UNIVERSITECATHOLIQUEDELOUVAIN

LOUVAINSCHOOLOFMANAGEMENT

and

KATHOLIEKEUNIVERSITEITLEUVEN

FACULTEITECONOMIEENBEDRIJFSWETENSCHAPPEN

THERESILIENCEOFTHERELATIONSHIPBETWEENAPPLEANDFOXCONN

SCENARIOSBASEDONTHEOLIFRAMEWORK

SupervisoratLSM:Jean-ChristopheDefraigneSupervisoratKUL:RoelLeus

ProjectbasedMaster’sThesis

SubmittedbyDeborahDanau

Withaviewofgettingthedegrees:

Masterintoegepasteeconomischewetenschappen:khandelsingenieur

MasterinBusinessEngineering

ACADEMICYEAR2015-2016

Acknowledgments

Iamsincerelyandheartilygrateful tomypromoter, Jean-ChristopheDefraigne, for

theguidanceandthepatienceheshowedmethroughouttheprocessofwritingthispaper.I

amalsoverygratefulforitsconstantavailability.Withouthishelp,itwouldn’tbepossibleto

concretizethispaper.

Thismaster thesiswouldnothavebeenpossiblewithout the supportofmy family

andfriends.Inparticular,Iwouldliketothankmymumfortakingtimeinreadingmythesis.

Lastbutnot least, Iowesincere thankfulness toProf.RoelLeus forbeingattentive

andcomprehensive.Ialsothankhimforthetimehegrantedforthereadingofmypaper.

Executivesummary

This paper is an analysis of the Alliance between two multinationals. On the one

hand,Apple Inc.,oneof themostadmiredand innovative firm in theworld famous for its

electronicproducts.Ontheotherhand,Foxconn,themajorApple’ssubcontractorsince2004

that is inchargeofAppleproducts finalassemblyandmanufacturing.Thethesis isdivided

intotwosections.First,wewill investigatethereasonswhyAppledecidedtooutsourcethe

finalassemblyofitsproductstoFoxconnthatismainlysituatedinChina.Wewillanalyzeit

bymeansof theOLI framework that focusonOwnershipSpecificAdvantages, Localization

advantagesand InternalizationAdvantages.Second,wewill investigatepossibleevolutions

of thisalliance.Todoso,wewilldevelopsix scenarios that seemparticularly relevantand

likely to happen. The first one will be about the possible consequences of bad working

conditions inFoxconnfactoriessituated inChina. Indeed,manyscandalsbrokeout in2010

followingmanyworker suicides.Wewill therefore look at possible consequences. Then, a

scenario will investigate the possible consequences of China transition phase. Indeed, the

countryisfacingrisingwagesanddecliningnumberofmigrantworkers.Therefore,Foxconn

maystartshiftingitsactivitiesinothercountries.Thethirdscenarioswilldiscussthepotential

consequencesofrobotinstallationinFoxconnplants.ItwillprobablynotinciteAppletostop

workingwiththelatter.Onthecontrary,it isbeneficialforApple.Next,thefourthscenario

willhypothesizethat thegrowingChinesemiddleclassmay inciteAppletokeeppartof its

productioninChina,tostayclosetothispromisingmarket.Thesecond-to-lastscenariowill

developtheeventualitythatApplejobswillcomebackintheUnitedStates.Finally,thesixth

scenarioisabouttheimportanceofenvironmentalconcerns.NewregulationstocontrolCO2

emissions may dramatically change Apple supply chain and therefore its alliance with

Foxconn.

Keywords

Apple~ Foxconn~Outsourcing~Finalassembly~Scenarios~China

Abbreviations

EPZ ExportProcessingZone

ETDZs EconomicandTechnologicalDevelopmentZones

EU EuropeanUnion

FDI ForeignDirectInvestment

FLA FairLaborAssociation

FTZs ForeignTradeZones

GHG GreenhouseGases

HTDZs HighTechnologyDevelopmentZones

IP IntellectualProperty

PC PersonalComputer

R&D ResearchandDevelopment

SAIDI SystemAverageInterruptionDurationIndex

SAIFI SystemAverageInterruptionFrequencyIndex

SCC SupplierCodeofConduct

SEZ SpecialEconomicZones

USA UnitedStatesofAmerica

VAT Value-AddedTax

WTO WorldTradeOrganization

I

Content

1.Introduction.....................................................................................................................................1

2.Problematic:AnalysingthepossibleevolutionsofthealliancebetweenFoxconnand

Apple.....................................................................................................................................................3

2.1Applestory...............................................................................................................................................3

2.2Problematic.............................................................................................................................................6

2.2.1ScenarioI:Consequencesofbadworkingconditionsscandals.......................................................6

2.2.2ScenarioII:ConsequencesofChinatransitionphase.........................................................................72.2.3ScenarioIII:Thegrowinguseofrobots....................................................................................................7

2.2.4ScenarioIV:ThegrowingimportanceoftheChineseconsumermarket.....................................7

2.2.5ScenarioV:ApplejobsbroughtbackintheUnitedStates................................................................8

2.2.6ScenarioVI:Consequencesofthegrowingenvironmentalconcerns...........................................8

3.Methodology..................................................................................................................................9

3.1Informationgatheringprocess.............................................................................................................9

3.2Choiceofscenarios..............................................................................................................................10

3.3Assumptions.........................................................................................................................................13

4.ApplicationoftheOLI-Framework...........................................................................................15

4.1 Ownershipspecificadvantages....................................................................................................15

4.2 Locationspecificadvantages........................................................................................................16

4.2.1 Economicadvantages............................................................................................................................17

4.2.2 Socialandculturaladvantages...........................................................................................................26

4.2.3 Politicaladvantages................................................................................................................................28

4.3 Internalisationadvantages............................................................................................................31

5.Scenarios.......................................................................................................................................41

5.1 ScenarioI:Consequencesofbadworkingconditionsscandals..............................................41

5.1.1AppleandFoxconnalliancemaystayunchangeddespiterisinglabourcosts........................50

5.1.2AppleandFoxconnalliancemayonedaybebrokentoprotectApplebrandimage...........51

5.1.3Applemayincreaseitsmanufacturingnetworktodiversifyrisksandavoidrisingcosts....54

5.2 ScenarioII:ConsequencesofChinatransitionphase...............................................................56

5.2.1TheendofAppleandFoxconnrelationship........................................................................................60

5.2.2Applemayincreaseitsmanufacturingnetwork................................................................................60

II

5.2.3ApplemayshiftfinalassemblyoutofChina.......................................................................................60

5.3 ScenarioIII:Thegrowinguseofrobots.......................................................................................66

5.4 ScenarioIV:ThegrowingimportanceoftheChineseconsumermarket..............................68

5.5 ScenarioV:ApplejobsbroughtbackintheUnitedStates......................................................71

5.5.1Apple’sjobskeptinAsiancountries......................................................................................................73

5.5.2VoluntarydecisionofAppletobringjobsbackintheUnitedStates.........................................75

5.5.3InvoluntarydecisionofAppletobringjobsbackintheUnitedStates......................................77

5.6 ScenarioVI:Consequencesofthegrowingenvironmentalconcerns....................................78

6.Limitationsofthispaperandfurtherresearch.......................................................................83

7.Conclusion.....................................................................................................................................87

8.Bibliography..................................................................................................................................91

9.Annexes.......................................................................................................................................103

III

Figures

Figure1:Apple'sFortune500rank...........................................................................................5

Figure2:Chinesepopulationevolution..................................................................................18

Figure3:Chineseactivepopulation........................................................................................18

Figure4:Chineseprovincespopulationconcentration..........................................................19

Figure5:LocationofFoxconnfactoriesworkingforApple....................................................20

Figure6:Applesuppliersthroughouttheworld.....................................................................24

Figure7:SAIDIandSAIFIindexes............................................................................................26

Figure8:Chinesesocialprotests............................................................................................27

Figure9:Worldwidegovernanceindicators...........................................................................30

Figure10:2015globalpeaceindex........................................................................................31

Figure11:Foxconnmanagementhierarchy...........................................................................42

Figure12:Appleannualaudits...............................................................................................45

Figure13:ValuedistributionoftheiPhonein2010...............................................................50

Figure14:Apple'snetsalesevolution(inmillion)..................................................................52

Figure15:Averagewageperyear(inYuan)...........................................................................57

Figure16:Chinesepopulationstructure(inmillion)..............................................................58

Figure17:Ruralresidentsin2015(inmillion)........................................................................61

Figure18:Averagemonthlywagesin2013(inUS$)..............................................................62

Figure19:Indiansmartphonemarketshare..........................................................................65

Figure20:Shareofthepopulationthatisinthemiddleclass................................................69

Figure21:Netsalesevolutionbyoperatingsegment(inmillion)..........................................70

Figure22:Americanunemploymentrate...............................................................................72

Figure23:Averagemonthlydisposablesalary(netaftertax)(in$).......................................74

Figure24:TotalGHGEmisisonspercountryin2012(inMtCO2)............................................79

Annexes

AnnexI:Apple’sfinalassemblyfacilities…………………………………………………………………………103AnnexII:ListofFoxconnworkerswhocommittedsuicide………………………………………………104

1

1.Introduction

Apple is an intensely successful company, and people all over the world are so

addictedto itsbrand.Thatwhenanewmodel is launched,peoplequeueforhourstobuy

theproduct.However,behindthescenes,thisfamouscompanyisnotasperfectasitwould

likepeopletothink.BehindeveryAppleproductareexploitedChineseworkersandchildren,

workingeverydayinconditionssodeplorablethatpeoplehaveevencommittedsuicideto

escape the exploitation.Despite scandals linked toworking conditions, so fewpeople are

aware of these conditions because Apple is skilled at manipulating its brand image and

controlling this information. The simplest proof of their manipulative power is observed

whenaskingquestionsofSiri,theAppleiPhonevoicepersonalassistant.

Wheredoyoucomefrom?

Likeitsaysonthebox…IwasdesignedbyAppleinCalifornia.

Whobuiltyou?

I,Siri,wasdesignedbyAppleinCalifornia.

Wherewereyoumanufactured?

I’mnotallowedtosay.

WhomanufacturedtheiPhone?

I’mnotsure,butIthinktherewasagarage.Anouterplanetwithsomestrangemetals.Andabunchofnerds.

DoChildrenmaketheiPhone?

Interestingquestion.

2

Youreallydon’tknow?

Unfortunately,Iamasyetimperfect.

DoyouknowFoxconninChina?

I’msorry,I’mafraidIcan’tanswerthat.

DoesApplerespecthumanrights?

Ican’tanswerthat.ButApple.comshouldbeableto.

Apple seemingly has a talent for avoiding every unpleasant question, and not just

whenaskingSiri.Indeed,emailstothecorporateofficethatbroachtopicsofmanufacturing

conditions either remain unanswered, or elicit replies that refer back to their perfectly

manicuredwebsite.BrowsingthroughtheApplefurtherpushestheidealsofaconscientious

and respectful company that cares about its suppliers throughout the world. The

disingenuousness of such responses prompted this paper,which aims to provide a better

understanding of what is hidden behind these well-design products used by millions of

people.Nevertheless,thistopicissobroadthatwehadtomakeachoice.Inresponsetothe

growingnumberofitsworkerscommittingsuicide,wethereforedecidedtoinvestigatethe

relationshipbetweenAppleanditsmajormanufacturerFoxconn,inparticular.

3

2.Problematic:Analysingthepossibleevolutionsofthe

alliancebetweenFoxconnandApple

2.1Applestory

Before explaining the problematic and the two main parts of this paper in more

detail,wewillfirstintroducethetopicandbrieflyconsiderimportantdatesintheevolution

ofApple, thecompany thatgrew fromasimplePC firm intooneof thebiggest consumer

electronicsfirmsintheworldinlessthan40years.

Apple Company was created in 1977 by Steven Jobs and Steven Wozniak. They

establishedtheirheadquartersinCupertinoinSiliconValley.

In 1980, Apple announced the construction of two manufacturing plants in Texas

(Carrollton)andinIreland(Cork)responsibleforthecomputersontheEuropeanmarket.A

year after, they opened a plant in Singapore. In 1983, the factory launched a highly

automatedplant inCalifornia.After some restructurings, themajorityofApple computers

soldintheUnitedStateswerebuiltbytheElkGrove(California)andtheFountain(Colorado)

plants, and Jobs claimed to be as ‘proud of the factory in America as [he was] of the

computer (Prince, M., & Plank, W. (2012)). In fact, in the 1980s, Apple resisted offshoring

despite the rapidmigration of electronic componentsmanufacturing toAsia (Duhigg, C.,&

Bradsher,K.(2012);Teagarden,M.(2016)).

In 1993, the company entered the Chinesemarket in order to capture PCmarket

share inoneofthe largestconsumermarkets intheworld (Teagarden,M.(2016)). (In2008,

AppleopeneditsfirststoreinBeijing).

However, in 1996, Apple encountered financial problems and began changing its

supply chain. The company reorganised their activities, determiningwhich shouldbe kept

4

insidethecompanyandwhichshouldbeoutsourced(Berger,S.(2013)).TheysoldtheFoutain

planttothecontractmanufacturerSCISystem,whichimpliesthatalargenumberofApple’s

computers were now manufactured by another company. As part of the reorganisation,

Applealsorelocatedthecircuitboardassembly.

In 2001, after considerable changes in the consumer electronics domain, Apple

shifted its emphasis from the PC (Personal Computer) industry to new sectors. After the

launch of the iTunes store, they released the iPod and—somemonths later—the iPhone

(Teagarden,M.(2016)).

In 2004, Apple finally closed its last US manufacturing line in Elk Grove and

succumbedtothelureofoffshoring.Theytransferredthemajormanufacturingoperations

from the US to China, outsourcing its production to Foxconn. Foxconn is a multinational

electronicscontractmanufacturingsubsidiaryofHonHaiPrecisionIndustry,headquartered

in Taiwan. The company uses Taiwan as its design centre, and China as its main

manufacturingbase.TheyalsoestablishedservicecentresinAsia,Europe,andmajorcitiesin

theUnitedStates(Foxconn(2007)).

In2011,ApplelaunchedtheiPadtocoordinatecomputing,telecommunication,and

media,finallyreleasingtheirlastproduct,theAppleWatch,in2015(Teagarden,M.(2016)).

In 2013, the Taiwanese company, Foxconn, became the principal manufacturer of

Apple.(Whenlookingatthetop200supplierslistreleasedbyApple,wenoticethatFoxconn

(Hon Hai Precision Industry Co. Ltd.) is a predominant supplier of the American firm)

Working with Apple has clearly contributed to the success and the growth of the

manufacturer.FoxconnhasbecomeChina’slargestprivateemployerandtheworld’slargest

electronicscontractor,producingmorethan40%oftheworld’sconsumerelectronics,while

40%to50%ofFoxconntotalrevenueisgeneratedthroughApple(Chan,J.,Pun,N.,&Selden,

M. (2013)). Nowadays, Foxconn employs 1.4 million people in China. The company

manufactureselectronicproductsforcompaniessuchasSony,Hewlett-Packard,andDell,as

wellassmartphonesforNokia,Motorola,Huawei,Cisco,andXiomi.

5

Twenty-twoFoxconnplantsarepartoftheproductionlineforApple.Amongthem,

oneplantissituatedinBrazil,twoareinTaiwan,andtheothersarelocatedinChina(Apple

(2016, b)). Out of 18 Apple final assembly facilities in the world, seven of the plants are

ownedbyFoxconnand6ofthemarelocatedinChina(SeeAnnex1)(Apple(2016,c)).

Concerning Apple, the company has been on a steady upwards trajectory and has

become one of the most well-known firms in the world due to its innovation, people

management, quality ofmanagement, social responsibility, financial soundness, quality of

products/services,globalcompetitiveness,and long-term investmentvalue.The firmholds

thefirstplaceinthe‘World’sMostAdmiredCompanies’rankingfortheninthyearinarow

(Fortune(2016,b)).Applealsoholds3rdplaceinthe‘Fortune500ranking’witharevenueof

233,715milliondollars.Thecompanyhasgracedthis list forthepast22years, risingfrom

the325thpositionin2002,asshowninthefigure1(Fortune500(2016)).

Figure1:Apple'sFortune500rank

Source:Fortune500(2016)

Applealsoholdsthe15thpositioninthe‘Global500ranking’andhasbeenrankedfor

thelast13years(Fortune(2016,a)).

6

2.2Problematic

We can now detail the two objectives of this paper: (1) understanding Apple’s

decision to outsource the manufacturing and assembly to Foxconn, and (2) generating

scenariosaboutthepossibleevolutionsofthealliancebetweenthesetwomultinationals.

First, we analyse the reason for this alliance. In order to do so, we use the OLI

frameworkandapplyittotherelationship.ByusingOLI,wecanunderstandthelogicbehind

Apple’s decision to outsource the production and the final assembly of its products, and

what will ensure their success (Ownership specific advantage). Then, we examine the

reasonswhyApplechosetoworkwithFoxconnandthustooutsourcethemanufacturingin

Chinaratherthaninanothercountry(Locationadvantage).Finally,weemphasisewhyApple

decided to outsource rather than make Foreign Direct Investment (FDI) by acquiring a

ChinesefirmorbymakingaGreenfieldinvestment(Internalisationadvantage).

In the second main part of the paper, we look at possible evolutions of the

relationshipbetweenthesetwomultinationalsbydevelopingseveralscenarios.Thechoice

ofthescenariosisexplainedhereafterinthemethodology.

2.2.1ScenarioI:Consequencesofbadworkingconditionsscandals

ThefirstscenarioregardscontroversialworkingconditionsinFoxconnfactories.The

Taiwanese firm was scrutinised in 2010 when many workers attempted suicide. We

therefore initially evaluate theworking conditions anddetermine themainproblems that

may have caused these suicides. Then, this paper emphasises the reactions of Apple,

Foxconn, the Chinese state, and the workers following this scandal. Finally, we develop

differentpossibleevolutionsof thissituation.For instance,Applemaystartdiversifying its

supplier network, consumers may stop buying Apple products, Foxconn may have to

improve conditions andwages and so forth. All these evolutionsmay impact the relation

betweenAppleandFoxconn,soweinvestigatewhichscenarioismostlikelytohappen.

7

2.2.2ScenarioII:ConsequencesofChinatransitionphase

Thesecondscenario isabouttheChinesetransitionphase.Forseveralyears,China

hasbeenintransition,andislosingitsstatusas‘thefactoryoftheworld’.Infact,wenote

somemajor changes such as the rise of salaries, the decline ofmigrantworkers, and the

growing middle class. Therefore, we develop these changes in more detail, and look at

possibleconsequences.Weespecially investigatecountries thatmayhavethepotential to

replace China. Moreover, we examine actual Foxconn factory locations, and how it may

evolveaswellasthemajoradvantageofdoingbusinessinthesecountries.

2.2.3ScenarioIII:Thegrowinguseofrobots

The third scenario discusses the increasing use of robots. This growing trend

accompanied the transition phase of China. Many Chinese cities, especially in Guandong

provinces,arecompensatingforthedeclineofworkersandthegrowingsalariesbyinstalling

robotsintheirfactories.Thestatesalsostartincitingcompaniestodosobecausetheywant

China to shift from ‘the sweatshop of the world’ to an innovation centre. This scenario

thereforedevelopsthistransitionandtheconsequencesfortherelationbetweenAppleand

Foxconn.Foxconnisnoexceptiontotherule,andhasalsostartedestablishingrobotsinits

factories.

2.2.4ScenarioIV:ThegrowingimportanceoftheChineseconsumermarket

Asmentionedinthesecondscenario,acharacteristicoftheChinesetransitionphase

is the growing middle class. The fourth scenario is focused on this important trend. The

Chinese consumer market is becoming more and more attractive for Apple, and even

became its second largestmarket.We therefore investigate it inmoredetail, and look at

possibleconsequencesforAppleandFoxconn.

