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No Exit for the Dragon?

“Ban China!” says ​Trump. “Boycott Chinese Apps” trends on ​Twitter. “It was all China’s fault”, cry leaders the world over, as they vow to make China pay for the Covid-19 Pandemic. In spite of Trade Wars with the United States, geopolitical tensions with India over the Ladakh region and its tightening control over Hong Kong for which it has faced backlash from both the US and UK, China continues to hold a central position in the global economy. Its economy is the second largest in the world, it has launched partnerships with almost all of Africa in the form of the ​Belt and Road Initiative and its progress shows no signs of slowing down. Since China began to open up and reform its economy in 1978, GDP growth has averaged almost 10 percent a year, and more than ​850 million people have been lifted out of poverty. China is an upper-middle-income country and the world’s second largest economy. It is the world’s manufacturing and service sector kingpin. But how did it get this way? Why do MNCs flock to China? “Low supply costs” is what the oft-repeated answer to that question has been. “Wrong,” says Harvard.​ Indeed, a closer look reveals that labor costs are even lower elsewhere; the​ lowest average hourly labor costs​ can be found in Vietnam ($3), India ($2.5) and Indonesia (mere $0.8). To understand what makes China unique, we turn to one of the world’s most valuable companies and one of China’s largest retailers: Apple. The company generates nearly a quarter of its revenues from sales in China and has some of the largest profit margins in the business. The smartphone has probably had the biggest influence in ushering the digital age than anything else. When the iPhone, Apple’s best-selling and most profitable product, was released in 2007, the Economist​ called it the “Jesus phone.” Steve Jobs told the world that the phone was not just a communication tool but a way of life. “Assembled in China”- we have all seen that label on the iPhone box. Unlike other technological milestones achieved by US-based companies,the iPhone isn't entirely American. A look at the iPhone’s suppliers reveals an interesting story - its components are made in around ​30 countries,​ before finally coming together in China. The iPhones aren’t made anywhere else, because they simply cannot be. Apple does not produce custom products and so it does not need to deliver quickly — all of its products are standard and mass-produced. The much bigger issue for Apple is supplier availability, engineering changes, and flexibility. The location decision isn’t really about labor costs — it’s about manufacturing risk and where that risk is best managed. The precision, speed, and efficiency of Chinese manufacturing can’t be found anywhere else in the world. Tim Cook​ explains - “China stopped being a low-labor-cost country many years ago. The reason to come to China is because of the skill, and the quantity of skill in one location and the type of skill it is.” What type of skill exactly? Cook adds “You find in China the intersection of craftsman kind of skill, and sophisticated robotics and the computer science world. That intersection, which is very rare to find anywhere, that kind of skill, is very important to our business." Everything centers around Zhengzhou referred to as "iPhone City" and the factory there, owned and operated by Apple's manufacturing partner Foxconn, can produce 500,000 iPhones a day. Their partnership frees up Apple to focus on its strengths - design and marketing. Apple comes up with a new idea, and Foxconn finds ways to produce millions of units at a low cost. With a hidden package of tax breaks and subsidies worth billions of dollars, China supports the world’s biggest iPhone factory. Foxconn received ​$1.5 billion from the local government to build sections of the factory, power plants, employee housing and for pavement of roads. Workers are recruited by the local government and energy and transportation costs are covered for the operation. These efforts have been encouraged by the National Government by developing special economic zones that offer tax breaks to multinationals and exempt them from costly and cumbersome rules. Even as companies mull moving production ​out of China​, this intricate network of suppliers, efficient distribution systems, competent workers and the large home market that the country offers would be difficult to achieve anywhere else. Thus, it seems unlikely that China will give up its place as the world’s production center anytime soon.


Authored by Mufti Taha Shah