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3 Reasons Apple Will Continue to Move Production Away From Foxconn

Apple (NASDAQ: AAPL  ) has announced plans to spend $100 million to manufacture computers in the U.S., a big departure from its history of outsourcing in Asia. Some people say its for political reasons after all of the public outcry over conditions at Foxconn. But there are plenty of practical reasons Apple is moving production to the U.S. It's a trend we've seen in recent years at other companies and I think it's a trend we'll continue to see at Apple. Here are the three biggest reasons Apple will continue to move production back to the U.S.

One of the major reasons companies locate manufacturing facilities near their headquarters is control. 3M (NYSE: MMM  ) , for example, has its two largest manufacturing plants within about an hour's drive from headquarters and has many other plants in the Upper Midwest. This allows product development engineers to visit the plant easily and make any necessary changes in manufacturing quickly.

One of the downsides of manufacturing in China is that you're a day's trip away from Cupertino just to see what's going on. The other downside is that you're handing your technology to a country known for stealing intellectual property. The PC industry has been through this before. It was only a decade ago that Gateway, Compaq, and Hewlett-Packard (NYSE: HPQ  ) were dominant players in PCs, but they've been replaced by Lenovo and Asus, competitors built from outsourcing.

Samsung is the latest example of this because it builds some of the key components for the iPhone and iPad. It's no wonder that Samsung is able to build similar quality products that are now Apple's competition. Now, word is that Foxconn is building a smartphone for Amazon (NASDAQ: AMZN  ) . It may be too late for Apple to begin moving production to the U.S.

Shipping costs
Apple must spend a fortune on shipping when it launches new products. I've ordered products at launch in the past two years and every time they've shipped from China. I don't know what Apple pays, but to send a 2-pound package via FedEx to Zhengzhou, China would cost me $111.34 if I sent it priority. At the least, Apple is spending a significant amount to ship individual items from China. Saving on that cost alone would pay for some of the cost difference manufacturing in the U.S.

Since Apple doesn't break out shipping costs, it's hard to know what the impact of local manufacturing would be, but the cost of the first few weeks of a product's launch has to run tens of millions of dollars. This could be a big savings for Apple if it produced products closer to sale points.

The two drivers I pointed to above come down to one big necessity for Apple -- speed to market.

One of Apple's greatest challenges with its fast rollout product launch model is moving from idea to development to manufacturing in a timely manner. I highlighted above that Apple actually ships from Asia when the product launches.Shipping by boat, which is most cost effective, takes weeks and that doesn't include any delays at customs. Shipping by truck from a U.S. plant would be less expensive and save time as well. 

Manufacturing closer to sales points would reduce cost and increase speed to market for Apple's engineers.

Speed to market has become even more important in recent years as Google (NASDAQ: GOOGL  ) , Samsung, Nokia (NYSE: NOK  ) , and Microsoft (NASDAQ: MSFT  ) become more viable competitors. We saw a mid-year upgrade with the iPad this year and I wouldn't be surprised to see shorter cycle times with the iPhone going forward as well. This makes speed to market crucial, and U.S.-based manufacturing could help that.

What to expect
Apple has the sheer size to move to a more regional manufacturing model than it currently employs. Economies of scale is one of the reasons so many U.S. companies outsource to China since there's a more efficient cost structure than there would be in the U.S.

But Apple really only makes four products -- iPhones, iPods, iPads, and Macs -- and it makes each of them by the millions. Apple can now reach economies of scale in manufacturing in multiple locations around the world if it chooses to.

I think the current move to build some Macs in the U.S. is just the beginning for Apple. The company is now wary of teaching competitors how to build its smartphones and it makes sense financially to move some production to the U.S. (and maybe even Europe).

A deep dive into Apple
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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  • Report this Comment On December 22, 2012, at 12:59 AM, mikepv wrote:

    you make some great points. I feel you will see a foxconn plant move here to the u.s apple has made them what they are.

  • Report this Comment On December 25, 2012, at 6:42 PM, bornboring wrote:

    Mr Hoium, I lost the last bit of confidence in you.

    1. Some months ago there was a piece of news that Foxconn is building one or more factories in the South of USA.

    2. Ther must be some Fool here with better knowledge on logistics, costs, and deals; not guesses. From the Orient, shipping to NYC may be cheaper than to Minnesapolis, both via the West Coast.

    By the way, Foxconn's parent is scooping up half of the world's production capacity of flat panel display. Think!

  • Report this Comment On December 26, 2012, at 1:57 AM, TempoAllegro wrote:

    Interesting piece, but not persuasive for the following reasons:

    On control, I would tentatively concede that point. For some industries, this level of control may be unnecessary. However, what if the designers are not always going to be in Cupertino?

    On shipping, no way. It is MUCH cheaper for them to ship to you than for you to ship to them. For one thing, there is much more traffic going from Asia to the USA right now, so I suppose competition must bring prices down. But your main argument about shipping costs is what it would cost you (I assume you are in Virginia) to FedEx something to Zhengzhou by priority. I am reasonably certain it is cheaper for us here in Asia to ship back to you, and if we use the normal post office system, which can get things there in just a few days, it is one third to one fourth of the cost for a medium-small box - I have done it recently myself.

    The speed to market argument is also rather US-centric as you assume that the USA is always going to be the premier market to which goods must arrive. What if in fewer years than we expect a different market, perhaps even China itself, were the market where manufacturers wanted to get their product quickly instead of the USA? Then it may look silly to have moved production back to the US and find out your competitors are faster to market because they did not make that expensive move.

    All in all, I think we need to see how things go in various economies of the world over the next few years before we can know if it is good to move production to the USA. I'd like to see it, but I'd also like to see an end to the political wrangling that's going on, and a certain level of financial maturity both in individuals and the country as a whole before feeling really good about the future of this country.

  • Report this Comment On December 27, 2012, at 11:39 AM, rlcato wrote:

    You forgot about the factory Foxconn is building in South America of which they'll be building iPhones (& such) there. I'm quite certain Apple has a consigned deal worked out about shipping large containers with orders of Apple gear inside to keep cost down. How else do you think you can track an order (Your little 2-lb. package is nothing). Tim Cook says he does not want products sitting in warehouses. Ship in bulk.

    Chances are, Macintosh computers will be built in the states; not phones or tablets. The 'large quantity to scale' of precision CNC milling machines Apple requires -along with the people to work them- just aren't in the US.

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