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It was only a decade ago that Gateway, Compaq, and Hewlett-Packard (NYSE:HPQ) were dominant players in PCs, but they've been replaced by Lenovo and Asus, competitors built from outsourcing.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.
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).
Fool contributor Travis Hoium is short Amazon.com and manages an account that owns shares of Microsoft and Apple. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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