The idea that Apple AAPL -0.05% might or should produce iPhones locally inside the Indian economy has been long discussed. From our point of view here, thinking about economics, it would actually be a fascinating test of the abilities, the sophistication, of that Indian economy. For the question would be whether there would be the creation of a supply chain capable of meeting the volumes and standards that Apple requires. The answer isn’t clear cut which is why the idea, if it goes ahead, will be such a fascinating thing to observe. The results from Brazil show that it’s not an easy thing to create, such a supply chain.
There’s also a certain mordant humour to the idea. Over here in Europe everyone is shouting at Apple for the manner in which they dodge local taxation. And yet a decision to manufacture in India would at least partly be driven by the desire to dodge local taxation:
Price is also an important factor for Indian customers and should Apple begin to manufacture the iPhone in India, prices would get noticeably cheaper for customers. This is due to import taxes that are currently applied to the price of iPhones in the country. Because of this, iPhones made in India would theoretically be priced at a cheaper point than devices made by companies in other countries.
Completed phones are taxed on import into India. The import of components with which to complete phones are, largely, not taxed. So, there’s a price advantage to local assembly. At least, there’s a potential advantage to local assembly. It’s not in fact, at least not necessarily, true that assembling behind a tariff barrier is cheaper. Because it might well be that local assembly is more expensive, in and of itself. And whether the whole process is cheaper will depend upon whether the extra costs of the local work are lower than the tariffs being dodged. And we do in fact have an example of this – Apple has some assembly done in Brazil for exactly this reason. It’s not entirely perfect:
Foxconn has created only a small fraction of the 100,000 jobs that the government projected, and most of the work is in low-skill assembly. There is little sign that it has catalyzed Brazil’s technology sector or created much of a local supply chain.The iPhones now rolling off an assembly line near São Paulo, the only ones in the world made outside China, carry a retail price tag of nearly $1,000 for a 32-gigabyte iPhone 5S without a contract – among the highest prices in the world and about twice what they sell for in the U.S.
I am about to employ hyperbole – there’s your trigger warning. Essentially, they’ve created a large shed within which they assemble imported components. And the actual assembly of an iPhone, in those Chinese factories, carries a labour bill of about $8 or so. Moving that activity to Brazil while importing all of the parts being assembled just doesn’t make much difference to the Brazilian economy at all – nor to the Chinese one either.
The question therefore isn’t whether the process can be done – we know very well that assembly can be done outside those Chinese factories. It may not be being done very well and it may not be something which, in the absence of tariffs, makes much sense. It’s also not something which makes very much economic difference to anything at all. There’s very little local added value. Just because assembly, qua assembly, doesn’t add much value. That in itself is something we should remember when talking about American manufacturing. The simple piecing together of these things, the “making” as some seem to think of it, just isn’t the high value part of the process. The chip manufacturing might be – but that’s done by Samsung in Texas anyway. The design part, the software writing, that’s done in California. The high value parts of this process are rather done in the US already. It’s the low value part, largely, which is done in China.
So, such simple assembly in India wouldn’t make all that much difference to anything. What would is if, unlike the Brazilian example, the move to local assembly sparked the creation of a local supply chain. And that’s the part which would make it a fascinating test:
Local manufacturing would allow Apple to bring products to market quicker besides making them cheaper for Indian consumers and turning the country into an export hub, analysts said, while adding that this would require creating an elaborate and complex supply chain.
That last is that important part. It’s only if there is such an elaborate and complex supply chain that there would in fact be any significant value being added in the Indian economy. We know that, in the Brazilian example, just bringing in the parts to assemble doesn’t do it. The question is, therefore, really this – is the Indian economy capable of producing to the scale and quality required? The answer there is that no one knows – Tim Cook doesn’t, Narendra Modi doesn’t and I don’t either. Which is why it’s such an interesting test of course.
At which point I can only offer an opinion – and I think I would retreat all the way back to Adam Smith to try and justify it. Brazil’s a rather more developed, richer, country than India (the two statements are the same statement of course). However, it’s also in terms of population very much smaller. Thus local production in India, in theory at least, could go rather deeper than that in Brazil. One the basis of the division and specialisation of labour.
Any factory producing parts for the iPhone is going to be, by definition, entirely world class. And to take a trivial example, is it worth building a world class factory to make microphones for iPhones to a population of 200 million, as in Brazil? Given that there is no such local supply chain we should probably assume not. Would it make sense to do so if supplying iPhones to a population of 1.2 billion, as in India? Maybe, perhaps – there’s obviously some number between 200 million and the 7 billion of the total global population where it does.
The actual decision will be different for each part of course. Tin to make solder is likely to continue to come from Indonesia, chips from Texas, software from California. Screens perhaps still from Japan – but at what point does it make sense to build a screen plant? Or a microphone, or speaker, or headphone jack (depending on whether those rumours about its existence into the future are valid or not) plant? The larger the potential market the more sense it would make to have that local plant, the further down the value chain local production would go.
That is, India could potentially be a sensible place to create very much more of the production and value chain than Brazil is. Which is again why I think it such an interesting question to ponder. Because whether it is in reality is going to be such a fascinating test of whether the Indian economy is, firstly, large enough to make those economies of scale work and secondly, whether there’s the local ability to in fact produce to the required volume and scale? If it’s just a shed assembling components then that’s of very little economic interest. If that supply chain gets created then that’s fascinating.
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