more workers in the United
States than ever before.

They say Apple’s success has benefited the economy by empowering
entrepreneurs and creating jobs at companies like cellular providers and
businesses shipping Apple products. And, ultimately, they say curing
unemployment is not their job.

“We sell iPhones in over a hundred countries,” a current Apple executive
said. “We don’t have an obligation to solve America’s problems. Our only
obligation is making the best product possible.”

‘I Want a Glass Screen’

In 2007, a little over a month before the iPhone was scheduled to appear in
stores, Mr. Jobs beckoned a handful of lieutenants into an office. For
weeks, he had been carrying a prototype of the device in his pocket.

Mr. Jobs angrily held up his iPhone, angling it so everyone could see the
dozens of tiny scratches marring its plastic screen, according to someone
who attended the meeting. He then pulled his keys from his jeans.

People will carry this phone in their pocket, he said. People also carry
their keys in their pocket. “I won’t sell a product that gets scratched,” he
said tensely. The only solution was using unscratchable glass instead. “I
want a glass screen, and I want it perfect in six weeks.”

After one executive left that meeting, he booked a flight to Shenzhen,
China. If Mr. Jobs wanted perfect, there was nowhere else to go.

For over two years, the company had been working on a project — code-named
Purple 2 — that presented the same questions at every turn: how do you
completely reimagine the cellphone? And how do you design it at the highest
quality — with an unscratchable screen, for instance — while also ensuring
that millions can be manufactured quickly and inexpensively enough to earn a
significant profit?

The answers, almost every time, were found outside the United States. Though
components differ between versions, all iPhones contain hundreds of parts,
an estimated 90 percent of which are manufactured abroad. Advanced
semiconductors have come from Germany and Taiwan, memory from Korea and
Japan, display panels and circuitry from Korea and Taiwan, chipsets from
Europe and rare metals from Africa and Asia. And all of it is put together
in China.

In its early days, Apple usually didn’t look beyond its own backyard for
manufacturing solutions. A few years after Apple began building the
Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine
that is made in America.” In 1990, while Mr. Jobs was running NeXT, which
was eventually bought by Apple, the executive told a reporter that “I’m as
proud of the factory as I am of the computer.” As late as 2002, top Apple
executives occasionally drove two hours northeast of their headquarters to
visit the company’s iMac plant in Elk Grove, Calif.

But by 2004, Apple had largely turned to foreign manufacturing. Guiding that
decision was Apple’s operations expert, Timothy D. Cook, who replaced Mr.
Jobs as chief executive last August, six weeks before Mr. Jobs’s death. Most
other American electronics companies had already gone abroad, and Apple,
which at the time was struggling, felt it had to grasp every advantage.

In part, Asia was attractive because the semiskilled workers there were
cheaper. But that wasn’t driving Apple. For technology companies, the cost
of labor is minimal compared with the expense of buying parts and managing
supply chains that bring together components and services from hundreds of
companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former
high-ranking Apple executive. Factories in Asia “can scale up and down
faster” and “Asian supply chains have surpassed what’s in the U.S.” The
result is that “we can’t compete at this point,” the executive said.

The impact of such advantages became obvious as soon as Mr. Jobs demanded
glass screens in 2007.

For years, cellphone makers had avoided using glass because it required
precision in cutting and grinding that was extremely difficult to achieve.
Apple had already selected an American company, Corning Inc., to manufacture
large panes of strengthened glass. But figuring out how to cut those panes
into millions of iPhone screens required finding an empty cutting plant,
hundreds of pieces of glass to use in experiments and an army of midlevel
engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already
constructing a new wing. “This is in case you give us the contract,” the
manager said, according to a former Apple executive. The Chinese government
had agreed to underwrite costs for numerous industries, and those subsidies
had trickled down to the glass-cutting factory. It had a warehouse filled
with glass samples available to Apple, free of charge. The owners made
engineers available at almost no cost. They had built on-site dormitories so
employees would be available 24 hours a day.

The Chinese plant got the job.

“The entire supply chain is in China now,” said another former high-ranking
Apple executive. “You need a thousand rubber gaskets? That’s the factory
next door. You need a million screws? That factory is a block away. You need
that screw made a little bit different? It will take three hours.”

In Foxconn City

An eight-hour drive from that glass factory is a complex, known informally
as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn
City was further evidence that China could deliver workers — and diligence —
that outpaced their American counterparts.

That’s because nothing like Foxconn City exists in the United States.

The facility has 230,000 employees, many working six days a week, often
spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work
force lives in company barracks and many workers earn less than $17 a day.
When one Apple executive arrived during a shift change, his car was stuck in
a river of employees streaming past. “The scale is unimaginable,” he said.