8

2.2.5ScenarioV:ApplejobsbroughtbackintheUnitedStates

The fifth scenario discusses the eventuality of bringing Apple jobs back into the

United States. After the financial crisis of 2008, the unemployment rate inAmerica grew,

andApplewascriticisedforhiringmorepeopleinothercountriesthaninitshomecountry.

Therefore,ApplebroughtsomefactoriesbacktoAmerica;although,thebulkofproduction

isstilldoneabroad.Wethereforediscussdifferentpossiblepermutationsofjoboutsourcing.

Ontheonehand,thesituationwillpossiblystayasitisbecauseChinaismoreattractivethan

Americatomakebusiness.Ontheotherhand,jobsmightreturnduetofactorsindependent

fromApple’scontrolortobenefitfromAmericanadvantages.

2.2.6ScenarioVI:Consequencesofthegrowingenvironmentalconcerns

Finally, the last scenario develops the consequences of growing environmental

concerns.Overthelastseveralyears,climatechangehasbecomeacrucialconcerntomany

societies. The CO2 emissions are rising exponentially and actions must be undertaken in

ordertostabilisethegrowingtemperatureoftheplanet.Moreover,Chinaisclearlyamajor

playerthatshouldtakemoresignificantmeasuresbecauseof itsmassive impactonglobal

warming.ThissectiondevelopsthepossibleconsequencesofnewregulationsinChinaand,

more broadly, in theworld. Applemay clearly be tempted to stop its collaborationwith

Foxconninordertoavoidenvironmentaltaxes.Theymayalsobringproductionplantsnext

to main consumer markets in order to avoid long transport, which may become heavily

taxed.Differenteventualitieswillbedeveloped.

Beforetheconclusion,apartofthispaperwillbedevotedtothe limitationsofthis

essay. Recommendations for further research are also set out as some topics may be

interestingtodevelopfurther.

Wewilleventuallyconcludebyhighlightingthemostimportantfactsofthisthesis,as

wellasthemostlikelyscenarios.

9

3.Methodology

Beforebeginningwith the firstpartof thispaper,whichconsidersapplying theOLI

frameworktothealliancebetweenAppleandFoxconn,thefollowingisexplained:(1)how

wegatheredthenecessaryinformation,andwhichsourceswetypicallyused,(2)thereasons

whywedecidedtodevelopthesespecificscenariosratherthanothers,and(3)assumptions

weshouldputforth.

3.1Informationgatheringprocess

Intheframeworkofthispaper,ourtimeandresourceswerelimited.Indeed,wedid

not have the ability to interview—or even go to China to interview—Foxconn and Apple

employees or other third parties. Therefore, in order to write this paper, we focused on

threekindsofdocumentation.

Inthefirstpartofthispaper,weusedbookstogatherinformationandtoacquirethe

necessary familiaritywith theOLI frameworkandout-sourcing in theelectronicssector. In

fact,aspreviouslynoted,webeganthisthesiswithanexplanationofthealliancebetween

AppleandFoxconnbyusingtheOLI framework fromJohnDunning.Therefore, todevelop

thisfirstpartconscientiously,wereadfirstphasebookstogatherinformationabouttheOLI

framework and the reasoning behind out-sourcing and multinationals’ international

decisions.Indeed,thelogicbehindtheseconceptsisthefoundationofthisthesis.

Then,afternotingthismoretheoreticalaspect,wereadinternationalpressarticlesin

ordertogather informationaboutAppleandFoxconn.Wetypicallyusedarticles fromThe

Financial Times, The Economist, theHarvard Business Review, Forbes, the Foreign Affairs,

amongothers.

We also gathered information from official paper by national and international

organisationssuchastheOrganizationforEconomicCo-operationandDevelopment(OECD),

theWorldBank,theWorldTradeOrganization,theUnitedNations,andsoforth.Information

10

from theNational Bureau of Statistics of China was also particularly useful in addition to

Apple’sofficialwebsite.

Wealsousedscientific literature,butinsmallerquantitybecausethesesourcesare

lessavailableandlessusefulforinformationaboutAppleandFoxconnspecifically.

In the second part of this paper, we used the same sources cited above—

international press articles, official organisations’ websites and scientific literatures—to

developthesixscenarios.

Apple and Foxconn keep a great deal of information confidential. Therefore, we

examined many sources released by many different organisations in order to gather the

mostinformationpossible.Nevertheless,someinformationwasstillmissing,aswediscussin

thelimitationsectionofthisthesis.

Also,thetopicofthispaper—therelationshipbetweenAppleandFoxconn—isvery

broad, and an infinite amount of research and investigation could be conducted on the

topic. Moreover, the electronic sector in which Apple operates moves rapidly, and new

competitors constantly enter the market to try to be better than the other players.

Therefore, information gathering is yet more complex. For this reason, we limited our

researchbyapplyingtheOLIframeworkanddefiningonlysixscenarios.Focusingoncertain

informationhelpedtoavoidbeingdistractedbytheinfiniteamountofavailabledataonthe

Internet.

3.2Choiceofscenarios

As explained above, we develop six scenarios for possible evolutions of the

relationshipbetweenAppleandFoxconn in thesecondpartof thispaper.Otherscenarios

could also have been developed to examine this future alliance; however,we decided to

focusonthesesixcasesforreasonsdefinedbelow.

11

First,aspreviouslymentioned,wearelimitedintimeandresourcesforthisanalysis.

Indeed, this thesis was completed over the course of a master’s degree. Therefore, we

workedwithalimitedperiodoftime,whichrestrictedustoalimitednumberofscenarios.

Additionally,wedeterminedthatchoosingasmallnumberofscenariosallowedustofocus

optimally and to analyse each scenario sufficiently thoroughly. Choosing more scenarios

wouldhavemeantlesstimeforeachscenario,andthereforelessinformationandaccuracy.

Anotherreasonwhywedecidedtodevelopthesescenariosratherthanothersisalso

linkedtotheavailabilityofinformation.AppleandFoxconnarebothveryconfidentialfirms

thatworktokeepmuchoftheirinformationsecret.Further,wedidnothavetheabilityto

interview Apple’s employees or other third parties, nor to go to China to collect data.

Therefore,ourresearchwasrestrictedbytheavailabilityofsomeinformation.Wedecided

tochoosescenariosonwhichwewillbeabletofindenoughinformationtoanalysethemin

detail.Missinginformationarediscussedinthelimitationpartofthisthesis.

Wealsodecidedto focusourattentionon thesescenariosbecause theywerevery

visible inthemediaatthetimeorbecausetheyarecurrent issuesortransformationsthat

we commonlyhearabout. The concernsdeveloped in thispaperarebasedon issues that

might be found when browsing the Internet, or listening to the radio. Some of these

scenarios are actual topics commonly discussed at university because they are major

economictopicsthatmayinfluencefuturebusinessconduct.Wealsofocusedourattention

onthesescenariosbecausetheyaresomeofthemost likelytooccur.Wefurtherdecided

nottodevelopscenariosthatarelesslikelytoinfluenceAppleandFoxconn’srelationship.

In sum, while we could have chosen to develop smaller scenarios that are less

discussed in the media and less relevant, we decided instead to focus on popular or

controversialtopics.

Eachofthescenarioswedevelophavebeenchosenforspecificreasons.Wediscuss

the first scenario about working conditions in Foxconn plants because these conditions

createdaworldwidescandal in2010,andmanyarticlesandpublicationswerereleasedat

thetime.Untilthatscandal,manyorganizationsattemptedtosecretlyenterthesefactories

togathermoreinformationandtorevealthetruthtotheworld.Specialorganisationsalso

12

commonlypublishreportsaboutworkingconditionsinthesefactories(ChinaLabourWatch,

forinstance).Afterthisscandal,Foxconnwasparticularlyinthespotlight,suchthatmuchof

theinternationalpresswastalkingaboutit.Therefore,wedecidedtodevelopthisscenario

because the highly visible broadcasted event caught our attention and motivated us to

gather more information to understand these working conditions and the possible

consequencestheirvisibilitymayhaveontherelationshipbetweenAppleandFoxconn.

We decided to develop the second and the fourth scenario because it is a highly

broadcastedanddiscussedtopicrecentlythatmayhaveworldwideimpact.Indeed,forthe

last severalmonths,wehaveheardagreatdealaboutChinaand its ‘transitionphase’.As

previouslymentioned, ‘transition phase’ refers to the risingwages in China, the declining

numberofmigrantworkers,andtherisingChinesemiddleclass.Moreover,asChinaisone

ofthemostpowerfulcountries intheworld,theseChinesetransitionsarecrucialandmay

impacttheglobaleconomy.

The sixth scenario discusses the possible consequences of growing environmental

concerns—acommonlydebated topic thesedays.Weheardabout theglobalwarmingon

theradioconstantly—attheuniversity,ontelevision,ontheInternet,andinnewspapers—

whichiswhywedecidedtodevelopthisscenario.

Regardingthefifthscenario,aboutthepossibilityofseeingApplejobsreturntothe

United States, we developed this case because after the 2008 financial crisis, talk of

unemploymentratesandrelatedproblemsabounded.Therefore,wedecidedtodevelopthis

scenario to thoroughly understand the role that Apple may potentially play in these

unemploymentproblems.

Finally, we discuss the third scenario regarding the growing use of robots as

automation isalsoacurrenttopic.Even if thistopic issubtlerthanthepreviousones,and

lessdiscussed inthemedia, inourviewautomation isstillavital factor inthecompetitive

market.Indeed,weliveinaglobalisedworldwherefirmsmustrapidlyadaptthemselvesto

be better than their competitors, and to attract potential clients. In sum, we decided to

13

developascenario involvingtheuseofrobots inAsiancountriesbecauseautomationmay

helpcompaniestoavoidcurrentissuessuchasgrowingsalaries.

We discuss scenarios we decided not to develop, and the reasons behind these

choices,inthelimitationsectionofthisthesis.

3.3Assumptions

First, throughout the paper, we use the simple and common name ‘Apple’ to

represent theAmerican firmeven though this isnot itsexactname. Indeed, thecompany

wasinitiallynamed‘AppleComputer’,andrenameditself‘AppleInc.’in2007(Teagarden,M.

(2016)).

Secondly,asFoxconn is in chargeof theAppleproduct componentsmanufacturing

and of the final assembly of Apple products, the framework of this paper especially

considersthislatterrole.AmajorconcernofthisthesisisindeedtounderstandwhyApple

decidedtooutsourcethemajorityofthefinalassemblyofitsproductstotheTaiwanesefirm

andhowitmayevolveinthefuture.

Consequently, whereas Foxconn is a Taiwanese firm, themajority of this paper is

aboutdoingbusiness inChinabecause6ofthe7Foxconnfinalassemblyfacilitiesworking

forApplearesituatedinChina.Moregenerally,19ofthe22Foxconnplantsworkingforthe

multinationalaresituatedinthatcountry.Indeed,asnotedabove,FoxconnusesChinaasits

mainmanufacturingbase.

Finally, throughout the paper, we will consider Taiwan as a country independent

fromChina.

14

15

4.ApplicationoftheOLI-Framework

The eclectic paradigm, or in other words the OLI framework, could be used to

understandwhyAppledecidedtoformanagreementwithFoxconnratherthaninternalise

Apple’sproduction.

TheOLIframeworkreferstothreeadvantagesthatexplainwhyafirmwouldengage

in international business through FDI instead of externalising through outsourcing or

licensing. More precisely, according to Dunning, a firm will engage in international

production if ithas(1)ownership-specificadvantages, (2) if it internalisestheuseofthese

ownership-specificadvantages,and(3)ifthecompanylocatesitsassetsinacountrywhereit

benefitsfromlocationspecificadvantages(Dricken,P.(1998)).

4.1 Ownershipspecificadvantages

Ownershipspecificadvantages(O)refertothefirm’suniqueabilitiesoritspossession

ofspecificassetsthatarenotownedbycompetitorsandthatarenoteasilyimitated.TheO

explains the ‘why’ofmultinationalactivities.Theseassetscouldrefer totangibles (natural

endowments, manpower and capital), and to intangibles or capabilities (technology and

information, managerial, marketing and entrepreneurial skills, organizational system and

accesstointermediateorfinalgoodsmarkets)(Dunning,J.(1993)).

Apple typically has unique assets that allow it to market internationally without

fearing any imitation from the competitors. In other words, Apple has competitive

advantagesthatarecrucialtocompetinginternationally.

First,Appleisaninnovativefirmthatregularlylauncheswell-designedbreakthrough

products.Intherankingofthetop700R&DinvestorsintheworldreleasedbytheEuropean

Commission,Appleranked109thin2004.Today,thefirmisconsideredtobeoneofthebest

16

performing R&D investors, and one of themost innovative firms in theworld. Their high

quality products typically offer rich functionality, and, ease of use (European Commission

(2014)).

ThebestpracticesofApplecanalsobeconsideredasaspecificownershipadvantage.

‘Best practices’ include Apple’s production management, organisation and marketing

system,andorganisationofwork.Forinstance,Apple’stypicalstrategyconsistsoffocusing

on a few product lines and avoiding customisation as much as possible (Satariano, A., &

Burrows,P.(2011)).Also,theyhaveaparticularsupplychainwheretheycontrolnearlyevery

part. The financial success of Apple is inseparable from its globally dispersed network of

supplierandfinalassemblers(Lu,C.(2014)).

Even ifbestpracticescanbe legally imitated itwillnotbeeasytodo.Actually,you

can acquire it only with experience. In other words, the teams working for Apple have

acquired assets that cannot be imitatedwithout experience. This concept is developed in

moredetailinanothersection.

Another specific ownership advantage of Apple is indubitably its brand power. As

mentionedabove,Appleisabrandadmiredworldwide.Thispopularityincombinationwith

their large market share, provides leverage in negotiations. Thus, the risks of the

concentrating manufacturing parts in a few locations are counterbalanced by this

‘negotiationpower’.Moreover,bybuyingfromtheircontractors inmassivevolume,Apple

benefits fromeconomiesof scale,gainingdiscountsonparts,manufacturingcapacity,and

airfreights(Chan,J.,Pun,N.,&Selden,M.(2013)).

4.2 Locationspecificadvantages

Thespecificassetscitedabovecanbedependentofacertainlocation,whichbrings

ustothesecondpillaroftheparadigm.Locationspecificadvantages(L)explainthe‘where’

ofproduction.Lconsistsoffactorspresent inspecific locations,thatareavailabletoevery

firmand canonlybeused in those locations (Dricken,P. (1998); pp. 187).Apple’sdealwith

Foxconn,amajorityofwhoseplantsaresituatedinChina,maybepredicatedonL.Wecan

17

distinguishthreetypesofadvantagesofdoingbusinessinChina,(1)economicadvantages,

(2)socialandculturaladvantages,and(3)politicaladvantages(Hill,C.W.L.(2014)).

Beforedevelopingthesethreetypesofadvantage,itisimportanttorecallthatApple

decidedtooutsourcetheproductionandfinalassemblyof itsproduct in2004.So,wewill

analysetheselocationadvantagesbyconsideringthecontextofthemarketin2004.

4.2.1 Economicadvantages

The first economic advantageofmovingproduction toChina is thequality of their

factors of production. Theworkforce is particularly attractive, due to its differences from

thatoftheUnitedStatesandmanyothercountries.Infact,theChineseworkersareknown

toworkharderandmorequicklythantheirAmericancounterparts.Theyworkmanymore

hoursandevenaccept living inclosequarters.Theirhigherproductivity levelscanalsobe

attributedtoChineseculturalviewsonwork.ThesefactorsmayexplainwhyAppledecided

toassemblethemajorityof its finalproducts inChineseplants—flexibilityandrapidityare

veryimportantfactorsforApple’ssuccess.

Another important point is the cost of these factors of production. Labour costs in

China are clearly much lower than in the United States. However, they represent a very

smallproportionofthetotalvalueofAppleproductsaswewillseeinthesecondpartofthis

paper(Hill,C.W.L.(2014);pp.33).

Thesizeofthemarketisalsoanessentialpointwhenchoosingalocationinwhichto

dobusiness.Chinaisasizeableterritorycharacterisedbyanenormouspopulation.Figure2

illustratesthepopulationevolutioninChinawithintherelevanttimeframeof2004.Therise

experiencedeachyearisnotnegligibleandrepresentsmillionsofpeople.

18

Figure2:Chinesepopulationevolution

Year Totalpopulation(year-end)

2001 1276270000

2002 1284530000

2003 1292270000

2004 1299880000

2005 1307560000

2006 1314480000

2007 1321290000

2008 1328020000

Source:NationalBureauofStatisticsofChina(2015).

However,itisthenumberofworkeravailablethatissignificantforApple.Chinadid

notbecomethe‘factoryoftheworld’bychance.Infact,Chinapossessesanabundanceof

semi-skilledworkers,which is an attractive factorwhen choosing anoutsourcing location.

Figure3highlightsthehugeactivepopulation,inthetimeframeof2004(OECDstatisticsportal

(2002)).

Figure3:Chineseactivepopulation

Year Activepopulation

2001 735540448

2002 742455842

2003 749740411

2004 756305157

2005 762608154

2006 767136988

2007 772098426

2008 776125592

Source:TheWorldBank(2016,b)

19

Besides the immenseactivepopulation, the largestproportionof thepopulation is

alsosituatedintheeasternhalfofthecountry.Only6%ofthepopulationissituatedinother

partsduetothearidityandthemountains(Naughton,B.(2007);pp.19).Therefore,aswecan

seeinthefigure4,alargenumberofindividualsarehighlyconcentratedintheeasternand

central cities. The figure5,wediscuss justafter, shows that themajorityof Foxconn final

assemblyplantsaresituatedinthesemostconcentratedprovinces.

Figure4:Chineseprovincespopulationconcentration

Source:Naughton,B.(2007)

Beforelookingatthespecific investmentzones,cities,andregionsthatmakeChina

soattractive to foreignbusiness, it is important to keep inmind that19ChineseFoxconn

factorieswork forApple.Among them,sixare responsible for the finalAssemblyofApple

products.

SevenaresituatedintheGuandongprovince,moreprecisely,inFoshanandShenzen

coastal cities; two of these factories are working on the final assembly. Four plants are

20

situatedinHebei,Jiangsu,andZhejiangcoastalprovinces.Fiveothersarenearby inShanxi

andHenanprovinces;includingtwofinalassemblyfacilities.Amongthetwoplantssituated

in Sichuan province, one is also responsible for the final assembly. Two plants are also

situated in Taiwan. Finally, the Foxconn plant that deals with the final assembly of

accessories is situated in an export-processing zone in Shanghai (Apple (2016, b)). For a

cleareroverview, refer to figure5.Starsare randomlyputted in theprovinces, theaimof

thisfigureisespeciallytohaveabroadpictureofplants’locations.

Figure5:LocationofFoxconnfactoriesworkingforApple

Source:Apple(2016,b)

Aspreviouslysaidinthemethodology,intheframeworkofthisthesisweespecially

focus on the final assembly of Apple products. Therefore, final assembly facilities are

representedinthefigure5bybiggerstars.

21

InrespectoftheChina’svastsizeandabundant labourforce,twomainregionsare

particularlyattractivetomakebusinessandattractedFoxconnplantsworkingforApple.

ThefirstregionistheGuangdong’sPearlRiverDeltawithitsproximitytoHongKong

and international trade.Foxconnhas sevenplants (outof19) in this region, including two

finalassemblyfacilities.Theplantsarerepresentedbyredstarsinthefigure5.Thisregionis

the primary manufacturing centre for consumer electronics. It contains convenient

infrastructures suchas aport toexport and import goodsall over theworld, expressway,

mainroad,andarailway(Torrens,C.(2010)).However,thisregionhasbecomeavictimofits

ownsuccess,and isnowconfrontedwiththehigherwagesand improved livingconditions

that lead firms to find other low cost places to manufacture products. This is further

discussedinascenariowithinthesecondpartofthispaper.

