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On November 3rd, 2017 Apple announced the iPhone X, the most expensive in its line of iPhones, with a price tag of $999. The high cost of the iPhone is in stark contrast to the low wages paid to the millions of workers toiling away in factories in China where the starting pay for an assembly worker in a electronics factory is only around $400 a month. iPhones and almost all the other electronics we use in our daily lives are manufactured in poor countries by workers making next to nothing in dollars. Today's podcast is about how and why Apple and other countries have moved to poor Asian countries. In part one, I discuss Apple's contract manufacturing model, and how this led to moving iPhone production to Shenzhen. In part two, I discuss the move of iPhone manufacture to the inland of China, especially to the city of Zhengzhou. Finally, in part three I discuss the rise of Vietnam's electronics industry, and why it is likely iPhone assembly will eventually move to Vietnam.

Apple from the very beginning has seen itself more as a design and technology company rather than as a manufacturing company. Apple began outsourcing manufacturing to Singapore as early as 1981, Starting from 2000, Apple began increasingly contracting the assembly of products to Foxconn, a Taiwan based company. Apple provided the design, high tech electronics companies such as Samsung and Intel the components, and Foxconn and a handful of other companies provide the labor. Of the $999 cost of the iPhone X, the majority goes to Apple, around $360 go to components makers, and only a few percent to the company providing the labor that assembles the final product. The business of contract manufacturing is a brutally competitive one. Despite employing 1.3 million people, and manufacturing millions of phones a year Foxconn has a gross profit of under $500 million, only a small fraction of Apple's profits. In order to keep labor costs low, Foxconn built its assembly plants in Shenzhen. However, as I discuss in my podcasts on hoverboards and Shenzhen's relationship with Hong Kong , Shenzhen has transformed itself into a center of innovation. The price of land, cost of living, and above all wages have been rising at an exponential pace, and as a result Foxconn has moved more and more of itself factories to the interior of China, especially the city of Zhengzhou.

Foxconn moved production to Zhengzhou, in the interior province of Henan, because wages for manufacturing tend to be 10 to 15% lower than along the coast. However, given the cost of housing is a quarter of what it is in Shenzhen, many workers were eager to move to Zhengzhou. By American standards, labor standards in Foxconn factories are very poor. The starting wage for the average Foxconn worker is only around $400 a month, rising to closer to $700 with experience. The work of assembling and iPhone is monotonous and uncomfortable and during peak seasons workers work a hundred hours of paid overtime a month. The city of Zhengzhou further provided billions of dollars of subsidies to Foxconn (and by proxy Apple) worth billions of dollars, including forgoing all corporate and value added taxes for five years and building the factories and housing used by Foxconn workers. As problematic as the relationship between Apple, Foxconn and Zhengzhou are, it is important to keep in mind that wages and labor standards at Foxconn factories tend to slightly above industry average. Moreover, Foxconn and Apple have sparked a boom in the region. The population of Zhengzhou has increased 36% since 2010, making it the fastest growing major metropolitan region during this period, and the province of Henan has been one of the fastest growing provinces during this period going from being the 23rd richest province to the 19th.

However, globalization isn't a force that can be contained to a single country. In the last decade, Vietnam has emerged as a major center for labor intensive electronics manufacturing. Total electronics exports from Vietnam has exploded from only $7 billion in 2008 to over $120 billion today. Foxconn currently does almost all of its smartphone assembly in China. Although factories have been opened in Brazil, India and Wisconsin they are more about politics and tariffs than anything else. The primary attraction to manufacturing out of Vietnam are the low wages, which are only a third of what they are in China. Moreover, the Vietnamese government puts much less pressure on manufacturers to transfer intellectual property to Chinese partners and Vietnam isn't subject to the brewing trade war between the US and China. Samsung has already turned Vietnam into a hub of smartphone assembly, and many Apple suppliers have started manufacturing components in Vietnam. It is likely that the final assembly of smartphones will eventually move to Vietnam as well.

The move of smartphone assembly from the US to Shenzhen, from the coast of China to it's interior, and from China to Vietnam may seem like a race to the bottom in wages and labor standards. While that is perspective that has a lot of merit to it, it is just as important to remember that the forces of globalization provide a ladder that poor countries can climb to achieve prosperity. Low cost manufacturing helps poor regions become wealthy, and then spreads to process to new locations. While the workers in the factories that make iPhones will likely never be able to afford an iPhone, Apple and other electronics companies are still helping the workers and the regions they come from achieve prosperity.