Foxconn employs nearly 300 guards to direct foot traffic so workers are not
crushed in doorway bottlenecks. The facility’s central kitchen cooks an
average of three tons of pork and 13 tons of rice a day. While factories are
spotless, the air inside nearby teahouses is hazy with the smoke and stench
of cigarettes.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and
in Mexico and Brazil, and it assembles an estimated 40 percent of the
world’s consumer electronics for customers like Amazon, Dell,
Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was
Apple’s worldwide supply demand manager until 2010, but declined to discuss
specifics of her work. “What U.S. plant can find 3,000 people overnight and
convince them to live in dorms?”

In mid-2007, after a month of experimentation, Apple’s engineers finally
perfected a method for cutting strengthened glass so it could be used in the
iPhone’s screen. The first truckloads of cut glass arrived at Foxconn City
in the dead of night, according to the former Apple executive. That’s when
managers woke thousands of workers, who crawled into their uniforms — white
and black shirts for men, red for women — and quickly lined up to assemble,
by hand, the phones. Within three months, Apple had sold one million
iPhones. Since then, Foxconn has assembled over 200 million more.

Foxconn, in statements, declined to speak about specific clients.

“Any worker recruited by our firm is covered by a clear contract outlining
terms and conditions and by Chinese government law that protects their
rights,” the company wrote. Foxconn “takes our responsibility to our
employees very seriously and we work hard to give our more than one million
employees a safe and positive environment.”

The company disputed some details of the former Apple executive’s account,
and wrote that a midnight shift, such as the one described, was impossible
“because we have strict regulations regarding the working hours of our
employees based on their designated shifts, and every employee has
computerized timecards that would bar them from working at any facility at a
time outside of their approved shift.” The company said that all shifts
began at either 7 a.m. or 7 p.m., and that employees receive at least 12
hours’ notice of any schedule changes.

Foxconn employees, in interviews, have challenged those assertions.

Another critical advantage for Apple was that China provided engineers at a
scale the United States could not match. Apple’s executives had estimated
that about 8,700 industrial engineers were needed to oversee and guide the
200,000 assembly-line workers eventually involved in manufacturing iPhones.
The company’s analysts had forecast it would take as long as nine months to
find that many qualified engineers in the United States.

In China, it took 15 days.

Companies like Apple “say the challenge in setting up U.S. plants is finding
a technical work force,” said Martin Schmidt, associate provost at the
Massachusetts Institute of Technology. In particular, companies say they
need engineers with more than high school, but not necessarily a bachelor’s
degree. Americans at that skill level are hard to find, executives contend.
“They’re good jobs, but the country doesn’t have enough to feed the demand,”
Mr. Schmidt said.

Some aspects of the iPhone are uniquely American. The device’s software, for
instance, and its innovative marketing campaigns were largely created in the
United States. Apple recently built a $500 million data center in North
Carolina. Crucial semiconductors inside the iPhone 4 and 4S are manufactured
in an Austin, Tex., factory by Samsung, of South Korea.

But even those facilities are not enormous sources of jobs. Apple’s North
Carolina center, for instance, has only 100 full-time employees. The Samsung
plant has an estimated 2,400 workers.

“If you scale up from selling one million phones to 30 million phones, you
don’t really need more programmers,” said Jean-Louis Gassée, who oversaw
product development and marketing for Apple until he left in 1990. “All
these new companies — Facebook, Google, Twitter — benefit from this. They
grow, but they don’t really need to hire much.”

It is hard to estimate how much more it would cost to build iPhones in the
United States. However, various academics and manufacturing analysts
estimate that because labor is such a small part of technology
manufacturing, paying American wages would add up to $65 to each iPhone’s
expense. Since Apple’s profits are often hundreds of dollars per phone,
building domestically, in theory, would still give the company a healthy
reward.

But such calculations are, in many respects, meaningless because building
the iPhone in the United States would demand much more than hiring Americans
— it would require transforming the national and global economies. Apple
executives believe there simply aren’t enough American workers with the
skills the company needs or factories with sufficient speed and flexibility.
Other companies that work with Apple, like Corning, also say they must go
abroad.

Manufacturing glass for the iPhone revived a Corning factory in Kentucky,
and today, much of the glass in iPhones is still made there. After the
iPhone became a success, Corning received a flood of orders from other
companies hoping to imitate Apple’s designs. Its strengthened glass sales
have grown to more than $700 million a year, and it has hired or continued
employing about 1,000 Americans to support the emerging market.

But as that market has expanded, the bulk of Corning’s strengthened glass
manufacturing has occurred at plants in Japan and Taiwan.