Another appealing region is the Yangtze River Delta, which includes the city of

Shanghai.Foxconnisalsosituatedinthisregion,whereonefinalassemblyplantisworking

forApple.Thisoneplantisrepresentedbyabluestarinthefigure5.Thisisageographically

strategic position on the coast with one of the best transport networks in the country,

including a port. Shanghai’swealth has emanatedoutwards to smaller cities, creating the

manufacturingclustersthatarecrucialtobeingamajorhub(Torrens,C.(2010)).

Such‘spatialclusters’canleadtoeconomiesofscale.AccordingtoAlfredWeber,the

geographyofanindustrytypicallydependson(1)thetransportcostsandlabourcosts,and

(2)theforcesofagglomeration.Thelatterisrelatedtothespatialconcentrationofeconomic

activities in a single location that lead to external economies of scale. When producers,

suppliers,orconsumersarelocatedinthesamearea,itcouldincreaseeconomiesofspecific

firmlocatedthere(Dricken,P.(1998);pp.75).Foxconn’s locationprovidesaclearadvantage

becausemany factories thatproducecomponents forAppleproductsare situatednext to

Foxconn’ assembly plant (Hill, C. W.L. (2014); Torrens, C. (2010); pp. 57). In fact, of Apple’s

supplierlist,45suppliersarelocatedinDongguan—oneofthelargestcomputerproduction

basesinChinathatissituatedintheYangtzeRiverDelta(Apple(2016,a)).

22

TherapidgrowthoftheseregionsandofotherChina’scoastalprovinceshasledtoa

gapbetweeneastandwest.ItiswhytheChinesegovernmentseta‘developthewest’policy

in2000 todevelopwesternand centralChina. The state sent financial capital andhuman

resources to some of these regions until it became beneficial for companies to move

production in these regions due to cheaper land and labour, and various government

incentives.Despitetheseregions’disadvantages,suchas longtransportdistanceforgoods

andweakinfrastructure,somecitiesbecameveryattractive.Amongtheseregions,Foxconn

setupfourplantsintheprovinceofShaanxiandSichuan(Chan,J.,Pun,N.,&Selden,M.(2013);

Torrens,C.(2010);pp.65).Theseonesareshowedinthefigure5byorangestars.

In 1980, China also started developing investment zones following the ‘Open-door

policy’; these were characterised by China’s desire to open its economy to FDI. These

investmentzonesclearlyplayedacrucialroleinthegrowthofChina’seconomyandbecame

attractiveplacesforbusiness.Anumberofinvestmentzonesthatcouldexplainthelocation

ofsomeFoxconnfinalassemblyfirmsfollows.

Firstly, China set up four Special Economic Zones (SEZ) in 1984 in order to attract United

States, Japanese, and European investments. One zone was created in Shenzhen, a city

where Foxconn established a big part of its plants (red stars). Secondly, they started

developing Economic and Technological Development Zones (ETDZs) in 1988. These zones

aimedatencouragingforeigninvestorstobringmoretechnologyintoChina.Todate,there

are54ETDZs,mostnotably inChengdu,Shanghai,ZhengzhouandTaiyuanwhereFoxconn

firmsare located.Then,theycreatedForeignTradeZones (FTZs)toprovidemoreeffective

importandexportinfrastructurestobringinrawmaterialsandexportfinishedproducts.FTZ

offersduty-free importandstorageofmachinery,equipment, rawmaterials,amongother

things.SixteenportsreceivedFTZstatus,includingtheportofShanghaiandShenzenwhich

could benefit Apple when working with Foxconn. A Foxconn plant is also situated in an

ExportProcessingZone (EPZ) inShanghai.Thesezonesexisteduntil2000,andaretodayof

the number of 25. It is an export enclave with special investment and trade incentives,

wherecertainlegislationisexempted.Also,thesezonescontainthesignificantinfrastructure

andservicesneeded formanufacturingactivities, suchas roads,power supplies, transport

facilitiesand low-cost/rentbuildings (Dricken,P. (1998);pp.130).Theprincipaladvantageof

EPZs is that companies do not pay VAT because goods are defined as exports (Torrens, C.

23

(2010)). Thegovernmentalsoput inplaceHighTechnologyDevelopmentZones (HTDZs) to

attractforeignhigh-techcompanies.OneFoxconnfactoryissituatedininZhongshan.

In sum, theseexternallyoriented locationsoffermanyadvantages that canexplain

why Apple decided tomake an alliancewith Foxconn. In fact, by being situated in these

zones,Foxconnbenefitsfrommoderninfrastructure,easilyaccessiblemainports,increased

flexibility regarding the government, and ultimately, Foxconn can benefit from clusters.

Nevertheless,thegrowingsuccessofthesezonescaneventuallyleadtorisingcosts.Forthis

reason, as explained previously, Foxconn decided to establish plants in the centre of the

country.However,theserisingcostsarestillamajorproblemtodayandthereforetheyare

discussedlaterinascenario(Torrens,C.(2010)).

On a macro-level, the geographical situation of China in the world is also an

important factor to consider. In fact, even if the globalisation and the improvement in

technologymakeitmucheasiertodaytotravelacrosscountriesandtotransportgoods,itis

stillessentialtoworkwithfactoriesthatarewellsituated.Atafirstglance,Chinaissituated

inthecentreoftheworld,andcanbeeasilyaccessedbyplaneandbyboat.Moreover,we

observed that themajority ofApple’ suppliers are situated inAsia. This is particularly the

caseinChina(seefigure6),whichcouldexplainthedecisionofAppletooutsourcethefinal

assemblyofitsproducttoFoxconn.Indeed,theFoxconnfinalassemblyplantsareproximate

tomostofthesuppliersthatwouldfacilitatethetransportationanddecreasecosts.

24

Figure6:Applesuppliersthroughouttheworld

Source:Apple(2016,b)

Whenlookingforalocationtooutsourcethemanufacturingandthefinalassemblyof

yourproducts, it isalso importantto lookatmorespecificpracticalaspects.Thetransport

andtelecommunicationnetworksarenotably importantfactorstotake intoaccountwhen

choosingbusinesspartners.

WhenAppledecidedtooutsourceitsmanufacturingactivitiesinChina,theycertainly

consideredtheimpactontheirdistributionnetwork.Applekepttheircentralwarehousein

ElkGroveinCaliforniatodealwithretailstoresanddistributors internationally.Moreover,

AppleproductsaredirectlysenttoonlineconsumersfromChina,viaUPSandFedEx(Lu,C.

(2014)). Therefore, the transport network is vital to ensure a good flow of products

throughouttheworld.Chinaoffersanenvironmentsuitedtothetransportofgoods.Infact,

investment zones, as explained above, possess the necessary infrastructures needed for

exportsandimports.Theroadnetworkhasrapidlygrown,andthestateisstilldevelopingits

transportnetworkinordertoreachallpointsofthecountryandstillattractforeignfirms.By

2004, China had developed a national network of express highways that already reached

34,300 kilometres. The country also had 507 airports in 2013 (Central Intelligence Agency

25

(2016,a)).However,thedevelopmentoftransportationnetworkleadstogrowingtrafficand

congestion.

Moreover, the government has succeeded in creating communication networks for

most coastal provinces and major cities, including the ones where Foxconn plants are

situated.China’stelecommunicationsinfrastructurehasgrownextremelyrapidly.Peoplein

China can easily be contacted via the Internet or by phone. By the end of 2004,

approximatively 25% of the Chinese population had a mobile phone. Today, fixed-line

telephone networks covers roughly 80% of the population and more than 95% of the

population has a mobile phone (Trends Tendances (2016); Naughton, B. (2007); pp.344).

RegardingthenumberofInternetusers,itgrowsfrom22millionInternetusersin2000to94

millionin2004.Today,721millionChinesecanaccesstheInternetathome(Internetlivestats

(2016)).

Electricitysupplyisalsoimportantifwewanttobeasefficientaspossible.InChina,

state investments inpowerplantsandenergydistributioncontinuously increase.Thestate

hasincreasedthesizeofthenationalpowergridandreducedenergyshortages(Torrens,C.

(2010);pp.89). In fact, foran ideaof thegrowth,electricityoutput increased11%annually

between1998and2004(Naughton,B.(2007);pp.341).Wecanconsidertheactualefficiency

of electric infrastructures by looking at two indexes. First, there is the SAIDI index, or in

otherwordstheSystemAverageInterruptionDurationIndex.Secondly,theSAIFI index,or

theSystemAverageInterruptionFrequencyIndexcanbeconsidered.Inthefollowingtable

thescoreoftheseindexesforsomecountriesisdepicted.Weselectedthesestatesbecause

theyarepotential future locations forApple finalassembly facilities,which isdiscussed in

thesecondpartofthispaper.WealsoincludetheBelgiumindicesforcomparison.

26

Figure7:SAIDIandSAIFIindexes

SAIDI SAIFI

China 0,4 0,2

Taiwan 0,3 0,3

Thailand 0,8 1,6

Vietnam 21,4 10,8

Belgium 0,6 0,5

Jakarta(Indonesia) 3,9 2,5

Mumbai(India) 2,2 4,0

Source:WorldBankGroup(2016)

Notably,Chinaenjoysexcellentelectricalinfrastructures.Theindicesareevenbetter

thanthoseofBelgium.Insum,electricityshortagesareveryshortandhappenrarely,which

isanotheradvantageofChinaandperhapsanotherreasonwhyAppledecidedtooutsource

itsfinalassemblyinthatcountry.

4.2.2 Socialandculturaladvantages

Social and cultural advantages can also influence the international decisions by a

multinational. The culture of a country is a system of values and norms that are shared

amongagroupofpeople.Whendoingbusinessinanothercountryitisvitallyimportantto

understandthecultureandthewaypeopleworkbecauseitcouldimpactbusinessstrategy

andthecostofdoingbusinessinacountry(Hill,C.W.L.(2014)).

First,thesocialstructureofChinesesocietyisorientedtowardcollectivism(Torrens,C.

(2010),pp.141).Thismeansthatitwouldbedifficulttofindpeoplewhoareentrepreneurial,

willacceptresponsibilities,andmakeindividualdecisions.Itisimportanttokeepitinmind

whendecidingtodobusinessinChina.Moreover,thisisasocietywhereauthorityisrarely

questioned.Finally,itisimportanttoaccountforChinesenationalism.Thelanguagespoken

in China is also of importance. Even if English remains the universal business language,

27

speakingthelocal languagecouldalwaysbeadvantageous.However, inChina,theculture,

language,businesspracticeandbehaviourofpeoplevarywidelyfromregiontoregion.

Social stability and securitywithin China could also be an important factor to take

into consideration. The Ministry of Public Security on ‘mass incidents’ and ‘public order

disturbances’showedasteadyincreaseinunrestfromthemid-1990stothemid-2000s.This

isillustratedinthefigure8(2001dataarenotavailable).

Figure8:Chinesesocialprotests

Source:ScotTanner,M.(2005)

Social stability is a major challenge in China, especially regarding labour unrest.

Conditions in factories have become more dire; people work overtime in unsafe

environmentsbecausemanufacturerswanttocutcostsasmuchaspossible.Thisunresthas

clearlybecomeaprobleminChinaasworkershavebeguntocomplainandstrike(Gobel,C.,

&Ong, L. (2012)). The communist party is losingmore andmoreof its legitimacy. Indeed,

according to the CIA, the instability crisis happening in China is in part due to a crisis of

legitimacy(EliMargolis,J.(2012)).

Therefore, Apple’s risk increases when it outsources manufacturing to a company

whoseworkingcultureplacesalowpriorityonworker’srightsandsafety.Indeed,aswewill

see in the second part of this paper, Foxconn does not respect all working conditions

standards. However, these movements are not yet particularly impactful, and if workers

bring complaints, it generally only impacts the company concerned rather than making

28

waves in thewider industry.Despite these social disturbances, China remains a politically

stablecountryaswewillseeinthenextsection.

4.2.3 Politicaladvantages

Finally, we assert that Apple decided to work with Foxconn to gain political

advantageinChina.

Governments have many tools at their disposal to control and stimulate the

economicactivityoftheircountry.Amongthesepoliciesaretradepolicies,policiestoward

foreign investment, and industry policies. Trade policies include policies toward imports

(tariffandnon-tariffbarriers)andexports.Thesecanplayanimportantrolewhendefining

thelocationofassemblyofthefinalproductbecausesuchcostscouldconsiderablyinfluence

themarginofacompany.Foreigninvestmentpoliciesaimtocontroloutwardandtheinward

FDI.Manyactionscanbeundertakeninordertocontroltheseflows.However,Appledidnot

makeFDIregardingthefinalassemblyofitsproductinChina,thustherulesregardingthese

techniquesarenotconsideredatlengthinthispaper.Nationalgovernmentscanalsoissue

industry policies including fiscal incentives (state ownership of production assets, merger

andcompetitionpolicies,company legislation,taxationpolicies, labourregulation,national

technical and product standards, environmental regulations and health and safety

regulation)andpolicieswherethegovernmentprovidescapitalgrantsorloans(investment

incentives, labour policies, technology policies, small firm policies, state procurement

policies,policiestoencouragerestructuringandpoliciestopromoteinvestment)(Dricken,P.

(1998);pp.90).

Given these instruments that can be used by the state, we can now consider the

evolutionofChinaandmajormarketreformsinmoredetail.

AmajoreventinthedevelopmentofChinawasitsaccessiontotheWTOin2001.The

WTO is an international organisation that deals with the rules of trade between nations

(WorldTradeOrganization(2016,b)).China’smembershipledtomanychangesintradepolicy.

By2007,Chinacutimporttariffsdownconsiderably.Suchtariffcutsareclearlyanadvantage

forFoxconn—thatmadefinalassembly—andthereforeforApple.However,Appledecided

29

tobeginoutsourcingin2004,thusthischangedidnotappeartoexplainnorinfluencetheir

decision.Itisthesameregardingthe2007introductionoftheEnterpriseIncometaxlaw,the

LabourcontractlawandtheAnti-MonopolyLaw.Inordertosetpublicadministrationwithin

atransparent legalframework,China introducedtheAdministrativeLicensingLawin2004.

Thelawclarifiedinvestmentproceduresandtherolesandauthorityofthedifferentofficial

bodies.Despitethesenewlaws,localprotectionismstillexists,especiallyininlandareasand

smallertowns.Moreover,therearestilldifferencesbetweennationalandlocalregulations

thatcouldbedisadvantageousforforeignfirmsdoingbusinessinChina(Torrens,C.(2010)).

WhendoingbusinessinChina,thereisalsoahighriskofcorruption,wherethe2004

corruptionperceptions index rankedChina at 3.4on an index rangingbetween10 (highly

clean)and0(highlycorrupted).Suchcorruptionweakensthecapacityofthestatetoenforce

anefficientcompetitionpolicy.

Another negative point regarding China is the abusive protection of the state. The

governmentmay treat its national champions favourably in order to transform them into

multinationals.Tofurtherthisagenda,thegovernmentoftenattacksforeignmultinationals

operating in China. Such government crackdowns can consist of prosecution for bribery,

distribution of fines, or shaming campaigns. Notably, the government appears to have

perpetratedthelatteragainstApple(Defraigne,J-C.(2014)).Indeed,in2013,aChinesenews

agency asserted that Apple was immoral in selling devices through which consumers’

personaldatacouldpotentiallybeextracted.Anothersourcepublishedthepotentialthreat

of the iPhone regarding national security. The state-run China Central Television also

shamed Apple and accusing them of providing different after-sales services domestically

thanabroad(Jourdan,A.(2013)).SuchstatementscouldbeathreatforAppleandmayhave

animpactonitssalesdespiteTimCook’spublicexcuses.ChinaCentralTelevisionwenteven

furtherbypayingChinesecelebritiestoblastAppleonWeibo,theequivalentofTwitter in

China. Such practices are very common in China. The state published foreign companies’

malpractices to create the impression that these firms cannot be trusted. In sum, these

attacksfromthestateareclearlyadrawbackofdoingbusinessinChina.

30

More positively, the Chinese government announced its plan to reform and

restructure the economy. They notably put in place the ‘Nationalmedium and long term

program for science and technology development’ from 2006-2020. This came into force

after Apple’s decision to outsource to China, thus it did not influence their decision.

However, China clearlywants tomove from ‘made inChina’ to ‘innovated inChina’what

could impact the future alliance Apple-Foxconn.We will investigate it later in a scenario

(Course:‘Economicsofglobalinnovation’atKatholiekeUniversiteitLeuvenin2016).

TheIPrulesenactedinChinaarealsoofgreatimportancewhenchoosingthecountry

wheretooutsourcethefinalassemblyofyourproducts.Wewilldevelopitinthethirdpart

oftheOLIframeworkaboutinternalization.

Last but not least, thepolitical stability of China is also of importance. That factor

couldbedecisivewhenchoosinga locationtomakebusiness.TheWorldwideGovernance

IndicatorsisarankingaboutthepoliticalstabilityandtheabsenceofViolence/Terrorismina

country.Therangeissituatedbetween0(thelowest)to100(thehighest).Wewill lookat

the same countries taken before in order to have a point of comparison between these

ones.

Figure9:Worldwidegovernanceindicators

Countries 2004Rank

China 32.21

Taiwan 64.42

Thailand 23.08

Vietnam 50.96

Belgium 71.63

India 13,46

Indonesia 4,33

Source:WorldBankGroup(2015)

31

Togainabroaderoverviewofthestateofpeaceworldwide,the2015GlobalPeace

Index classifies countries into five categories. Fig 10 illustrates the stability of East-Asian

countries.

Figure10:2015globalpeaceindex

Source:GlobalPeaceIndex(2015)

Chinaappearstosufferfromalowstateofpeace,positionedat124thoutof162.Yet

even ifmany other countries aremore stable and safe than China, China does not suffer

fromattacksthatmightblockthecountryandhindertheflowofAppleproductsthroughout

theworld.

4.3 Internalisationadvantages

Finally, we identify the internalisation advantages (I) that explain the ‘how’ of

involvement.ThisthirdadvantageoftheOLIframeworkemphasiseswhyacompanymakes

32

FDI, whether by acquiring a foreign firm or bymaking Greenfield investments. However,

despitetheadvantagesofmakingFDI,Appledecidedtooutsourcetheproductionandthe

finalassemblyofitsproductsinChinaandthusnottomakeinternalization(TheWorldBank

(2016,a)).

OnereasonwhyApplemayhavedecidedtoestablishanoutsourcingcontractwith

Foxconn,ratherthanmakingFDIcouldbelinkedtothenegotiationpowerthatAppleenjoys.

Appleischaracterisedbytheirverystrongsupplychain.Theycontrolnearlyeverybranchof

thesupplychain,andcaneasilyobtainwhattheywantfromsuppliersduetothevolumeof

producttheyrequire.

Secondly,byoutsourcingtheproductionandthefinalassemblyofAppleproductsto

Foxconn,Applegainsstrategic flexibility.On theonehand,manyFoxconnplantswork for

Apple, which ensures a flexible supply chain and faster adaptation to meet changing

demand.Ontheotherhand,ChinesefirmsaremuchmoreflexiblethanAmericanones,and

FoxconnthereforerespondsveryquicklytorequestsfromApple(Hill,C.W.L.(2014)).Infact,

as the workforce availability is much higher, companies can reassemble workers or

engineers you need much faster. Additionally, labour laws allow companies to retain

workers overnight and 12 hours a day. Thus, factories can produce much more Apple

product,muchquickerthaniftheywereinAmerica(Teagarden,M.(2016)).

