SMITH BRAIN TRUST — A recent New York Times investigation exposes the “hidden bounty of perks, tax breaks and subsidies” that benefit the world’s largest iPhone factory in China, a country where professor Gary Cohen has followed business trends for years. Cohen, executive education director at the University of Maryland's Robert H. Smith School of Business, says Zhengzhou emerged as “iPhone City” in central China by offering generous incentives to Apple’s largest manufacturing partner, Foxconn. Perks include access to modern infrastructure, subsidized transportation and energy costs, and a streamlined customs routine.
“The icing on the cake is Zhengzhou recruiting workers for Foxconn and paying bonuses when Foxconn meets its export targets,” Cohen says. “Although U.S. state and local governments have been offering incentives for years to lure companies to set up operations in their domain, we don't see this extreme.”
Cohen, who will lead a Smith School export management workshop series starting on Jan. 12, 2017, says the aggressive tactics are part of China’s push for inland development. “China wants to see more business activity in the central part of the country,” Cohen says. “The vast majority of manufacturing has been in eastern China, where the population is large, infrastructure is more developed and there is closer proximity to ports.”
Cohen says U.S. policymakers need to understand what they’re up against when they talk about reshoring manufacturing jobs. “President-elect Trump has been vowing to level the playing field, and Apple has been one of the companies he has mentioned when saying that manufacturing needs to come back to the U.S.,” Cohen says. Trump could pressure Apple to loosen its Foxconn ties and bring manufacturing home by implementing trade barriers and other protectionist measures, but such policies could backfire. One vulnerability for Apple and many other U.S.-based multinationals is that China not only represents a manufacturing base but also a growing retail market. Apple already earns about 25 percent of its global revenue in China, which has a huge appetite for iPhones and other mobile gadgets.
This gives China leverage. “Protectionist measures that target China would likely trigger a retaliatory response that would have an enormous impact on U.S. multinationals that not only manufacture in China, but also sell into China, soon to be the world's largest consumer market,” Cohen says.
Chinese consumers would have several homegrown options if trade barriers made iPhones less affordable. Chinese mobile brands such as Huawei, Xiaomi and Honor already take substantial market share from Apple and Samsung in Asia and Africa. “China is making a huge push in the areas of innovation and technology, and they will be a formidable player,” Cohen says.
Even if manufacturing comes back to the United States, automation will limit factory jobs in the modern economy. The Verge reported on Dec. 30, 2016, that Foxconn already has flooded its Chinese factories with Foxbots, machines that don’t mind abysmal work conditions and don’t commit suicide. They don’t even need sleep. Foxconn announced in March that it already had automated away 60,000 jobs at one of its factories.
Communities still benefit from local manufacturing, but in less direct ways. “Labor is only one input, and there are many that make up the cost of manufacturing a product,” Cohen says. “There are also raw material costs, country endowments, capital and property taxes.”
WHEN U.S. CITIES PLAY THE INCENTIVES GAME
Cities usually lose when they bid against each other to lure the same sports franchise, factory, corporate headquarters or some other economic prize. But this won’t stop San Francisco and Los Angeles from battling for a new George Lucas art museum. Smith School Professors Rajshree Agarwal and Tunay Tunca explain why in this Smith Brain Trust infographic.
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