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws,
Corning’s vice chairman and chief financial officer. “We could make the
glass here, and then ship it by boat, but that takes 35 days. Or, we could
ship it by air, but that’s 10 times as expensive. So we build our glass
factories next door to assembly factories, and those are overseas.”

Corning was founded in America 161 years ago and its headquarters are still
in upstate New York. Theoretically, the company could manufacture all its
glass domestically. But it would “require a total overhaul in how the
industry is structured,” Mr. Flaws said. “The consumer electronics business
has become an Asian business. As an American, I worry about that, but
there’s nothing I can do to stop it. Asia has become what the U.S. was for
the last 40 years.”

Middle-Class Jobs Fade

The first time Eric Saragoza stepped into Apple’s manufacturing plant in Elk
Grove, Calif., he felt as if he were entering an engineering wonderland.

It was 1995, and the facility near Sacramento employed more than 1,500
workers. It was a kaleidoscope of robotic arms, conveyor belts ferrying
circuit boards and, eventually, candy-colored iMacs in various stages of
assembly. Mr. Saragoza, an engineer, quickly moved up the plant’s ranks and
joined an elite diagnostic team. His salary climbed to $50,000. He and his
wife had three children. They bought a home with a pool.

“It felt like, finally, school was paying off,” he said. “I knew the world
needed people who can build things.”

At the same time, however, the electronics industry was changing, and Apple
— with products that were declining in popularity — was struggling to remake
itself. One focus was improving manufacturing. A few years after Mr.
Saragoza started his job, his bosses explained how the California plant
stacked up against overseas factories: the cost, excluding the materials, of
building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it
was $6. In Taiwan, $4.85. Wages weren’t the major reason for the
disparities. Rather it was costs like inventory and how long it took workers
to finish a task.

“We were told we would have to do 12-hour days, and come in on Saturdays,”
Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

Modernization has always caused some kinds of jobs to change or disappear.
As the American economy transitioned from agriculture to manufacturing and
then to other industries, farmers became steelworkers, and then salesmen and
middle managers. These shifts have carried many economic benefits, and in
general, with each progression, even unskilled workers received better wages
and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed,
economists say. Midwage jobs started disappearing. Particularly among
Americans without college degrees, today’s new jobs are disproportionately
in service occupations — at restaurants or call centers, or as hospital
attendants or temporary workers — that offer fewer opportunities for
reaching the middle class.

Even Mr. Saragoza, with his college degree, was vulnerable to these trends.
First, some of Elk Grove’s routine tasks were sent overseas. Mr. Saragoza
didn’t mind. Then the robotics that made Apple a futuristic playground
allowed executives to replace workers with machines. Some diagnostic
engineering went to Singapore. Middle managers who oversaw the plant’s
inventory were laid off because, suddenly, a few people with Internet
connections were all that were needed.

Mr. Saragoza was too expensive for an unskilled position. He was also
insufficiently credentialed for upper management. He was called into a small
office in 2002 after a night shift, laid off and then escorted from the
plant. He taught high school for a while, and then tried a return to
technology. But Apple, which had helped anoint the region as “Silicon Valley
North,” had by then converted much of the Elk Grove plant into an AppleCare
call center, where new employees often earn $12 an hour.

There were employment prospects in Silicon Valley, but none of them panned
out. “What they really want are 30-year-olds without children,” said Mr.
Saragoza, who today is 48, and whose family now includes five of his own.

After a few months of looking for work, he started feeling desperate. Even
teaching jobs had dried up. So he took a position with an electronics temp
agency that had been hired by Apple to check returned iPhones and iPads
before they were sent back to customers. Every day, Mr. Saragoza would drive
to the building where he had once worked as an engineer, and for $10 an hour
with no benefits, wipe thousands of glass screens and test audio ports by
plugging in headphones.

Paydays for Apple

As Apple’s overseas operations and sales have expanded, its top employees
have thrived. Last fiscal year, Apple’s revenue topped $108 billion, a sum
larger than the combined state budgets of Michigan, New Jersey and
Massachusetts. Since 2005, when the company’s stock split, share prices have
risen from about $45 to more than $427.

Some of that wealth has gone to shareholders. Apple is among the most widely
held stocks, and the rising share price has benefited millions of individual
investors, 401(k)’s and pension plans. The bounty has also enriched Apple
workers. Last fiscal year, in addition to their salaries, Apple’s employees
and directors received stock worth $2 billion and exercised or vested stock
and options worth an added $1.4 billion.

The biggest rewards, however, have often gone to Apple’s top employees. Mr.
Cook, Apple’s chief, last year received stock grants — which vest over a
10-year period — that, at today’s share price, would be worth $427 million,
and his salary was raised to $1.4 million. In 2010, Mr. Cook’s compensation
package was valued at $59 million, according to Apple’s security filings.