For example, one Foxconn factory can employ 230,000 assembly lineworkers and

each line can make 72,000 iPhones per day (FinancesOnline (n.a.)). The biggest Longhua

factorycanevenproduce137,000iPhonesevery24hours(Ngai,P.,&Chan,J.(2012)).Inorder

toguide the200,000assembly-lineworkersneeded tobuild the iPhone,more than8,700

engineersarerequired.Whereitwouldhavetakenninemonthstofindthatmanyengineers

inAmerica,itonlytook15daysinChina(Hill,C.W.L.(2014)).

FoxconnhasadoptedaproductionmodelapparentlybasedonclassicTaylorism.The

productionprocess isverysimpleandeveryworkercanperformtaskswithouthavingany

trainingorspecificknowledge(Chan,J.(2013)).Thisstrategicflexibilityisofgreatimportance

to Apple. Indeed, meeting demand on a day-to-day basis is essential for the company,

33

especiallysincethedeathofSteveJobs,replacedbyTimCookin2011.Whenaproductgoes

onsaleinretailstores,Appletracksthedemandineachstore,ateachhouroftheday,and

adjustsproduction ifnecessary.TheCEOTimCookemphasizesthe importanceofavoiding

as much sitting inventory as possible. He famously held that ‘nobody wants to buy sour

milk’.

As a result of thismotto,Apple’s networkof suppliers is alwaysunderpressure to

respectdeadlines and toproduce thequantity requiredasquickly aspossible. In fact,we

knowthatworkers inFoxconntypicallyoperateexcessiveovertime inorder to respondto

the demand of Apple. These suppliers are continuously under pressure and adapt

themselves to respond to the needs of Apple. The CEO’s special assistant Louis Woo in

Foxconnexplainsthatthecompanyhastwochoiceswhenfacingsuddenlyahigherdemand.

They canhiremorepeopleor let actualworkersdoovertime. The secondoption is often

chosenbecauseitisnoteasytohiremanypeopleinashortperiodoftime(Chan,J.,Pun,N.,

& Selden, M. (2013)). It emphasises the strategic flexibility that such network allows, and

more precisely why Apple decided to outsource assembly to Foxconn. Therefore, a

competitive advantage of Foxconn is its ability tomaintain flexibility (respect the delivery

time), which ensures a certain ‘security’ for Apple. In other words, they are demand-

responsive,whichiscrucialtoApple’sstrategy.However,thisparticularityofFoxconnleads

to controversial problemswith regard to working conditions, which are addressed in the

nextsectionofthispaper.

By outsourcing manufacturing of its product, Apple can also maintain a ‘simple’

organizational structure and therefore can effectively prioritise its different activities to

focusonthemostimportantones(Hill,C.W.L.(2014)).Highvalue-addactivitiesarealldone

intheUS,includingmarketing,productdesign/development,andsoftwareengineering.

Moreover,outsourcingtoChinaratherthanmakingFDIwillenablethecompanyto

avoidhighoperatingcosts.Infact,foreigncompaniesthatestablishthemselvesinChinaare

muchmorescrutinisedthanChinesefirms.Theymustmaintaininternationalstandardssuch

astax,labour,healthandsafety,whichyieldshighercosts(Torrens,C.(2010)).Furthermore,

localChinesefirmsoftenenjoycloselinkstolocalgovernmentofficials,whichcouldalsobe

34

beneficial. Foxconn, for example, typically has an alliance with the Chinese state. In

particular, local government courts Foxconn to encourage them to build new factories in

order to boost GDP growth in their specific region. Foxconn has received extensive land,

infrastructural support and labour from the state.Oftenas a result of such ties,domestic

competition inChinaisachallengeforforeigninvestors.Thus, it iseasiertochoosealocal

partneralreadyestablished inthecountry.Local firmsgrowrapidlyandclimbthe learning

curvequickly,whichisanessentialadvantageovercompetitors.

WecanalsoseeApple’soutsourcingchoicefromanotherperspective.Asmentioned

above,Apple is a very innovative firm that invests a largepartof its revenue intoR&D in

ordertobethemostinnovativeandoutpacetheircompetitors.Thechoicetooutsourcethe

productionandtheassemblyofitsgoodsisthereforeawaytokeepmoremoneytoinvestin

R&D. In fact, as previously said, investing in FDI would lead to higher organizational and

operatingcosts(Lo,C-P.(2011);pp.163-169).

AnotherimportantfactorthatcouldexplainthedecisionofAppletooutsourcerather

thaninternaliseistheexistenceofstrongIPprotection.Withoutit,thecompanywouldrun

the risk of its profit expropriation. In China,many laws have been set up to protect IP in

order toattract foreignbusiness. IP lawswereradically reformedunder thereignofDeng

Xiaoping in the late 1970s when he decided to open China to the outside world. A new

patentlawwasnotablyenactedin1984.In1985,ChinaaccededtotheParisConventionfor

theProtectionof IntellectualProperty.TheyalsosignedtheMadridTrademarkAgreement

in 1989 and acceded to the Patent Cooperation Treaty in 1994 (Devonshire, C., Scott, A.,&

Woollard,S.(2011)).

Nevertheless,despitethenumerouslawsensuringIPprotection,andtheaccessionof

China to WTO in 2001, Chinese IP protection remains a major challenge. Intellectual

property rights remain subject to continual violations and laws are hardly enforced.

Counterfeitoperationsarethusveryfrequent.For instance, in2004,90%ofChinesedaily-

use goodswere counterfeited (Torrens, C. (2010); pp. 98).Also, in 2003, 60%of counterfeit

goodsseizedintheEuropeanUnionweremadeinChina(Gipouloux,F.(2005)).Accordingto

35

the World Intellectual Property Organization, China is one of the worst counterfeiting

offendersinAsia.

China finally made improvements in legislation and enforcement for two reasons.

First,theyfacedmountingpressuretoofferprotectiontonationalbrands.Second,bybeing

a member of the WTO, they were more heavily scrutinised internationally to respect

requirementsoftheWTO’sTRIPS—theTrade-RelatedAspectsofIntellectualPropertyRights

thatcame intoeffect in1995 (WorldTradeOrganization (2016,a)).Nevertheless,despite the

new laws and regulations establishedby the state, enforcement bodies donot truly have

enoughpower,funding,credibilitynorincentivetoactagainstviolators.

Despite the weak IP protection in China, it is possible to justify why Apple still

decided tooutsource itsproductionand final assembly to Foxconn. First,we can suppose

that the majority of counterfeit products would not look exactly like Apple products.

Counterfeitscanbesimilarinappearance,butthecomponentsused,thefunctionalities,the

design, and so forth cannot be the same as Apple products. This is mainly because best

practices of Apple are difficult to imitate, and are specific ownership advantages that

Chinese or even Taiwanese companies will not be able to easily reproduce. In fact, the

engineersworkingforAppleintheUnitedStateswhodealwithhighvalue-addedactivities

can be said to have gained a certain experience that cannot be replicated. Apple also

benefits from negotiation power, having many partners, and a very strong supply chain.

Thus, from this point of view, Apple need notworry as itwould be nearly impossible for

ChinesecounterpartstobuildanempiretorivalApple’s.Eveniftheelectronicssectorisvery

competitive,andmarketshareisincreasinglycapturedbyotherfirmssuchasSamsungand

low-cost smartphone makers, Apple has its own strategy that differentiates it from the

crowd.Also,Applebenefitsfrommanypatentsandtrademarks(Apple(2016,a)).

Nevertheless, the most crucial element of Apple’s outsourcing success is the IP

protectioninTaiwanbecauseassaidaboveFoxconnisaTaiwanesefirmthatputthebulkof

itsmanufacturinginChina.TheR&D,thecontract,thespecificationsgivenbyApple,andthe

plans were shared in Taiwan. It is therefore in that country that IP protection should be

enforcedbecauseitistheTaiwanesefirmthathasthecontrolofApple’stradesecrets.Itis

36

thentheresponsibilityofFoxconntoprotectAppleinChina.IfaproblemhappensinChina

and if secrets or information are disclosed, Foxconn would be accountable. Choosing

FoxconnisavoteofconfidencefortheIPprotection,whichsuggeststhatthedealwouldnot

resultindivulgencesthatwouldhinderApple’business.

First,TaiwanhasalsobeenpartoftheWTOsince2002,whichmeansthattheyare

expected to comply with the TRIP agreement. They also adopted laws to strengthen IP

protection, considerably reducing piracy and counterfeiting to render Taiwan more

attractive tobusinesses. The Taiwan’s Trade SecretsAct alsoprovidesprotection to trade

secretsthatbelongstoTaiwancitizensandtocitizensofWTOmembercountries,including

theUnitedStates.Finally,theTradeandInvestmentFrameworkAgreementbetweenTaiwan

andtheUnitedStatesalsoensureintellectualpropertyprotections.Taiwancommitsnotto

violateanAmericanpatent(AmericanInstituteinTaiwan(2010)).

Moreover, it is in the interestof theTaiwanesegovernment toguarantee rights to

AppleasTaiwanishardlyrecognisedasacountrybythemajorityofthenationsintheworld.

For themoment, it enjoys a robust unofficial relationship with the United States, where

AmericaisTaiwan’s largestforeigninvestor(U.S.DepartmentofState(2015)).Therefore, it is

desirable forTaiwan toprotect a famousAmerican firm. Indeed, if a state-basedproblem

appeared,theUnitedStateswouldlikelysideagainstTaiwantodefendApple,whichwould

bepoliticallydisadvantageousforTaiwan.

BymakingadealwithFoxconn,Applelikelyestablishedacontractthatisfavourable

totheirbusiness,andsufficientlyprotectiveoftheirintellectualproperty.

Lastly,thetransactioncostscertainlyimpactedthedecisiontooutsourcetoFoxconn

ratherthanmakingaFDI.Thesecostsrepresentthecostofmakingadealwithacompany.

Put simply, this is ‘the cost related to exchanges of goods and information’ (Suemastsu, C.

(2014)).

Today, information processing is, more than ever before, at the centre of every

business. Software and intellectual property have also taken onmore significant roles in

every society. In fact, since markets globalise and integrate, companies have started

37

spreadingtheiractivitiesaroundtheworld;doingsocreatesmorecomplexcommunication

and increasesglobalcompetition. Therefore, thetransactioncost theory isarelevantand

important concept for the actual business environment in which we currently operate

(Suemastsu,C.(2014)).

Therearemanydefinitionsofwhata ‘transactioncost’ is,butwewill focusonthe

mostimportantdefinitions.First,transactioncostcouldbethecostofconcludingacontract

and, in case of litigation problems, the costs of resolving suits. Second, the term may

represent the cost linked tomoral hazard. Finally, the transaction costs may include the

qualitycontrolandthemeasuresundertakenintheoutsourcingentity.

Wecannowapply this theory to therelationshipbetweenAppleandFoxconn.We

hypothesisethattheAmericanfirmdecidedtooutsourceitsproductioninpartbecauseof

therelativelysmalltransactioncostsinvolvedinthemove.

The first reason for the low transaction costs between Apple and Foxconn is the

appearance of the Internet. Before the 1990s, it was quite uncommon to outsource

manufacturing to Chinese firms—transaction costs were too high. When a partner was

chosen, the foreign company was required to investigate the credibility of its quality,

delivery,anditstrustworthiness.Then,theforeigncompanyalsohadtoplanaprotocolfor

solving eventual problems with that Chinese partner. Indeed, foreign firms have their

customsandthustheyarerisksofdoingbusiness inanothercountry.Thus,outsourcing in

Chinawas tooexpensivedue to transaction costs.However,with thedevelopmentof the

Internet and of new technologies, communication become much easier, which brought

transactioncostsdown(Suemastsu,C.(2014)).

Secondly, costs linked to moral hazard are mainly avoided. Foxconn is keen on

satisfyingApple’severyneed inordertobuildtrust. Indoingso,FoxconnconvincedApple

thattheyarenotopportunistic,butratherarecapableofatrustingrelationship.Infact,by

satisfyingtheneedsofApple,Foxconnalsodemonstratesthatitisaseriousandastablefirm

(Suemastsu,C.(2014)).WhenAppledecidedtocollaboratewithFoxconn,italsolookedatthe

reputationof Foxconn. TheTaiwanese firmwas founded in1974, and thereforehad long-

38

termclientsandacertainhistory.FoxconnispartofHonHaiIndustrygroupthatwasyetthe

largestmanufacturersofelectronics.In2002,thegrouphadaturnoverof5billiondollars—

proof of their success (Bethesda (2003)).Moreover, as noted in the introduction, Hon Hai

workswith otherwell-knownmultinationals like Sony, Hewlett-Packard, Dell, Nokia (until

2001),Motorola,Huawei,andCisco.Furthermore,thereisnoevidenceofscandalsormajor

problems between the Taiwanese firm and one of its partners. This is further proof of

Foxconn’s reliability. This trusting relationship allows Apple to leave a large part of the

assembly of the final product to Foxconn, which allows both firms to benefit from

economiesofscaleandthustoenjoywidermargins.

The contract between both firms may also have played a role in this trusting

relationship by forcing Foxconn to respect Apple’s product specifications. Without a

sufficiently watertight contract, Foxconn would possibly have cut corners on the

manufacturingprocesstodrivetheirownprofitsattheexpenseofquality.Thus,wesuppose

that the contractwas sufficiently thorough, and that standards agreed under the original

termsofthepartnershipwillberespected.However,aswediscusslater,thecontractmade

betweenbothfirms isconfidentialand it isdifficult toevaluate its termsandtheeventual

qualitycontrolsestablished.

Nevertheless, contracting to outsource the production of Apple productsmay not

have been so simple. The partners must negotiate and agree on the conditions of the

transaction. They must agree on specifications, prices, deliveries, contingencies and so

forth—the process takes time and money. Apple had to clearly explain its expectations

about the final products, the payment, among other things. They must also decide on

protocolformistakesandproblems.IfFoxconnrejectsApple’sproposedmethodofproblem

solving,itcouldleadtolegalproceedings.

By choosing to work with Foxconn, Apple also had to consider the intellectual

property laws in Taiwan andChina. If the lawswere notwell established, costly litigation

mightarise.Aspreviouslydiscussed,whileIPprotectioninChinaisweak,weconcludethat

Appleissufficientlyprotected.

39

Inconclusion,theDunning’stheoryemphasisesthatafirmwillengageitsproduction

internationallyonly if threeadvantages/conditionshold.However,Appledoesnotentirely

follow this paradigm. They possess sustainable specific ownership advantages (O) and

benefitfromspecific locationadvantages(L),buttheydonot internalisetheproductionof

theirgoods.

40

41

5.Scenarios

Different scenarios involving the evolution of the alliance between Apple and

Foxconnarenowdeveloped.

5.1 ScenarioI:Consequencesofbadworkingconditions

scandals

This first scenario will be linked to working conditions in Foxconn plants. Many

articles, riots, complaints, lawsuits, scandals happened in 2010 after a series of suicides.

Sincethatperiod,Foxconn,andotherChinesefirms,areattheforefront.Beforelookingat

thepossiblefutureconsequencesofthissituation,thispaperwillfirstintroducethecontext

andmainreasonsfortheseemployeesuicides.

Asexplainedabove,Foxconntriestobeasflexibleaspossibleandtoadaptitselfto

Apple’sdemands,eventothedetrimentofsafetyandgoodworkingconditions. In fact, in

2010,eighteenworkersagedbetween17and25yearsoldattemptedsuicideattheFoxconn

production facilities, including sixteen in Foxconn Longhua, in Shenzen (see Annex 2).

Fourteenindividualsdidnotsurvive(Brown,G.(2010);Ngai,P.,&Chan,J.(2012)).Despitethese

poor working conditions and the labor contract law released in 2008, local government

continues tosupportFoxconn, ignoring theenforcementof labor lawsand incitingworker

grievance and feelings of desperation. Production workers are clearly pushed to their

physicalandpsychological limits.Manycontroversialproblemsstillexist inFoxconnplants.

ThefollowingareobservationsmadedespitethedifficultyofenteringFoxconnfirmsthatare

controlled24hoursperday.

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Foxconnplantsareorganisedthroughahighlycentralisedandhierarchicalproduction

system in which workers are subjected to very strict discipline. As noted in figure 11,

Foxconnmanagementhierarchycontainsthirteenlevels(Ngai,P.,&Chan,J.(2012)).

Figure11:Foxconnmanagementhierarchy

Source:Ngai,P.,&Chan,J.(2012)

Typically, seniormanagers formulate rules and standards, and lower level staff are

chargedwithexecutingthem;lowerlevelstaffareunderconstantpressuretobeasefficient

as possible. They repeat a simple task endlessly, and are pushed to complete their task

quickly. Workers appear to lose their freedom when working in Foxconn manufacturing

centres.Theyareconstantlysupervised:forinstance,toentertheworkshoptheymustpass

throughlayersofelectronicgatesandinspectionsystems.Whentheyareworking,theyare

always checked, and if they do notwork fast enough or if they talk in the line, they are

punished in public or insulted. The line leaders treat workers harshly in order to reach

productivitytargets.Workersshouldalsobeattentivetosupervisors’speechesaboutrules,

targetstoachieveandsoforth.Somecomparethesecampusesto‘concentrationcamps’of

labour(Chan, J. (2013); Ngai, P., & Chan, J. (n.a.)). On the walls of the factory, slogans from

Foxconn’CEO,TerryGoudeclare:

43

Aharshenvironmentisagoodthing

Executionistheintegrationofspeed,accuracyandprecision

Production operators are typically young migrants coming from the countryside.

Therefore, they work and live on the campuses. The living space is as controlled as the

workshop and every activity (e.g. eating and drinking, sleeping, and washing) is strictly

scheduled.Moreover,dormitoriesarenoisyroomsunsuitabletorest,wheretheonlyprivate

spaceforworkersistheirbed.Workersshouldalsofrequentlychangeofdormitoryinorder

tobreakupevery social links theymayhavecreatedwith their roommates. It isaway to

avoid any collective action against Foxconn. Workers just do not have any social and

personallifeandsuchenvironmentfacilitatesflexibleproductionthroughimposingovertime

workbecausedormitoriesandsweatshopsareveryclosetoeachother.Someworkersjust

donotsupportallthispressureandisolationandfinallyquitorattendedsuicide(Ngai,P.,&

Chan,J.(n.a)).

Workersarealsoputtedagainstoneanother inorder to increaseproductivity.The

workers who produce faster and who are disciplined receive production bonuses.

Nonetheless, the bonus will be reduced if they do not clock enough overtimework. The

pressure appears to be unbearable. In some factories, there is also a system of points.

Workers lose one point when they make mistakes, and they are fired when their count

reacheszero(Chan,J.,&Ngai,P.(n.a.)).

Asidefromtheconstantsupervisionandpressure,workersarealsosubjecttowork

hoursmuchhigherthanthelegalmaximum.Theytypicallywork12-hoursshifts,andthefirm

triestopersuadeworkersthroughpropagandathatsuccessandgrowthofthecompanyare

onlypossible iftheyworkdiligently(Ngai,P.,&Chan,J.(2012)).Someslogansthatareoften

hungonthewallsinclude:

“Hearttoheart,FoxconnandIgrowtogether”

“Valueefficiencyeveryminute,everysecond”

“Achievegoals,otherwisethesunwillnolongerrise”

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Therefore, despite the rules stipulated by labour law about overtime,most of the

workersarerequiredtoclockapproximately80hoursofovertimeworkeachmonthinstead

ofthe36hourlegalmaximum.Employeesareexhaustedandonlyhavefewdayspermonth

torest.Moreover,duringtheworkday,theyareallowedonlyshortpauses,andiftheydo

notreachtheirexpectedtarget,theymaybecompellednottotakeabreak(Chan,J.(2013)).

