Apple and the China Syndrome

The latest threat to Steve Jobs' legacy has been the news that workers laboring in Apple factories in China work long hours, are paid little and are required to perform the same function thousands of time during a long shift as they bring iPhones and other products to market. The question raised in American media is whether Apple's reputation can survive this latest blemish. Will American consumers continue to buy Apple products that are brought to market on the backs of Chinese workers who are little more than slaves in service to a brand and the Chinese Comunist state?

Say what?

I would suggest those asking these questions spend some time visiting factories in Asia. I've been visiting bike, car, and electronic factories in Asia for twenty-five years and find the above story, without the hyperbole, predictable and economically necessary. My first visits to factories in Japan, Taiwan, and Korea--in that order--turned up similar stories about working conditions and low wages. Even then the dynamic was clear. American manufacturers outsourced the low-end products and as Japan, for example, moved up the product value chain, production of the these items moved to countries such as Taiwan and Korea. In time these countries developed the necessary workforce skills, computer aided design, and overall tech sophistication so that few would suggest today that products sourced in these parts of Asia are in anyway inferior to what we produce in the states. It's actually been the inverse.

And this is just not an Asia story. One of my favorite pieces of geography is the stretch in northern Italy from Milan to Venice, where one can draw a rhumb line through the heart of traditional bicycle country of craftmen and artists, including Columbus, Campagnola and Cinelli. By and large manufacturers were slower than their American counterparts to outsource to Asia but they eventually followed the same pattern, grumbling all the way. They subsequently focused on high-end products that Americans and others will continue to pay for because of the brand, the craftmanship and the history that is incarnated annually in the spendor of the Tour de France.

This shedding of low-end, low-value products continues apace. China is losing business to Vietnam, Thailand, and the Malay Peninsula. The 100 million Chinese workers who have just returned home, largely in the west, to celebrate the Year of the Dragon, will need these jobs to return to if China is to continue to fan its version of state capitalism and hold our debt. Ironically, the assembly of electronics, including iPhones, is made-to-order for a workforce like China's which does not want a labor pool that literally has time on its hands.

This is a delicate dance of course, as China has made remarkable strides up the product value chain. The dance is really about maintaining and growing types of businesses, especially in electronics, that require millions of hands to do the numbing, repetitious piece work that is the shadow side of product manufacturing. The last thing China wants to do is to introduce too much technology, too fast when there is a restive work force that has already shown its contempt for a system that has created a cadre of billionaires overnight. Labor unrest, especially in the west, is China's great worry.

My guess is that Apple consumers won't care too much about this shadow side and might even point to  China's burgeoning middle class of 300 million, literally up-from-poverty in a generation, as an example of wise capitalism at work.

But there are other economic and market forces at play. Mobile phone companies shipped 500 million smartphones in 2011 with Apple and Samsung leading the way. There is every reason to believe the predictions that use of mobile phones will surpass desk top computers for Internet access by 2014.

Add to this that the business model for mobile networks continues to change. For example, according to IGR research, in 2009 almost 58% of AT&T's new subscribers were postpaid. In 2010 this number fell to 24% and continues to decline.

With the introduction of the iPad there was a sense--and perhaps a desire--among publishers that consumers would settle on three devices: a smartphone. a tablet and an e-reader. The world doesn't seem to be unfolding out that way. We know that data consumption is expected to increase by 530% from 2010 to 2014.  And given consumers' movement away from postpaid to pre-paid plans, carriers have made it very clear they will bring more devices on line and that they are interested in pre-loaded content and enterprise offers to help differentiate a device. It is not unreasonable to think that families will have 5-7 mobile devices on average in the household by 2013. The carriers are counting on this.

Harrison Research has suggested that the most important by-product of this multiple-device adoption is that it is being led by consumers, rather than technology companies. To that end there is an element of fashion to device acquisition, one for every pocket and purse, shed frequently.  Asia hands should be busy for a while.

And times change. My local wine merchant in Nyack, New York tells me that China is importing the bulk of the expensive wines from Italy, Spain and France. Also vines. His prediction: get ready for the Great Wall brand, led by a robust cabernet. Almost hand-made.