A person close to Apple argued that the compensation received by Apple’s
employees was fair, in part because the company had brought so much value to
the nation and world. As the company has grown, it has expanded its domestic
work force, including manufacturing jobs. Last year, Apple’s American work
force grew by 8,000 people.

While other companies have sent call centers abroad, Apple has kept its
centers in the United States. One source estimated that sales of Apple’s
products have caused other companies to hire tens of thousands of Americans.
FedEx and United Parcel Service, for instance, both say they have created
American jobs because of the volume of Apple’s shipments, though neither
would provide specific figures without permission from Apple, which the
company declined to provide.

“We shouldn’t be criticized for using Chinese workers,” a current Apple
executive said. “The U.S. has stopped producing people with the skills we
need.”

What’s more, Apple sources say the company has created plenty of good
American jobs inside its retail stores and among entrepreneurs selling
iPhone and iPad applications.

After two months of testing iPads, Mr. Saragoza quit. The pay was so low
that he was better off, he figured, spending those hours applying for other
jobs. On a recent October evening, while Mr. Saragoza sat at his MacBook and
submitted another round of résumés online, halfway around the world a woman
arrived at her office. The worker, Lina Lin, is a project manager in
Shenzhen, China, at PCH International, which contracts with Apple and other
electronics companies to coordinate production of accessories, like the
cases that protect the iPad’s glass screens. She is not an Apple employee.
But Mrs. Lin is integral to Apple’s ability to deliver its products.

Mrs. Lin earns a bit less than what Mr. Saragoza was paid by Apple. She
speaks fluent English, learned from watching television and in a Chinese
university. She and her husband put a quarter of their salaries in the bank
every month. They live in a 1,080-square-foot apartment, which they share
with their in-laws and son.

“There are lots of jobs,” Mrs. Lin said. “Especially in Shenzhen.”

Innovation’s Losers

Toward the end of Mr. Obama’s dinner last year with Mr. Jobs and other
Silicon Valley executives, as everyone stood to leave, a crowd of photo
seekers formed around the president. A slightly smaller scrum gathered
around Mr. Jobs. Rumors had spread that his illness had worsened, and some
hoped for a photograph with him, perhaps for the last time.

Eventually, the orbits of the men overlapped. “I’m not worried about the
country’s long-term future,” Mr. Jobs told Mr. Obama, according to one
observer. “This country is insanely great. What I’m worried about is that we
don’t talk enough about solutions.”

At dinner, for instance, the executives had suggested that the government
should reform visa programs to help companies hire foreign engineers. Some
had urged the president to give companies a “tax holiday” so they could
bring back overseas profits which, they argued, would be used to create
work. Mr. Jobs even suggested it might be possible, someday, to locate some
of Apple’s skilled manufacturing in the United States if the government
helped train more American engineers.

Economists debate the usefulness of those and other efforts, and note that a
struggling economy is sometimes transformed by unexpected developments. The
last time analysts wrung their hands about prolonged American unemployment,
for instance, in the early 1980s, the Internet hardly existed. Few at the
time would have guessed that a degree in graphic design was rapidly becoming
a smart bet, while studying telephone repair a dead end.

What remains unknown, however, is whether the United States will be able to
leverage tomorrow’s innovations into millions of jobs.

In the last decade, technological leaps in solar and wind energy,
semiconductor fabrication and display technologies have created thousands of
jobs. But while many of those industries started in America, much of the
employment has occurred abroad. Companies have closed major facilities in
the United States to reopen in China. By way of explanation, executives say
they are competing with Apple for shareholders. If they cannot rival Apple’s
growth and profit margins, they won’t survive.

“New middle-class jobs will eventually emerge,” said Lawrence Katz, a
Harvard economist. “But will someone in his 40s have the skills for them? Or
will he be bypassed for a new graduate and never find his way back into the
middle class?”

The pace of innovation, say executives from a variety of industries, has
been quickened by businessmen like Mr. Jobs. G.M. went as long as half a
decade between major automobile redesigns. Apple, by comparison, has
released five iPhones in four years, doubling the devices’ speed and memory
while dropping the price that some consumers pay.

Before Mr. Obama and Mr. Jobs said goodbye, the Apple executive pulled an
iPhone from his pocket to show off a new application — a driving game — with
incredibly detailed graphics. The device reflected the soft glow of the
room’s lights. The other executives, whose combined worth exceeded $69
billion, jostled for position to glance over his shoulder. The game,
everyone agreed, was wonderful.

There wasn’t even a tiny scratch on the screen.

David Barboza, Peter Lattman and Catherine Rampell contributed reporting.