Despitetheselonghoursofdemandingandrepetitivework,employeesreceive low

wagescomparedtootherworkersincitiesandthehigherlevelmanagersinFoxconn(Ngai,

P.,&Chan,J.(n.a.)).

Employeesalsofacehealthandsafetyrisks.Deadlyexplosionsarecommonplaceand

workersarealsooftenexposedtopoisonouschemicals.AccordingtoasurveyfromtheFair

LaborAssociation, 43%ofworkers experiencedan accident in their campus. So there is a

patentlackofsafetyandsecurity(Nuttall,C.,&Waters,R.(2012)).

Another striking fact is the super-exploitation of students. Many students, mostly

agedbetween16and18,mustworkforFoxconnasinternsattherequestoftheirschool.In

reality, it is the government that encourages such internship because, as noted above,

governmentsareinclosecollaborationwithFoxconn.Infact,localgovernmentsviefiercely

for the opportunity to host Foxconn plants because the plants increase local economic

growth, therefore leading to student work. Such an arrangement is also beneficial for

Foxconnbecauseinternsarenotconsideredtoberealemployees,andthereforelabourlaw

neednotbeappliedinthesamewaytointerns(Ngai,P.,&Chan,J.(2012)).Moreover,despite

theiryoungageandthemaximumeight-hourworkdaystipulatedbytheEducationMinistry,

thechildrenoftenperformexcessiveovertimework.Furthermore,theworktheydoisoften

absolutely outside of scope of their studies, and therefore offers them little education.

These ‘student internships’ are arguably away to implement ‘student labour’. Foxconn is

alsoparticularlykeentohirechildrenbecausetheyareeasilyinfluencedandcontrolled,and

becausetheyrequirelowerwagesthanadults.Whereaswomenwerethepreferredtarget

oftheTaiwanesefirmyearsago,nowchildrenaremoresoughtafterasaworkforce(Brown,

G.(2010)).

45

After the suicide scandal in 2010, conditions in Chinese factories became amajor

issueforApple.TheAmericanmultinationalappearedtotakeparticularinterestinthetopic

becauseofthemediaattentionthatlabourconditionsgarnered.AftertheFoxconnscandal,

Apple began focusingmore on respect for their Supplier Code of Conduct (SCC). The SCC

contains expectations about labour and human rights, health and safety, environment,

ethics andmanagement commitment (Apple (2016, c)).Apple tried improving theirpublicly

perceived transparency by publishing the list of their 200 major suppliers. They also

dedicatedasignificantportionoftheirwebsitetotheir‘supplierresponsibility’.Infact,when

browsingit,theirsloganis immediatelyapparent: ‘Thereisarightwaytomakeproduct. It

startswiththerightsofthepeoplewhomakethem’ (Apple(2016,c)).Moreover,aswecan

seeinthefigure12,thenumberofworldwideauditsconductedbythecompanyhassteadily

risensincethesuicidescandalof2010-2011.Theauditsareinplacetoensuretherespectof

theirSupplierCodeofConduct.

Figure12:Appleannualaudits

Source:Apple(2016,d)

According to their 2016 progress report, Apple conducted 633 audits in 2015,

covering more than 1.6 million workers. When violations are discovered, the company

purports to work closely with themanagement of the concerned company to help them

improvetheconditionsofworkers.Applealsoclaimsthattheylimitworktonomorethan

46

60 hours a week, with amandatory day of rest once every seven days. The reports also

highlight that 95%of audited suppliers had complied in 2015. Apple has also emphasised

thattheydonottolerateunderage labour,and iftheyfindchildworkers,theywill require

thatthesuppliersreturnthechildrentotheirhomes,payfortheireducationataschool,and

continuetoprovideincomeforbasicneeds.Since2007,Applehasalsotrainedworkersall

over theworld in understanding laws, health and safety regulations, aswell as theApple

CodeofConduct.By2015,9.25millionworkershadreceived‘rightstraining’(Apple(2016,d);

Nuttall,C.,&Waters,R.(2012)).

ApplealsojoinedtheFairLaborAssociationin2012.Thelatterconductedanauditthesame

year in order to assess labour conditions in Foxconn facilities producing Apple products.

They noticed at least 50 serious non-compliances with Apple’s Code of Conduct and the

Chineselabour law,andproposedreforms.However,thesereformswerenevereffectively

implemented.ItissuggestedthatApplemainlyjoinedtheFairLaborAssociationtoimprove

theirpublicimage(FairLaborAssociation(2012)(ChinaLaborWatch(2015);Newton,J.(2012)).

Appletriestomaintainawholesomeandrespectfulimage.Infact,theSupplierCode

of Conduct is cited as a reason why people want to buy Apple products. If potential

consumers feel that Apple is a sleazy company that employs workers under abusive

conditions,theyarenotaslikelytoacceptpayingsuchhighpricesfortheirproducts(Ozimek,

A.(2012)).However,behindthescenes,thingsarenotasperfectasApplemayclaim.Infact,

Appleregularlyclaimsthattheymonitorsuppliers’compliancewiththeircode,buttheydo

notactuallyexerciseefficientcontrollingoverthiscompliance.Manyrulesarenotrespected

atplants,forinstance,overtimehoursoftenexceed60hours.Appleturnssufficientprofits

to improveworkers’ treatment.However,Apple is actuallypartly toblame for thesepoor

workingconditionsbecauseoftheconstantpressuretheyexertontheirsuppliers. Indeed,

asexplained inthefirstpartofthispaper,Foxconnhashadtoadapt itsproductiontothe

demandoftheAmericanfirm,andsometimesdemandissohighthattheproductioncannot

bemetwithout violating alreadyweakworkplace standards. Apple should therefore take

more responsibility, and should consider codes of responsible ordering practices. It is not

sufficient to simply make public commitments, and stick to its own code of conduct;

however, companies such as Apple appear to be most concerned with finding low-cost

47

producers in order tomaximise their profitwhile balancing their public image (Newton, J.

(2012)).

Foxconn has made some improvements and changes following the wave of the scandal.

First, they installed safetynets inall campusesanddormitorieswereallwire-grilled.They

alsoorganisedlabourunionelectionsin2013forthefirsttime.Theseunionelectionswere

generally controlled by management and by the local government (Hille, K., & Jacob, R.

(2013)). Moreover, they made some improvements regarding dormitories, restricted

overtime to no more than 60 hours, and also started increasing wages—although these

improvementswereespecially focusedontheLonghuaplants,wheremediaattentionwas

focused. After the wave of suicides, Foxconn also changed its hiring methods. All job

applicantshad to completeapsychological test inorder toavoidhiringpeoplewithmore

fragile spirits. The company also attempted to make workers sign a no-suicide ‘consent

letter’inordertolimitFoxconn’liabilityincaseofsuicideandtomakeworkersresponsible.

However, this no-suicide pledge was intensely criticised, and Foxconn finally dropped it

(Chan,J.(2013)).

Thestatedidnot takespecificmeasures,evenafter thesesuicides.Theypublicised

generalstatements,butthespecificmeasuresundertakenwereneverdisclosed.Moreover,

rather than looking for the reasons for these suicides, local-level Chinese officials instead

bannedallnegativereportingaboutFoxconn.AMay2010releasedstatedthat‘forthefront

pagesofnewswebsitesandnewscenterpages,blogs,micro-blogs,thereshouldbenonews

related to Foxconn except from official sources’. It might be surmised that the state

prioritisedprotectingFoxconnoverprotectionoftheworkers(Chan,J.(2013)).

Yet,evenifthestateandlocalgovernmentignorethesefacts,socialunrestinChina

has increased at an alarming rate, in part due to the growing access to communication

technology (Gobel, C., & Ong, L. (2012)). Current workers have greater access to news and

information, and thereforeexpectmore, andask formoreacceptableworking conditions.

This increasingawareness iswhyworkershavebegundemandinghigherwagesandbetter

working conditionsby stealingproducts, implementing slow-downsor ceasing toworking,

forming strikes, and sabotaging. Inotherwords, theworkershaveaworkplacebargaining

48

powerbecauseiftheydecidetostopworking,forinstance,itwillhaveanimpactonamuch

largerscalethanontheirproductionlinealone(Chan,J.,Pun,N.,&Selden,M.(2013)). Inthe

faceoflabourshortagesandoftheseprotests,Foxconnfinallyhadtorespondbyimproving

workingconditionsandbyraisingwages.Despiteimprovementsandactionsundertaken,the

situation is far from being perfect—workers do not work in perfectly fair conditions. For

instance,despitetheadomadeaboutlabourunionelectionsorganisedinFoxconnfactories,

the Fair LaborAssociation felt that theunion failed to truly representworkers (Hille, K.,&

Jacob,R.(2013)).

Overall, the Foxconn scandal had two important consequences. First, Foxconn and

Apple were brought into the spotlight, and media began scrutinising working condition

standards.Second,followingrisinglevelsofworkerprotests,Foxconnwagesstartedrising.

For instance, in Longhua (Shenzen) where Apple products are manufactured, salaries

increasedfrom$152to$320(ChinaLaborWatch(2015)).Foxconnnowpaysbetterthanmany

similar employees. Salaries also increased because of the Chinese transition phase. From

2008 to 2012, China’s minimum wage levels have registered an average 12.6% annual

growth(Chan,J.(2013)).Thefollowingscenariodiscussestherisingwagesfurther.

ApplebeganshiftingitsproductiontoPegatronin2011inordertosecureproduction

capacityandtoavoidrisinglabourcost(Chan,J.,Pun,N.,&Selden,M.(2013)).Thismovewas

also attributable to Apple’s new CEO, Tim Cook, who placed a greater premium on risk

diversification. Pegatron Corp (Pegatron) is a Taiwanese firm that existed since 2008 and

benefits themost fromthe locationchange.Pegatron’s corebusiness is theproductionof

computers and related components, and they have many locations in mainland China

(Pegatron(n.a.)).PegatronwasfirstresponsiblefortheproductionofApple’smoreperipheral

products, and finally started producing core products of the brand like the iPhone 6, the

iPhone5C,and the iPadMini (Dou,E. (2014)). TheybecameoneofApple’smain suppliers.

ApplestartedshiftingitsproductiontoPegatronbecauseofthelowerlabourcosts.Evenifit

representsonlyasmallpartoftheoverallcosts(seefollowingparagraph)thesavingswere

notnegligible.Infact,whencomparingall-inlabourcostsinPegatronShanghaiandFoxconn

Longhua,thesavingsareparticularlyapparent.PegatronShanghaiisasubsidiaryofPegatron

Group that has more than 80,000 workers; almost all of these workers work on the

49

manufacturingofAppleproducts(Chan,J.,Pun,N.,&Selden,M.(2013)).Therefore,bytaking

intoaccountall-inlaborcosts(bonuses,subsidies,hiringcosts),in2014,PegatronShanghai

still possessed an 8% cost advantage over Foxconn Longhua, translating into a 61million

dollarannualadvantage.Moreprecisely,thereisa21%differenceinbasepayalone(China

Labor Watch (2015)). Pegatron has the ability to hire an enormous number of dispatch

workerswhoaretempworkers.Thesetempworkerscostlessmoneybecausethecompany

doesnotpaythemfullbenefits,anddoesnothavetopaywagestotheminthelowseason.

Moreover,whenApple startedworkingwith the firm,Pegatronwas receiving little

attentionfromthemediacomparedtoFoxconn.Evennow,aGooglesearchwiththeterms

‘Foxconn worker’ returns 433,000 results compared to only 126,000 results involving

‘Pegatronworker’.However,thistrendcouldrapidlychangeandPegatronbecamemoreand

moreinthespotlightbecauseitisoneofthebiggestApplecontractors.

As we will see later in this scenario, Apple also starts working with other final

assemblycontractors.

AsforFoxconn,theyreactedtothesechangesbymovingapartoftheirproductionto

Brazil,Mexico,EasternEurope,andVietnam.Notably,anApplefinalassemblyfacilitycharge

oftheproductionof iPhoneand iPad issituated inBrazil.Foxconnalsomovedsomeof its

plantsinmainlandChina,includinginSichuanandHenanprovinceswheretheyestablished

factories towork forApple.Thesemovesbenefitted from lower laborcosts, tax,and land

costs.Despitethedistancefromthesea,andotherdisadvantagescited inthefirstpartof

this thesis, Foxconn convinced some of its suppliers to follow them. Moreover, these

locations contained plenty of available skilled labour, which was essential for Foxconn in

ordertorespondquicklytoApple’sdemand(Hille,K.(2010,a)).

We may wonder whether these poor working conditions will impact Apple and

Foxconn alliance.Would it impact Apple supply chain? Would Apple have to change the

supplierstheyworkwith?WouldtheystopworkingwithFoxconn?Wouldtheylossclients?

Would they losemoney?Would their imagebe impacted?Wecandevelop threepossible

futurescenariosabouthowthesituationmayevolve.

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5.1.1AppleandFoxconnalliancemaystayunchangeddespiterisinglabour

costs

Apple may continue working with Foxconn despite rising labour costs due to

mountingprotestsfromworkers,andotherexternalpressures.

We can hypothesise that it will not be too disadvantageous for Apple, and that it

won’tincitethemtostopworkingwithFoxconn.Infact,Appleisaverysuccessfulcompany

thatisabletocapturealargepartofthevalueofitsproducts.Assaidabove,ithasatypical

valuechain,andhasthiscapacitytoputpressureonallsuppliersandmanufacturersinorder

toproduce thepartsas fastaspossible,at the lowest costpossible.Aswecansee in the

figure13,theprofitmarginofApplerepresentsthebiggestpartofthevaluedistributionfor

theiPhone.TheChineselabourcostsrepresentonly1.8%and2%ofthetotalvalue,whichis

borderlinenegligiblecomparedtotherestofthedistribution.

Figure13:ValuedistributionoftheiPhonein2010

Source:Worstall,T.(2011)

Chinalabourcost1,79% NonChinalabour

cost3,78%

Appleprofit58,21%

NonApleUSprofits2,39%

EUprofits1,09%

Taiwanprofits0,50%

Japanprofits0,50%

S.Koeraprofits4,68%

Unidenrfiedprofits5,27% Costofinput

materials21,79%

51

Moreover, it is important to keep in mind that Foxconn has already moved plants in

mainlandChina.Asexplainedabove, Foxconnmoved inpart tobenefit from lower labour

costs. The companywill perhaps continuemoving plants into these provinces in order to

benefitfromcostadvantagesandtosatisfyApple.However,thesebenefitswillcertainlybe

temporary,andwageswilleventuallyincrease.Foxconnalsomovedapartofitsproduction

toBrazilwheretheiPhone6isassembled.

IfrisinglabourcosthindersApple,theymayreacttothisby,forinstance,increasing

the final priceof their products. Therefore, rising labor costs arenot a decisive factor for

Apple.Eveniftheyarekeenondecreasingtheircostsasmuchaspossible,risinglabourcosts

areunlikelytomotivatethemtoendtheiralliancewithFoxconn.

5.1.2AppleandFoxconnalliancemayonedaybebrokentoprotectApple

brandimage

ApplemaychangeitswayofworkinganditscontractwithFoxconnduetoremaining

conditionproblemsifpeoplematter.Threeevolutionsmaybehighlighted.

Peoplemaynot careverymuch,andApplemaymaintain itsworldwide reputation

andcontinueworkingwithFoxconn.Thesituationwillthereforecontinueasitis,andApple

willsimplycarryonmakingauditsandimplementingotherplanstomaintainarespectable

reputation.Forthemoment, thisscenarioseemstobeplausible. In fact,by lookingat the

netsalesevolutionofAppleinthefigure14,wenoticeaconstantgrowthacrossyears.

52

Figure14:Apple'snetsalesevolution(inmillion)

Source:UnitedStatessecuritiesandexchangecommission(2015)

However,thesituationinChinesefactoriescanstarttonegativelyimpacttheimage

of Apple. In fact, even if todaymost people do notworry about howApple products are

built,thebalancemaytipintheotherdirectionassomecitizensrealisethattherearemajor

issues behind the manufacturing of these products. Manifestations of such a change in

consumerfocusalreadytookplacetodenouncepoorworkingconditionsofApple’supplier

plants.Forinstance,inFebruary2012,aconsumerorganisationorganiseddemonstrationsin

frontofApplestoresinNewYork,London,Sydneyandotherbigcitiesintheworld.Onthe

12thJune2016,ontheinternationaldayagainstchildrenwork,demonstrationsalsooccurred

in front of Apple Stores. Associations also circulated petitions to put pressure on the

multinational.

Thepowerofmediashouldnotbeneglected.Ifacampaignerdecidestolatchontoa

company,informationcanberapidlyspreadaroundtheworldbymeanoftheInternet.One

day, Apple may be subjected to the same scrutiny as Nike. In the 1990s the company

became in the spotlight followingbadworking conditions in their sweatshop.Even if they

were not the worst in the sector, they had to change of partners and to completely

restructuretheirsupplychain throughout theworld.Theynotablystoppedworkingwitha

plantinCambodiawhereinvestigatorsfoundchildlabouraswellaswith11otherfactories

infourothercountries.Followingthesescandals,theyalsoestablishedaverystrictCodeof

Conductandadoptedotherstrictstandards(Skapinker,M.(2002);Graham,J.(2000)).Ifsucha

108,249

156,508170,91 182,795

233,715

2011 2012 2013 2014 2015

53

situation shouldmaterialise, Applewill need to restructure their supply chain,whichmay

impacttheirrelationwithFoxconn.

Itisdifficulttoknowwhichofthesesituationsismostlikelytohappen.Today,things

canchangesorapidlythatbothmaybeequally likelytooccur.However,weconsiderthat

thesecondscenarioisparticularlyrelevanttothecurrentperspective.Peoplebecomemore

andmoresensitivetohumanrightsandchildren’srights; therefore,workingwithFoxconn

degradesApple’simageandtheyrisklosingclients.Ontheonehand,theywanttobeseen

as company that respects all of its employees and it suppliers’workers. However, on the

otherhand,Appleseekstomaintain itshighmarginsandtohavevery flexiblecontractors

like Foxconn. These two mentalities are contradictory, which may start to disturb Apple

customers.WemaythereforeexpectthatonedayitwillbeintheinterestofAppletoendits

relationship with Foxconn. It seems likely that the relationship would end rather than

changesubstantiallybecauseFoxconnisaTaiwanesefirmwithaveryspecificmentalitythat

isunlikelytotransformradically.CuttingtieswillensureApple’srelationshipwithitsactual

customers. Even if it is costly, itmaybeworthwhile for their long-termsuccess (J.Ottman

consulting(2011)).

Nevertheless,changedoesnotseemtobeApple’spriorityforthemoment.Indeed,

the scenario where Apple stops working with Foxconn is less likely to happen now for

severalreasons.

Foxconn recently hired 130,000 additional workers for the final assembly of the

iPhone 6.Moreover, Foxconn is the sole assembler of the iPhone 6 Plus and seem to be

involvedinthefutureproductionoftheiPhone7(Hough,J.(2015)).Infact,themanufacturer

began hiring more people because the manufacture of this new iPhone will be more

complex than other Apple products (Heisler, Y. (2016)). All of these facts contribute to the

suggestionthattherelationshipbetweenFoxconnandApplewillnotyetdisappear.

It isalsocrucial toconsider thatApple isa listedcompany,and theprimarygoal is

thereforearguablytomaximiseshareholdervalue.EvenifitcouldbebeneficialforAppleto

end its collaborationwith Foxconn inorder tohaveabetterpublic imageand to keep its

clients,itmaycostagreatdeal,andshareholdersmaybereluctanttoapprovethenecessary

expenditurebecausebenefitswillonlycrystalliseinthelongterm.

54

5.1.3Applemayincreaseitsmanufacturingnetworktodiversifyrisksand

avoidrisingcosts

AnotherlikelyscenarioisthatApplewillexpanditsmanufacturingnetworkinorder

todiversifyrisksandavoidrisingwages.Manypermutationsarepossible.Asnotedabove,

Apple hasworkedwith firms other than Foxconn for the final assembly of their products

over the last several years (see Annex 1). Three eventualities are therefore possible: (1)

Applewillpossiblyreinforcetheiralliancewiththesenewfirms,(2)theymayworkwithnew

manufacturesand/or(2)movetheirproductiontoothercountries.

First, Apple may strengthen their alliance with Pegatron, their second largest

manufacturer.Aspreviously stated, they started shiftingapartof theirproduction to this

manufacturer in2011.Over theyears,Apple shiftedmoreandmore itsproduction to the

manufacturer. In fact, the latter recently hired 130,000 additional workers for the final

assemblyoftheiPhone6.Nevertheless,evenifAppleoutsourcesahugepartofitsproduct

to Pegatron, it is important to keep inmind that this Taiwanesemanufacturer also fields

problemswithworkingconditions.Evenifthecompanyisunderlesspublicscrutinyforthe

moment,theyhavealreadyhadproblemswithmedia.In2014forinstance,afteranarticle

bytheBBC,Pegatronquicklyreducedtheirworkers’workinghours.TheChinaLaborWatch

stillobservedmanyissuesin2015.Theyclaimthat52%ofworkerscompletedmorethan90

hours of overtime per month—which clearly exceeds 60 hours. Additionally, dormitories

were foundtocontainmore than tenworkers,whereasApplestandards restrictdorms to

eightpeople(ChinaLaborWatch&Framtiden(2015)).Therefore,workingwithPegatronmight

amounttocommutingtheproblemofworkingconditionstoalatertime(ChinaLaborWatch

(2015)).Whenthemediapublishesarticlesaboutworkingconditionproblems,Pegatronwill

needtoreactandmakeimprovements,asFoxconndid.

QuantaCompany is also a big supplier ofApple. This is a Taiwanese firm thatwas

established in 1988 and is specialised in computer hardware. It is the world’s largest

notebookcontractmanufacturer.Amongthe18finalassemblyfacilitiesworkingforApplein

2015, threeof thembelongtoQuantaCompany.Quanta is inchargeof theproductionof

55

MacsandiPads.TheyalsomanufacturetheiWatch,themorerecentproductofApple.They

are the solemanufacturer of this newproduct. This privilige could be proof thatApple is

strengtheningitslinkswiththecompanyandthatthealliancebetweenbothcompanieswill

not end anytime soon (Apple (2016, d)). Moreover, the company also moved factories in

mainlandandwesternprovincesinordertoavoidrisinglaborcosts,whichispositivepoint

forApple.

However,thecompanyalsoencounteredproblemswithworkingconditions.In2014,

China LaborWatch undertook a survey in a Quanta Company factory that manufactures

computersforSony,Dell,HPandApple.Theydiscovered15setsofviolation.Workersmust

workovertime,manysalariesareunpaid,andthe lackofsecurity in factories issignificant

(ChinaLaborWatch(2014)).

As notable in the Annex 1, Apple also started working with Wistron Corporation,

CompalElectronics, InvenecApplicationCorporation,andBYDCompany.Thesecompanies

areallsituatedinChina,andareresponsibleforthefinalassemblyofAppleproducts.Apple

may thereforealso reinforce its relationshipswith these firms in the future.However,we

willnotdevelopthisconcernfurtherbecausewedonothaveenoughresourcesandtimeto

explainaccuratelythefuturepossibleevolutionsofeachcompany.

ThemajorityoffinalassemblyfirmsworkingforApplearelocatedinChinaandhave

theTaiwanesenationality.Overtheyears,Appleseemstohavebroadeneditsnetworkwith

Taiwanese firms. However, it is important to highlight the reason for this Taiwanese

predominance.TaiwanhasalwaysbeenaheadofChinaregardingtechnology.But inafew

years,ChinesecompanieswillcertainlycatchupTaiwanesefirms.Therefore,itisimportant

tokeepitinmindthatApplemightstartworkingwithChinesefirms,whichcouldimpactits

alliancewithFoxconn.Asdiscussinthelimitationpartofthepaper,itmaybeinterestingto

makefurtherresearchaboutit.

Apple may also start outsourcing to a country other than China.We develop this

concerninthefollowingscenario.ApplealsoshiftedapartoftheirproductionintheUnited

States,whichisdiscussedinthescenario5.

56

In sum, this scenario is likely to be realised. Apple will certainly expand its

collaborationwithdifferentfirmsandthereforedecreaseitsdependenceonFoxconn,while

continuing working with the latter. Foxconn is already losing Apple orders. In 2015, they

received69%ofordersfromtheAmericanmultinational,comparedto87%in2014(Colleau,

A. (2015)). To react to this decline and recover their loss of revenue, Foxconn started

diversifyingtheiractivitiesandcustomerbase.Towardsthisaim,theyboughtthecompany

Sharp in early 2016. This companywas specialised in theproductionof screens, including

thoseofiPadsandiMacs.ThefiguresindicatethatAppleisdecreasingitscollaborationwith

Foxconnwithoutendingitsalliancewiththefirm.

5.2 ScenarioII:ConsequencesofChinatransitionphase

China’seconomyhaschangedoverthepast30yearsfromacentrallyplannedsystem

toamoredynamicmarket-basedeconomywheretwo-thirdsofeconomicactivity is inthe

handsof private enterprises. For the last several years, Chinahasbeen radically changing

andfocusingmoreonitsdomesticpopulation.Thecountry isthoughttobe inatransition

phase and is changing its economic model in the direction of a liberalisation of their

economy.Infact,theydecreasetheirexportations,theirFDIandrefocusmoreandmoreon

theinternalconsumptions.Theyshifttoamoreconsumer-driveneconomy.

First, new government policies favoured household income growth, improved the social

safety net, and supported the expansion of the service sector and private enterprises. It

createdmore and better-paid jobs (McKinsey & Company (2013)). Manufacturing wages in

Chinaremainedrelativelylowfrom1980to2005andcontinuedrisingsincethatperiod,as

depicted in figure 15. In otherwords, figure 15 illustrates the risingwages from 2005 to

2015.

57

Figure15:Averagewageperyear(inYuan)

Source:TradingEconomics(2015);NationalBureauofStatisticsofChina(2015)

This increase of Chinese salaries has led to the emergence of the Chinesemiddle

class.Themiddleclassgrewsteadilyinallofthecountry’smajorcities,aswellasinsomeof

itssmallerones.(Barton,D.,Chen,Y.,&Jin,A.(2013)).Thedevelopmentofthismiddle-income

consumer segment will radically change China. Indeed, by having bigger wages, Chinese

workers consume more, profiting from a higher purchasing power. This means that

consumers will be able to buy more services and goods. These economic factors

considerablyalter thementalityof residents,andallowChina to recentreon itsdomestic

population.Wherepeopleoncesimplewantedtoearnmoneyinordertoeatandtosupport

their family, Chinese today have disposable income, and therefore higher expectations of

theirexpenditures(TheEconomist(2016)).

AnotherimportantfactorthatcharacterisedChina’stransitionphaseisthedeclining

numberofmigrantworkers.ThisconcernisinpartduetothechangeinChinesementality.

Before,eldersandchildrenlivedinthecountryside,andtheotherfamilymembersmovedto

thecities inordertofinanciallysupporttheir family.Today,youngworkerstendtostayat

homeor next to their village. This trend clearly has an impact on the number ofmigrant

workers(FinancialTimes(2016)).Moreover,thisdeclineoftheurbanlabourpoolisalsodueto

theincreasinglyagingpopulation.In1980,only5%oftheChinesepopulationwere65years

0

10000

20000

30000

40000

50000

60000

70000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

58

oldormore.Weexpectthispercentagetoincreaseupto24%in2050.Figure16showsthe

structureoftheChinesepopulationuntil2030.

Figure16:Chinesepopulationstructure(inmillion)

Source:Gipouloux,F.(2005)

Olderworkerswhoarenear retirementagealsooften return to their family in the

countrysidebecause itbecomes toodifficult for themto find jobs incities.Big companies

prefertohireyoungpeople,andotheravailablejobsaretoodifficultfortheseolderpeople.

Thisslowintheurbanlabourpoolgrowthwillincitecompaniestoincreasetheirproductivity

throughtraining,automation,moreflexibleproduction,andenhancedemployeeloyalty.

Followingthesetransitions,Chinaislosingmoreandmoreitsstatusasthe‘workshop

oftheworld’.Thisisclearlydesiredbythestateastheylaunchedthe‘Nationalmediumand

long term program for science and technology development’ from 2006-2020. In other

words,Chinaintendstoshifttheirrolefrom‘madeinChina’to‘innovatedinChina’(Course:

‘Economicsofglobalinnovation’atKatholiekeUniversiteitLeuvenin2016).

Insum,thetransitionphasehappeninginChinaismainlycharacterisedbytheriseof

salaries, the expansion of the middle class, and the decrease in migrant workers and,

therefore,intheavailableworkforce.Toexplainthissecondscenario,wefocusonthefirst

27,7

66,7

5,6

26,7

66,6

6,7

23

70,2

7

17,9

64,5

17,6

0-14 15-64 65+

1990 1995 2000 2030

59

and third change. Thepossible consequencesof themiddle class expansion are explained

hereafterinthescenario4.

Before developing future possible evolutions of these two major changes, an

important consequence of this transition phase should be highlighted. The days of cheap

landandlabor incoastalcities,especially inGuandong,arewaningandbusinesses located

there have begunmoving into mainland China. Foxconn, following the example of many

othermultinationals,hasshiftedpartofAppleproductionfromShenzhentocentralChina,in

Henan and Sichuan province (Hille, K. (2010, b)). They invested in these provinces to avoid

rising laborcostsanddemographicchanges.Moreover,asnoted inthefirstscenario, they

also switched production locations to escape Shenzen suicide scandals, and the resultant

higher wages. Nevertheless, cost advantages in these provinces do not exceed 10%.

Moreover, by going to a new location, the company lost the concentration of suppliers,

logistics,andservicesthatGuandongprovincesofferedthem.

Capitalising on these challenges to China’s characterisation as ‘workshop of the

world’, thegoalof thegovernmentappears tobe tomove fromthepreviouscheap labor

export model to one based on innovation, domestic consumption, and services. More

specifically,theywanttoreinventindustryinthePearlRiverDeltaandChinatorankasone

of theworld’smost innovative countries by 2020 (Balding, C. (2016)). This province is now

attractingnewkindofbusinessesandfirmslocatingtherewouldbebenefittedbyreplacing

partofworkersbyrobots(wediscussthefuturepossibleconsequencesofrobotsinanother

scenario). Therefore, Chinese migrant workers mostly would return to the countryside.

Guandong is now attracting talents and entrepreneurial startups. Today some 8000

technologicalcompanieshavebeensetupinthecity,andthePearlRiverDeltaisbecoming

thenew‘Siliconvalley’(Bloomberg(2016)).Insum,theChinesetransitionhasahugeimpact

onmanyfirmslocatedthere,includingFoxconn.TheshiftofAppleproductioninBraziland

othercountriesisprobablyalsolinkedtothistransition.

Wecannowlookatpossiblefurtherconsequencesofthistransitionphaseandmore

particularly of the rising salaries and the decreasing number ofmigrant Chineseworkers.

What are the possible evolutions of the relation between Apple and Foxconn?Will other

countriesbecomemoreprofitablethanChina?WillApplestopworkingwithFoxconn?

60

5.2.1TheendofAppleandFoxconnrelationship

First, following the growing salaries in coastal and Eastern provinces, Apple may

decidetoenditscollaborationwithFoxconn.Wealreadydevelopthiseventualityinthefirst

scenarioandconcludethatthelikelihoodofthisevolutionissmall,atleastintheshortterm.

Infact,Appleseemstoengage itselfwiththefirmbyawardingthemtheproductionof its

mostrecentproducts.Asmentionedabove,Foxconnisalsoimplementinginitiativestoavoid

risingwagesbybuildingplantsinmainlandChina.Finally,labourcostsrepresentaverysmall

partofApplemargin.Applehasabigprofitmargin thatnever fellabove19.53%andthat

even reached 2.66% in 2012 (YCharts (2016)). It is defined as the proportion of revenues

remaining after paying operating costs like wages, raw materials and administrative

expenses (Chan, J.,Pun,N.,&Selden,M. (2013)).Therefore, fromthisperspective, itwillnot

incitethemtostopworkingwithFoxconn.

5.2.2Applemayincreaseitsmanufacturingnetwork

Apple may expand its collaboration with other manufacturers to depend less on

Foxconn. We also saw before that this process has begun, and we concluded that this

evolutionislikelytohappen.Byfindingotherpartners,Applecandiversifyitsriskandavoid

higherworkersalaries.

5.2.3ApplemayshiftfinalassemblyoutofChina

Appleproducts’finalassemblymaybeshiftedawayfromChina.Atthemoment,two

final assembly facilities are situated in the United States, one is situated in Ireland, and

anotherisinBrazil(seeAnnex1).Applemaycontinueshiftingproductionabroadindifferent

ways. First, by working with Foxconn, facilities may be built in—or relocated to—other

countries.Secondly,Applemayfindotherpartnersthathaveplantssituatedelsewherethan

China inordertoescapetheactualtransition.Finally, theymayalsorelocateapartofthe

production to the United States. We develop this last eventuality hereafter in another

scenario.

61

BeforelookingatthepotentialfutureApplemanufacturers,wewillfirstlookattwo

factorsthatareessentialwhenchoosinga location inwhichtodobusiness.Thesereasons

maybedecisiveandmaydeterminetheattractivenessofacountryinwhichtosituatethe

finalassemblyofproducts.

First,aswesawinthefirstpartofthispaper,workforceavailabilityisessentialwhen

lookingforalocationinwhichtodobusiness.ItisanimportantreasonwhyChinabecame

the‘factoryoftheworld’.Infact,thehugenumberofmigrantworkerswholefttheirvillage

to gowork in the cities led to China’swealth explosion. Therefore, another countrymay

have this potential. As we can see in figure 17, many countries in South East Asia are

inhabitedbyalargenumberofruralresidents.

Figure17:Ruralresidentsin2015(inmillion)

Source:FinancialTimes(2016)

Allofthesecountriesclearlyholdacertainpotential.However,themostpromising

countryisIndia,whoseruralpopulationin2015was863million.Thiscountrymayreplicate

Chinaandbecomethenewworkshopoftheworld.

62 80 96 105 115 118

863

62

Another important factor to look at is the average salaries in these countries. The

risingwagesinChinaisamajorconsequenceofitstransition;theaverageincomesinsome

oftheseAsiancountriesareclearlylowerthaninChina.

Figure18:Averagemonthlywagesin2013(inUS$)

Source:InternationallabourorganizationregionalofficeforAsiaandthePacific(2014)

Nevertheless, these two factorsarenotenough todeterminewhethera country is

suitable to manufacture products, and whether it is more attractive than China. As we

develop in the first part of this paper, many other characteristics are determinative and

shouldalsobetakenintoaccount.However,intheframeworkofthispaperwedonothave

enoughtimetodevelopallofthespecialfeaturesofeachpotentialcountry.Therefore,we

will focusonaselectfewwhereAppleproductsarealreadyassembled,orwheretheyare

themostlikelytobeassembled.

Beforedevelopingpossibleevolutions, it is importanttokeepinmindthatFoxconn

has already set up plants in countries other than China and Taiwan. One of the plants,

situated in Brazil, is already working for Apple. The other plants are situated in Mexico,

EasternEurope,andVietnam.Theymayestablishotherplantsorexpandexistingones.Ifthe

company continues its worldwide expansion, it may ensure a certain stability in its

relationship with Apple. In fact, if Foxconn locates its final assembly facilities in more

73121

183 197 215

391

613

63

favourablecountriesthanChina,andifitshiftedAppleproductionthere,itmaybebeneficial

for Apple. It will be a way to counter the transition phase of China and to decrease

transportation costs, import taxes, as well as respond more quickly to Apple customer

demand.Consequently,Applewouldnothave compelling incentives to stopworkingwith

themanufacturer.

We now look at possible future locations of final assembly facilitieswhether it be

ownedbyFoxconnorbyanotherfirm.

In2014FoxconnannounceditsdesiretoinvestinJakarta,oneofthebiggestcityof

Indonesia. First, the investment allowed them to depend less onChina,where the labour

costadvantagesaredecreasing.Second,IndonesiaholdsacertainpotentialforApple.Apple

canselltheirproductsinthatcountry,despitepovertyandthevastnessofthearchipelago.

Indeed,thewealthierconsumersarehighlyconcentratedinandaroundJakarta,thecapital,

andthenumberof thesepeoplethatwillspendmoneyongoodsotherthannecessities is

expected to rise from 45 million to 145 million by 2030 (Bland, B. (2014)). Foxconn is

projectedtoinvest1billioninordertoestablishR&D,productionandfinalassemblyinthe

country. Nevertheless, they did not officially claim the construction of these plants, and

negotiations with the Indonesian state are still happening. Moreover, a specific law in

Indonesia thatwill takeeffect in 2017may influence their decision.Companiesproducing

smartphonesinthecountrywillberequiredtoproducesomepartslocally.Itcouldrestrain

Foxconnto locate factories in Indonesia (Danubrata,E.,&Christina,B. (2015)).Therefore, for

the moment, we cannot ensure that Foxconn will establish final assembly facilities in

Indonesia. We are not in a position to say if negotiations with the state will end in an

agreementornot.

Tim Cook, the Apple’ CEO, visited India inMay 2016 in order to look at potential

projectsthatcouldbeundertakenthere.Accordingtounofficialinformation,heisplanning

tomeettheIndianPrimeMinistertotalkaboutbringingassemblyandmanufacturingtothe

country aswell as opening the first Apple Stores in India. Such amove facilitates iPhone

promotioninthecountry.Thisprojectmaymakesenseandcouldlikelyberealisedformany

reasons.Asidefromthehugenumberofruralresidentsandthelowaveragewage,Indiais

64

becoming themost desirable outsourcing destination of firms because the country offers

manyotheradvantages.

First,theyhaveahugenumberofavailableworkforcethatisqualifiedandavailable

every day 24/24 hours (Boillot, J-J. (2005)).Moreover, India is geographically well situated

nexttoChina,wherethebulkofApplesuppliersaresituated.Theyarealsoamemberofthe

WTOwhichoffersthesameadvantagesascitedaboveforChina.

Indiaisalsotheworld’ssecond-largestsmartphonebasewith222millionusers,whichonly

represents 17%of thepopulation.Moreover, itsmiddle class is expected toquadruple to

200millionby2020. It couldbecome theworld’s largest class consumermarketby2030.

Somepeopleevensay that ‘India is thenextChina’.Therefore, Indiahasahugepotential

thatshouldnotbeneglected.

However,Indiahasmajorchallengestodealwith.First,waterandenergyshortages

as well as increasingly overloaded roads and telecommunication networks are major

drawbacks. Environmental problemsmay also become difficult to manage. Besides these

general disadvantages, Indian productivity is also disadvantageous when analysing the

appeal of India as a manufacturing base. Physical productivity of Indian workers is far

inferiortoChineseproductivity.Thelatterarefarmorerapidintheassemblyofparts.It is

an important factor to keep in mind when choosing India as a new location for

manufacturing. However, robots may possibly counterbalance this lack of physical

productivity.

Fromanotherperspective,Indianconsumersarealsoverypricesensitiveandarenot

generallywillingtopayforiPhones.WhileApple’smostaffordablephonestartsat399$,the

average saleprice in India for smartphone isprojected todecline to102$by2018 (Rai, S.

(2016)).Alittle-knownIndiancompanyevenhasplanstosellasmartphoneat4$.Applehas

therefore been less successful in India than itsmajor competitors. Indeed, as depicted in

figure19,itsmarketshareissmallatonly3%.WecanexpectAppletotakeinitiativesinthe

nearfutureinordertorecoverthisdelaycomparedtoitscompetitors,andtobenefitfrom

thefuturepotentialofIndia.Appleproductsmaybecome‘madeinIndia’.

65

Figure19:Indiansmartphonemarketshare

Source:Culpan,T.(2016)

Thirdly,ifAppleestablishesitsownstoresinIndia,thelawrequiresthatatleast30%

oftheproducts’componentsbeproducedlocally,inordertoboosttheeconomy.

In sum, despite these challenges, India has great potential. Nevertheless, for the

moment, Foxconnexecutivesdonotplanonestablishingassembly facilities there. Froma

broaderperspective,themanufacturingofiPhonesandtheestablishmentofApplestoresis

stilluncertain.AppleproductsmayonedaybeassembledinIndia,byFoxconnorbyanother

company,butwecannotbesureofthiswithcurrentdata.

FoxconnisalreadysituatedinVietnam.Theymayexpandtheirplantsthereandshift

a part of Apple production. Other manufacturers may also be situated there. Indeed,

Vietnamisagrowingmarket. In2014,theynotablybecamethebiggestAsianexportersto

theUnitedStates.Vietnam isattractingmoreandmoremanufacturingplants. Samsung is

notably situated there to make the final assembly of its smartphones. Vietnam is also

characterizedbyayoungpopulation(Cheok,M.(2016)).

As already mentioned, an Apple final assembly facility owned by Foxconn is also

situatedinBrazil.Thisproductionbasemaybeexpandedinthefuturebecausethecountry’s

Apple3%

Samsung37%

Intex15%

Lenovo13%

Lava9%

Micromax23%

66

marketdemonstratespotential.Applemayalsobeinterestedinothercontractorssituated

there.ManyelectronicfirmssuchasSamsung,Lenovo,Ericssonandsofortharealsolocated

in Brazil. One positive factor for Brazil is its massive domestic market. Over the years,

consumershaveexperiencedrisingincomesandgreateraccesstocredit.Wecantherefore

expect an explosive growth of the country’s middle class. Nevertheless, they are major

challenges in Brazil regarding infrastructure problems, high tax (including hefty import

taxes), and red tape. For instance, Apple products that are imported in Brazil tend to be

twicethepriceoftheirUSequivalents.Thisispartofwhywedepictedthesamephenomena

asinIndia.Evenifthepotentialishuge,Applehasverylittlemarketshare—littlemorethan

1%. Therefore, we can expect the final assembly of Apple products to be shifted to that

country inordertoavoidthesehugetaxesandthereforetocapturea largerproportionof

the demand (Pearson, S., (2012)). Foxconn published its ambitions in 2013 to expand its

Brazilian plants. Nevertheless, we should keep in mind that Foxconn’s structure is highly

autocratic, and applying it to other culturesmay cause clashes. Indeed, Brazilians have a

differentwayofworkingthanChineseworkers,andattemptingtoimplementsuchaharsh

environmentmayleadtodissatisfactionandprotests.

Insum,Indonesia,India,VietnamandBrazilarepotentialcountriesthatmayoneday

replaceChinaasmanufacturingcapitals,orsimplybecomethelocationoffutureApplefinal

assemblyfacilities.

5.3 ScenarioIII:Thegrowinguseofrobots

Aspreviouslystated,Chinaisintransition,andhasencounteredrisingsalariesanda

decliningnumberofmigrantworkers.AconsequenceofthesechangesinChinesecostsand

demographyisthegrowinguseofrobots.Foxconnisoneofthesefirmsthathaveinstalled

suchenginestofacecurrenttransitions.

Every activity does not have the potential to be automated. For Foxconn, the

majorityofmanufacturingactivitiesaresplitupintodifferenttasksthatarepredictableand

simple to execute. Such tasks could easily be replaced by robots. Indeed, according to a

67

report fromMcKinsey&Company the technical feasibilityofautomation forapredictable

physical task isabout78%,comparedto25%forunpredictableones.Moreprecisely, they

ranked the technical feasibility of automation of many types of activities including

predictablephysicalworkinthemanufacturingsectorthathasatechnicalfeasibilityof90%

(Chui,M.,Manyika,J.,&Miremade,M.(2016)).ItexplainsinpartwhyFoxconnhadthisabilityto

automatepartofitsactivities.

Foxconnalsostartusingrobotsforotherreasons.Whiletheydoputrobotsintheir

plantsinordertobemoreflexibleandtorespondquickertothedemandofApple,theyalso

dosotofaceworkers’shortageandhighersalaries.Asnotedabove,coastalcities,especially

in Guandong province, are particularly hit by this transition. Indeed, many companies

upgradedtheirplantsbyreplacingworkerswithrobots.Itallowedthemtocuttheircostsby

nearly 10%. In Dongguan for instance, 43,684 workers were replaced by robots in 2015

(BloombegNews (2016)). The governmentplayed amajor role in that shift andencouraged

companiestoreplacehumanworkerswithrobotsbygivingthemfinancialincentives.These

companies are called the “dark factories”. Indeed, they do not need lights any longer

becauseonlyrobotsworkontheproductionline.

Moreprecisely,Foxconnrecentlydeployed10,000FoxbotstoassembletheiPhone6

(CompareCamp (2014)). 60,000 workers were also recently replaced by robots in another

plant.Thecompanyhasalsoinvested10milliondollarsinaventureforresearchinrobotics

andmanufacturing.Foxconn’CEO,TerryGou,notablyclaimedsomemonthsago:"Weare

applying robotics engineering andother innovativemanufacturing technologies to replace

repetitive tasks previously done by employees, and through training, also enable our

employeestofocusonhighervalue-addedelementsinthemanufacturingprocess,suchas

research and development, process control and quality control”. It is clearly just the

beginningandmanyotherworkerswillstillbereplaced.

Following this growing use of robots, we can wonder what could be the future

consequencesofthistrendontherelationbetweenAppleandFoxconn(Wakefield,J.(2016)).

68

Wedonot think thiswillnegatively impact therelationshipbetweenboth firms. In

fact,byestablishingrobots,Foxconncanmitigaterisingwagesandlabourshortages,andcan

thereforeensureastablerelationshipwithApple.Moreover,byusingsuchengines,Foxconn

isstillflexible,whichisessentialforApple.Italsomeansthattheywillbelessresponsiblefor

workerssocialandworklifeandthattheywillhavelessriskofworkingconditionscandals.

Consequently, the growing importance of robots in Chinawill not impact the relationship

betweenthetwofirmsandwilljustconfirmwhatwesaidabove—Applewillnotyetendits

alliancewiththefamousTaiwanesefirm.

5.4 ScenarioIV:ThegrowingimportanceoftheChinese

consumermarket

ThisscenariostatesthatApplemaycontinueworkingwithFoxconntostaycloseto

the Chinesemarket. Indeed, it may be beneficial for Apple to stay in China because the

Chinesemarketisbecomingmoreandmoreattractive.

Chinahas a very promising consumerbase, in part becauseof the growingmiddle

class. In fact, as explained above, this class is in full emergence. Before going intomore

detail,itisimportanttodefinewhatexactlyamiddleclassis.Therearevariousdefinitions,

but in the framework of this paper,wewill use a definition utilised bymany businesses:

‘peopleearningbetween$10USDand$100USDperday’.AccordingtoareportbyErnst&

Young, themiddleclass inAsiaPacificwill growby66% from2009 to2030 (Ernst&Young

(2013)).ThemiddleclassgrowthinChinaisrepresentedinthepicture20.

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Figure20:Shareofthepopulationthatisinthemiddleclass

Source:Ernst&Young(2013)

In other words, the Chinese middle class is becoming as important as that of

Germany,Italy,andFrancetogether(Thomas,P-H.(2016)).

Asthemiddleclasshasrisen,privateconsumptioninChinahasgrownandpeopleare

morewillingtopayapremiumforquality.Consumersceasetobuyjustnecessities,andare

more likely tobuy laptops, smartphones,andcameras.Therefore, itmaybebeneficial for

Apple,whoseproductsarequiteexpensiveandluxurious.

This Chinesemiddle classmay also be divided into different generations, including

theGeneration2.Thisgeneration is typicallycomposedof teenagersandyoungpeople in

theirearly20s.Todate,theyarethemostwesternizedinChina.Generation2wantstotry

newthingsandtobuyexpensiveproductsasstatussymbols.Theyarealsoveryloyaltothe

brandsthattheytrust.Therefore,thisspecificclassmayalsobeverybeneficialforAppleand

itcouldbeareasonforthebrandtostayclosetothismarket (Barton,D.,Chen,Y.,&Jin,A.

(2013)).

The emergence of e-commerce also plays a role and made Chinese market more

attractiveforApple.Infact,aspreviouslymentionedinthefirstpartofthepaper,withmore

11%

42%

72%

2009 2020 2030

70

than 700 million Internet users, China is a very attractive market in which to sell Apple

products.Moreprecisely,68%ofthemiddleclasshasaccesstotheInternet(Barton,D.,Chen,

Y.,&Jin,A.(2013)).

Apple implemented an aggressive strategy in order to increase the number of

iPhonessoldinChina(Culpan,T.,&Higgins,T.(2015)).Chinaclearlybecomesamajormarket

forApplethatcouldnotbeneglected.Bysimplylookingatthe2015annualreportofApple,

itisstrikingthattheChinesemarkethasagrowingimportancetoApple.Figure21showsthe

netsalesevolutionbyoperatingsegment.(ChinarepresentsChina,HongKongandTaiwan)

Figure21:Netsalesevolutionbyoperatingsegment(inmillion)

Source:UnitedStatessecuritiesandexchangecommission(2015)

In2012,Chinawasthethird largestmarketforApple,andaccountedfor13%ofall

sales. That year, the American firm sold two million iPhone 5s in China during the first

weekend it was available.More than 17,000 outletswere already selling Apple products.

Then,itdoesnotstoprising.TimCookevensaidin2013thatheexpectedChinatoreplace

North America as Apple’s largest source of revenue (RTE News (2013)). In 2014, Apple

completedadealwiththeworld’s largestmobilecarrier,ChinaMobile,tosell its iPhone5

acrossmainland China. The company hasmore than 760million subscribers (Guglielmo, C.

0

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Americas Europe China Japan RestofAsiaPaciMic

2013

2014

2015

71

(2013)).SuchasdealisawayforAppletobringtheirproductstoChinesecustomers.Chinais

indubitablyextremelyimportantforApple.In2015,itbecamethesecondlargestmarketfor

Appleandaccountedfor25%oftotalsales.From2014to2015,sales increasedby84%.It

overtakesEuropethatfallto22%.

In sum, following the rising Chinesemiddle class, and the growing sales in China,

Apple may simply stay in the country to be closer to its customers. Indeed, it may be

beneficialtomakefinalassemblyofproductsinChina,especiallyforgoodssoldtoChinese

customers. Therefore, this scenario may lead to three evolutions. First, the relationship

betweenApple and Foxconnmay remain stable and continue as it is. Second, Applemay

continueworkingwithFoxconn,butmayonlyleavethemresponsibleforChineseconsumer

products.Finally,ApplemaysimplyfindanothermanufacturerinChina.Thisscenariostates

thatApplewillcertainlycontinueoutsourcingpartofitsfinalassemblyinChina—itisonlyits

relationshipwithFoxconnthatmaynotbeguaranteed.

5.5 ScenarioV:ApplejobsbroughtbackintheUnitedStates

Asexplainedinthefirstpartofthispaper,Applehasaspecificsupplychaindispersed

allovertheworld—Appleproductsaccountforthousandsofmanufacturingjobs.However,

amongthe700,000peopleworkingforApplethroughouttheworld,fewofthemworkinthe

UnitedStates.WhetherornotthesejobsmightreturntotheUSbecameacrucialquestion

in2008,afterthefinancialcrisis,whenmanyAmericanlosttheirjobs.Indeed,aswecansee

inFigure22, theunemployment rate in theUnitedStates reached9.8% in2010. (It is the

ratetakenonthe1stofJanuary)

72

Figure22:Americanunemploymentrate

Source:BureauofLaborStatistics(2016);CentralIntelligenceAgency(2016,b)

Nowadays, unemployment has returned to a rate around 5%. It is a good score

compared toothercountries, likeBelgiumorFrance.Nevertheless,wemaystillwonder if

jobswillonedayreturntotheUnitedStates.Itcouldbebeneficialforthecountryandstill

decreaseunemploymentrates.

Atthemoment,twofinalassemblyfacilitiesarealreadysituatedintheUnitedStates.

ThecompanyFlextronicsisresponsibleforthemanufacturingofMacandQuantaComputer

(Apple (2016, d)). More precisely, Apple returnedMac production to the United States in

2013.They invested100milliondollars todoso,and theseMacsareclearly labelledwith

‘assembledintheUSA’(Smith,J.(2012)).

Wemaythereforewonder if thisscenario is likely tohappenand ifApplemayone

day decrease its orders to Foxconn to switch them in America.When examining possible

evolutions of this scenario, three casesmay be highlighted.On the one hand, it could be

disadvantageousforthemultinationaltobringproductionandassemblybackinAmerica.In

thatcase,ApplewouldkeeptheseactivitiesinChinatobenefitfromactualadvantages.We

4,7 4,6 5

7,8

9,89,1

8,3 8

6,65,7

4,9

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

73

emphasize themost importantdifferencesbetweenbothcountries thatmakeChinamore

attractive.Secondly, itcouldbeonthecontrarybeneficial forApple torelocatepartof its

activities in America to enjoy some advantages. Lastly, Apple may relocate part of its

production in that countrywithout having any choice. Theymay be forced following new

regulations.

5.5.1Apple’sjobskeptinAsiancountries

Today, since the industrial revolution, transportation costs have decreased and

transportationmeansaremorediversified.Itiseasiertoproducepartsinthemostsuitable

locations, and supply chains continue fracturing. However, distance remains less

advantageous for two reasons. First, it is beneficial to be situated in an agglomeration of

talentedindividualsandspecificfactories.Aswediscussinthefirstpartofthispaper,many

Foxconnplantsare situated in suchclusters in theGuandongprovince. Therefore,moving

theproductionoutofthesespecificzonestoAmericawillbedisadvantageousforFoxconn

and thus for Apple. Theywill lose benefits in the form of time andmoney, among other

advantages.Moreover, it is important to limit thedistancebetweenplantsbecausecloser

plantsareabletooperatemoreefficientlybyensuringcoordinationofproductionprocesses.

PlantslocatedinAmericawillbefarfromtheAsianmarketwherethebulkoftheproduction

isdone.Thesetwopointsand,thehangingtransportationandcommunicationtechnologies

curb temptation to shift, and instead keep manufacturing in Asia (The Economist (2012)).

These characteristics explain the first possible scenario, which states that Applemay not

bring production back to the United States. Other factors may also explain such an

eventuality.

Aspreviouslymentionedinthefirstpartofthisthesis,Chinaalsohasmanylocation-

specificadvantagesthatareessentialforAppleandnotofferedbyAmerica.Thefirstcrucial

determinant that makes China more attractive than the United States is the workers’

salaries. Figure 23 illustrates the gap between wages in these two countries. American

wagesare221.7%higherthancomparableChinesewages(Numbeo(2016)).

74

Figure23:Averagemonthlydisposablesalary(netaftertax)(in$)

Source:Numbeo(2016)

ThespeedandtheflexibilityofferedbyChinesefactoriesarealsounique.Itprovides

astrategicflexibilitytoApplethatwouldnotbeavailabletothecompanyifproductionwas

moved to America. Indeed, Chinese employees work an average of 12 hours per day,

whereas theirAmericancounterpartsworkabout8.6hours (Kavoussi,B. (2012)). Indeed,as

previously stated in the first part of this paper, Chineseworkers have a certainmentality

that leads them to bemore productive than Americanworkers. For example, they easily

acceptovertimework,average12-hourshifts,andliveindormitories.

TheChineseworkerproductivity indexmayalsobeconsidered.Nevertheless,when

lookingfornationalindex,theAmericanworkerproductivityishigherbecausetheseindexes

taketheaverageofworkerproductivityeverywhereontheterritory.Therefore,theChinese

index is clearly lowerbecausemanyprovincesarestillunder-developed inChinaandmiss

currenttechnologies.Indeed,manyprovincesarestillverylatecomparetocoastalprovinces

and it decreases average national worker productivity index. Consequently, to be more

precise, itwouldbe interestingtofindworkerproductivity indexperprovincebecausethe

oneofcoastalChineseprovincewouldcertainlybehigherthaninAmerica.Insum,goingin

America may not be very advantageous from the point of view of worker productivity

because,inChina,Foxconnplantsarealreadysituatedinthemostadvancedprovincesthat

disposed from current technologies and where worker productivity is much higher than

elsewhereinthecountry(Accenture(2016)).

2858,09

888,43

UnitedStates China

75

As explained in the first parton this thesis,Applehas aparticularly specific supply

chain,andtheycontrolnearlyeverypartit.Theirsupplychainisflexible,andprovidesApple

theabilitytoquicklyobtainthequantityofproductsthattheydesire.Indeed,aspreviously

mentioned, Foxconn satisfies every desire of Apple, which is in part thanks to Apple’s

negotiationpower.Therefore, fromaflexibilitypointofview,returningback intheUnited

Stateswill not bemore advantageous forApple because the company already has a very

efficientsupplychain.Nevertheless,itisgenerallymorebeneficialformultinationalstobring

partoftheirproductionbacktotheirhomecountryinordertospeeduptheirsupplychain

and establish a quicker flow of products to respond in a timely manner to consumer

demand.

Insum,itisclearthatattractingApplemanufacturingtoAmericaisnotjustamatter

of reducing labour costs in the United States. Many other factors, including ones cited

above,arealsoas important.Moreover, itwouldbecostlytoreplicatetheconvenienceof

the entire Chinese supply chain if jobs are brought back in America.Multinationals today

primarilyconsidermovesthatareoptimalforprofits.Appledoesnothavetheobligationto

solve America’s unemployment problems, and prefers to keep this money to invest in

innovationandotherprojects.Therefore,fromthesepointsofview,thescenariothatjobs

willcomebackintheUnitedStatesislesslikelytoreflectreality.Applewillalmostcertainly

continuemanufacturingthebulkofitsproductsabroad,andwilllikelykeepthehighvalue-

added activities at ‘home’. In 2012, Steve Jobs informedBarackObama that jobswill not

comebacktoAmerica(TheEconomist(2012);Duhigg,C.,&Bradsher,K.(2012)).Theproduction

theyrecentlybroughtbackwaslikelytoberootedinbrandimageconcernsasitappearsto

representonlyasmallfractionoftheentiremanufacturingprocess.

5.5.2VoluntarydecisionofAppletobringjobsbackintheUnitedStates

The second possibility regarding this scenario is linked to the potential benefits of

bringingproductionback to theUnitedStates.Thesebenefitsmaybevarious, sowehave

chosentoenumerateonlythemoststriking.

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First, theUnitedStates isoneof the16 countries in theworld thatdonot require

timeoffeachweek.ItmaybebeneficialforApple,andhelpthemachieveacertainflexibility

bymakingAmericanworkerswork every day. In China, rules require a certain amount of

timeoffeachweek (Gilson,D. (2011)).Nevertheless,aspreviously stated, theaveragedaily

hoursofworkinChinaismuchhigherthaninAmerica.Therefore,thisregulationdoesnot

seemcompellingenough to justifyApple’sdecision to returnmanufacturing to theUnited

States.

Another, more relevant, characteristic is the safety regulation in America. Indeed,

theserulesregardingsecurityinworkplacesarestricterthaninChina.Therefore,evenifit

wouldbecostlier toApple, itwouldbeaway toavoid scandalsaboutworking conditions

andemployeesuicidesasithappenedinFoxconnin2010.

Moreover,theloweremployeeturnoverintheUnitedStatesmaybeanadvantageof

shiftingproductiontothatcountry.Indeed,theaverageretirementrateis65.5yearsoldin

Americaand51.2yearsinChina.ItmeansthattheemployeeturnoverinChinaishigher.On

the other hand, Chinese plants encounter toughworking conditions that exhaustworkers

and lead tomany resignations,whichcompounds the turnover rate.Thishigh turnoverof

Chineseworkers at Foxconn factoriesmakes their plants less stable. However, this is not

veryrelevantinthecaseofApplebecauseChinahasatremendouslylargepoolofavailable

workforcethatcounterbalancesthisyoungretirementrate(Kavoussi,B.(2012)).Nevertheless,

a characteristic of the actual transitionphase inChina is thedecliningnumberofmigrant

workers. Therefore, having a stable pool of labour may be an attractive point towards

returningfinalassemblytotheUnitedStates.

It may also be advantageous for Apple to locate its activities in America in

anticipation of future possible regulations regarding the production of components. The

American government may decide to impose requirements that the production of some

partsmustbecompletedinAmerica. ItwouldthereforebeadvantageousforAppleifthey

arealreadysituatedcorrectly.

77

Apple may bring jobs back to the United States in order to avoid heavy taxes on

transportation. We will discuss this motivation in the following scenario related to

environmentconcerns.

ApplemayalsoeventuallyhaveanewCEO thatwillbe temptedtobringback jobs

becauseofamoreconservativemind.

Finally,ApplemayalsorelocateitsproductioninAmericatobenefitfromsubsidies.

The American state may offer heavy subsidies to Apple to incite the firm to relocate its

production in itshomecountry. Itwouldbenefit low-skillworkersandbedisadvantageous

for richerpeoplewhowillhave topaymore taxes.Such initiativemaydecrease the rising

incomeinequality.However,itwouldbeveryexpensiveandcontroversial.

5.5.3InvoluntarydecisionofAppletobringjobsbackintheUnitedStates

Apple may move the rest of its production and assembly to the United States

becauseofnewregulationsorchangesthatmayforcethemtochangetheirwayofworking.

Inthisrespect,wedevelopthemostrelevantpossibilitiesasfollows.

First,itisimportanttokeepinmindthatAmericanshaveaprotectionistmind,which

is reflected in the twocandidates for the2016presidentialelectionsof theUnitedStates.

Donald Trump mentioned his desire to bring jobs back home if he becomes the new

president of theUnited States. According to him, since China joined theWTO,Americans

closedmore than 50,000 factories and lost tens ofmillions of jobs. Therefore, he said he

wantstofightfortheAmericanbusinessbyreclaimingmillionsofAmericanjobsandreviving

American manufacturing (Trump Pence (2016)). On the other hand, the second candidate,

Hillary Clinton, also has protectionist ideas. Shementioned its desire to remove America

fromtheWTO(Navarro,P.(2016)).

Therefore,changesmaybeinitiatedbygovernmentandprotectionistideasmayone

dayhavemajor implications forApple’s supply chain. The futurepresidentmaydecide to

establish new regulations to oblige Americanmultinationals to bring production activities

back in the country. He or she may also decide to leave the WTO. The United States’

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continuedparticipationintheWTOisnotnecessarilyguaranteedandsuchadecisionmaybe

decisiveforApple.

Aspreviouslymentioned,theAmericangovernmentmayalsoobligetheproduction

ofsomepartstobedoneinAmerica.SuchacasewillforceAppletobringjobsbackinUSA.

Insum,itisdifficulttostatewhichoftheseevolutionsmayhappenbecauseeachone

maybe likely.But it shows that the relationbetweenAppleandFoxconnmayonedaybe

impacted.

5.6 ScenarioVI:Consequencesofthegrowingenvironmental

concerns

Amajorchallengeinsocietyiscombattingclimatechange.Indeed,forthelastseveral

years,humansand firmshaveproducedmoreandmoregreenhousegases (CO2,CH4,N2O

and so forth), which reinforces the greenhouse gas effect. It is especially the CO2

concentration that exponentially rises. This leads to an increase in the average earth

temperature,withmajorconsequences.Therearemorefloods,someregionsbecomevery

arid, the polar ice caps are melting, the temperature of oceans is rising, the snow is

disappearing,andthesealevelisincreasing.Climatechangehasbecomeamajorchallenge

thatsocietyshouldgrapplewith(Course:‘EnergieTechnologie’atKatholiekeUniversiteitLeuven

in2016).Internationalagreementsarethereforeinplacetoapproachthisproblem.Themost

famousistheKyotoProtocolthatislinkedtotheUnitedNationsFrameworkConventionon

Climate Change. It came into force in 2005 andmust set internationally binding emission

reductiontargets.Chinaispartofthischart(UnitedNations(2014)).

Asexplainedinthemethodology,wedecidedtodiscussthischallengebecauseChina

isamajorplayerinthisglobalwarmingproblem.Therefore,itmayimpactthefirmslocated

there, includingFoxconn,andtherefore itmaychangetherelationbetweenthe latterand

Apple.Itisparticularlyrelevanttodevelopthisscenariofortworeasons.

79

First,therapideconomicexpansionofChinaovertheselastfewyearsledtogrowing

pollution.Theybecamethefirst-largestsourceofgreenhousegases(GHG),aftertheUnited

States(seefigure23).Actionsshouldbeundertakentocontrolthisgrowthbecauseitdoes

notonlyhaveanimpactonChina,butalsoworldwide.

Figure24:TotalGHGEmisisonspercountryin2012(inMtCO2)

Source:CAITClimateDataExplorer(2012)

WhereasChina’senergyefficiencyisimprovedyearonyear,theyremainarelatively

energy-intensive economy, and their total carbon emissions grow continuously. The

fundamentalprobleminChinaistheirdependenceoncoaltoproduceenergy.Thisenergy

source releasesmuchmore CO2 than gas. They should therefore improve their efficiency

regarding coal usage and try to control their pollution as much as possible (Naughton, B.

(2007)).Moreover, if the situation is not brought under control, the public health will be

deteriorated.Thestatesshouldthereforeconsiderasolution,atleastforitspopulation.

Secondly,climatechangehasbecomeacrucialtopicthesedaysthatisparticularlyin

the spotlight in many countries. It becomes an important value for many people in the

world.Wenotably heard a great deal about theCOP21 that tookplace in Paris last year.

Therefore,itmayfurtherpressuretheChinesegovernmenttoimprovethesituationandto

implementmoreaggressivemeasures.

10684,29

5822,87

4122,642887,08

2254,47 1981

China UnitedStates

EU(28) India Russia Indonesia

80

Resulting fromthesechanges, theChinese stateput inplace specific regulations in

ordertocontrolCO2emissions,toimprovethequalityofairandsoforth.Companiesmust

nowsubmittostronglawsandtaxes.Moreprecisely,thecommunistpartyofChinarevised

theenvironmentalprotectionlawin2014.Itwillenterintoforcein2015.Inaddition,they

passed about 30 new laws, 90 administrative regulations and a number of environmental

standards. Through all these new regulations, basics rules have been added to heighten

consequences for violating China’s environmental laws (they increased penalties if a

company does not respect rules), to expand the scope of projects subjected to

environmentalstandards,andtoallownongovernmentalorganizationstotake legalaction

againstpolluters.TheNationalPeople’sCongressalsorevisedtheLawonthePreventionand

TreatmentofAirPollutionandtheLawonthePreventionandTreatmentofWaterPollution

(Falk,R.,&Wee,J.(2014);LibraryofCongress(2014)).

Wemightwonderwhattheconsequencesoftheserisingpollutionconcernsare.Will

pollutionproblemsandnewlawsimpacttherelationbetweenAppleandFoxconn?

First,wecanexpectAppletofindotheralternativesthanFoxconninordertoavoid

risingcostsandconstraintslinkedtonewstrictenvironmentalregulations.

Fromabroaderperspective,otherevolutionsmayalsobepossible,butwedecided

to focus on the one that seemed important. Apple could begin completing part of its

productionoutofChina inordertoavoidtransportation,andcosts linkedto it. Infact, for

themoment, the bulk of Apple production and final assembly is performed in China, and

productsarethenshippedallovertheworld.However,itisdetrimentaltotheenvironment

to transport thesegoods. Indeed, rawmaterialsare sent toChina, then finalproductsare

shippedallaroundtheworld,thenwastesisoftensendbacktoAsiancountriesandsoforth.

Sucha‘disposable’supplychainisdisastrousfortheplanet.Therearealsostrikingproblems

with containers. It is cheaper for Apple and many other companies to throw empty

containersandtorebuildnewonesinChina;however,thisisalsohighlydetrimentaltothe

ecology.

Manyotherexamplescouldbehighlighted,butthemostimportantmatterhereisto

understand the challenges that transportation and pollution create. We expect states to

81

create new regulations in order to incite firms to participate in short supply chain rather

than locatingactivitiesallover theworld. If statesdo soand start taxing transport,Apple

may have to change its way of working. Therefore, it will impact the relationship with

Foxconn because Apple may only produce products dedicated to the Chinese market in

China.ProductionofEuropeangoodsmaybecompletedinEurope,andAmericanproducts

manufacturingmayreturntotheUnitedStates. It isaneventualitythatweshouldkeepin

mind(InterviewwithBernardPaqueonthe22/07/2016)

82

83

6.Limitationsofthispaperandfurtherresearch

In addition to reading international press articles to develop the first part of this

paper,furtherresearchandtimemayhavebeenusefultoamorecompleteelaborationof

thissection.Indeed,indescribingthereasonsforthealliancebetweenAppleandFoxconn,

further information may have been useful to gather to develop some parts. Part of the

limitingfactoronthisinformationwasconfidentiality.Itwouldlikelybeimpossibletofind—

inthepublicdomain—theexactclausesstipulatedinthecontractbetweenbothfirms.For

instance, regarding quality control, we do not know exactly how Apple ensures that

manufacturers respect its product specifications. As Apple prefers to keep its operations

confidential, including itscollaborationwithFoxconn,wewould likelyneedmoretimeand

opportunitytointerviewAppleemployeesandotherthirdpartiesifwewanttoincreasethe

accuracyandcompletenessofourpaper.

As we saw inmany scenarios, Foxconn started shifting its activities into countries

otherthanChina.Indeed,aspreviouslynoted,Chinaislosingmoreandmoreofitsstatusas

the ‘sweatshopof theworld’. Thecountry isnotasattractiveasbefore,especiallydue to

risingsalaries.WenoticedthatsomecountriesmightbecomegoodalternativesforAppleto

outsourcetheirproductfinalassembly.Weenumeratedmajorreasonsfortheseshiftsand

thepotential advantagesof these countries.However, information about these countries’

attractiveness and weaknesses could be further developed—we only noticed the most

importantones.Withmoretimeandresources,wewouldconductfurtherresearchoneach

of thesecountries inordertothoroughlyunderstandtheirevolution. In fact,aswesaw in

the first part of this paper there are somemonetary factors to look at when choosing a

location in which to do business. Therefore, with more time, it would be interesting to

furtherdevelopanalysesof these countries, aswell asother countries. In future,wemay

look at eventual clusters, specific infrastructures, regulations, intellectual property rights,

locationsandsoforth.

84

Wealsodiscussed theother final assembly contractorsworking forApple, and the

possible evolutions of their relationswith theAmerican company.However, as previously

notedinthefirstscenario,wedonothaveenoughtimeandresourcestotalkaboutallofthe

suppliersthattheyworkwith.Indeed,Appleworkswithsevenfinalassemblycontractorsin

China,andweonlydiscussedtwoofthem:PegatronCorporationandQuantaComputer.We

preferfocusingontheseinordertobethemostaccuratepossible,especiallybecausethese

two companies are themost important suppliers after Foxconn. Nevertheless, withmore

timeandresources,wecoulddevelopotherpossibleevolutionsbetweenAppleand these

otherfinalassemblycontractors.

In the fifth scenario, we discuss the advantages of doing business in China and in

America. Nevertheless, we only focused on the most relevant. With more time and

resourceswemay analyse other advantages of both countries, for instance theAmerican

regulations.

Finally, in the framework of this thesis, we developed six scenarios regarding the

futureevolutionsofthealliancebetweenAppleandFoxconn.Asexplainedinthebeginning

ofthispaper,wechosetodiscussthesescenariosforspecificreasons.However,withmore

timeandresources,wecoulddevelopotherscenariosthataresubtlerandthatmayrequire

moreinvestigationtogatherdata.

For instance, itmaybe interesting to look at the evolutionof intellectual property

rights, as well as other important laws. A change in Chinese, Taiwanese, or American

regulationsmayinfluencetherelationshipbetweenAppleandFoxconn.Wedidnotdevelop

thisaspectofthetopicbecause informationaboutregulatorychanges isdifficulttogather

and the number of existing regulations is huge, so analysis ofwhich regulationwould be

mostlikelytochange,andinwhichperiodoftime,wouldaddexcessivecomplexityforthe

confinesofthisthesis.

Moreover, over the last several years, low-cost smartphonemakers have become

more and more dominant, with rising market share worldwide. Therefore, we may also

developa scenario regarding thispossibility,andconsequences itmayhave forAppleand

Foxconn.Wedidnotdevelop sucha scenario in thispaperbecause it seems less likely to

85

happen.Indeed,Applehasmanyownership-specificadvantages,includingitspowerbrand,

thatmakethefirmveryspecial.WethinkthatAppleiscompetinginadifferentmarketthan

the low-cost smartphone markers. Ultimately, the latter have different competitive

advantagesthanAppleanddonotproposethesamekindofproductsasApple.Therefore,

at first glance, these new players in the smartphone market are not threats to Apple.

However, with more time, it may be interesting to develop and analyse this situation

thoroughlyandconsidertheconsequencesitmayhaveforApple’sbrand.

Overthecourseofthisthesis,wediscussedthepotentialcountrieswhereApplemay

shift the finalassemblyof itsproducts tobenefit fromdifferentadvantages.Wealsonote

potentialTaiwanese firms (PegatronandQuantaComputer) thatmaybecomea threat for

FoxconnandthatarecurrentlyinchargeofAppleproducts’assembly.Nevertheless,itmay

havebeeninterestingtoadditionallyinvestigatepotentialChinesefirmsthatmaybecomea

threat to Foxconn. At themoment, none of the final assembly contractors have Chinese

nationality; the majority are Taiwanese. Therefore, we may wonder whether potential

Chinese firmsmayeventually startassemblingAppleproducts, andeven replaceFoxconn.

WedidnotdevelopthisscenariobecauseinformationaboutpotentialChinesefirmthatmay

assembleAppleproducts isnoteasytofindandrequiresthoroughanalysis.Therefore,we

preferred not develop it, rather than discussing it quickly and without enough tangible

information.

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87

7.Conclusion

Inthefirstpartofthispaper,weusedtheOLIframeworkinordertounderstandthe

reasonsbehindthealliancebetweenAppleandFoxconn.WeconcludethatAppleisaspecial

companythatcandifferentiateitselffromthecrowd—indeed,theyhavespecificownership

advantages. Then, we also investigated the reasons why they decided to make the final

assemblyoftheirproductsinChinaratherthanelsewhere.Chinaisaparticularlyattractive

country in which to do business. Indeed, the country possessesmany particularities that

ultimately transformed the country into ‘the factory of theworld’. Finally,we discovered

thatAppledecidedtooutsource the finalassemblyof itsproducts rather thanmakingFDI

becausethetransactioncostswerenottoohigh,andFoxconnwasacrediblefirm.

Inthesecondpartofthispaper,wedevelopsixscenariosaboutpossibleevolutions

ofthealliancebetweenFoxconnandApple.Toconcludethisthesis,wereturntothemost

likelyevolutions.

Regarding the first scenario, the most likely evolution is that Apple will continue

expandingitsmanufacturingnetwork.Indeed,themultinationalalreadystartedoutsourcing

final assembly to new firms like Pegatron, Quanta Computer, and so forth. Following

scandalsaboutworkingconditions,andtheadventofcustomerswhocaremoreandmore

abouthumanrightsandrisingsalaries,weexpectthisevolutiontobethemostrelevantand

themostlikelytohappen.ThesituationwhereApplejustceasestoworkwithFoxconnisless

logicalforthemomentbecauseontheonehand,wagesrepresentaverysmallpartofApple

productstotalvalue,andontheotherhand,Foxconnundertookdifferentmeasurestofight

scandalsandrisingsalaries.Moreover,Appleseemstooutsourcethefinalassemblyofthe

futureiPhone7toFoxconnwhatensuresashort-termrelationshipwiththelatter.

ThesecondscenariooutlinedthreemajorChinesechanges,(1)therisingsalaries,(2)

thedecreaseinavailableworkforceand(3)therapidexpansionoftheChinesemiddleclass.

88

Twoevolutionsseemthemostlikelytohappen.First,asinthescenariocitedbefore,Apple

will likely continue expanding its network and finding new collaborators to work with in

order todiversify its risksand toavoid risingwages. Second,Applewill certainly continue

shiftingpartoffinalassemblyelsewherethanChina.Wediscussedfourpotentialcountries,

Indonesia, India, Vietnam and Brazil. Even if they all have specifics advantages and

drawbacks, we want to highlight the attractiveness of India. This country offers small

salaries,ahugepoolofavailableworkers,andarisingmiddleclass.Wemaythereforeone

dayexpectpartApplefinalassemblyfacilitiestobeshiftedthere.

Moreover,wemayexpectpartoftheproductiontobesentbackinAmerica.Itisnot

inourpowertostatethata returnof jobswouldbecompulsory,butweshouldkeepthis

eventuality in mind because it is likely to happen. As we saw in the fifth and the sixth

scenario,evenif itmaycosta lotofmoneytoApple,theymaynothaveachoice. Indeed,

thefutureAmericanpresidentmaydecidetobringalljobsbackfromoverseas.Futuretaxes

on transportation and pollution may additionally make it too expensive to manufacture

Apple products abroad and to send them back to every consumer location. In such a

situation,partofthefinalassemblymaybeshiftedawayfromChina,andthealliancewith

Foxconn may therefore be impacted. Such a shift could also happen if new Chinese

environmentalregulationsbecometooimposing.

In the third scenario,we discuss the expansion of robots in Chinese coastal cities.

Foxconn isnoexceptiontotherule,andautomatedpartof itsactivities.Nevertheless,we

conclude that this automation will not radically impact the relation between Apple and

Foxconn.On the contrary, automationwill reinforce thealliancebetweenbothbecause it

willbeawayforFoxconntoensureacertainflexibilitythatwillhelpthemrespondtothe

needsanddesiresofApple,aswellasfightingagainstrisingsalariesanddecliningavailability

ofworkers.

The fourth scenario supports our vision that Apple may not totally end its

collaborationwithFoxconn—atleast intheshortterm.Indeed,besidesthegrowinguseof

robotswhich isbeneficial for theAmericanmultinational, theChinesemarket isbecoming

more andmore attractive for Apple. Chinawill likely soon become the largest of Apple’s

89

markets.Therefore,itwillalsobebeneficialforthefirmtocontinueworkingwithFoxconnin

ordertostayclosetothispromisingmarket.Bykeepingmanufacturinginalargeconsumer

market,theywillavoidsignificanttransportationcosts,logisticcosts,taxes,andsoforth.

Insum,intheshorttermwethinktherelationshipbetweenAppleandFoxconnwill

persistbutwilldecreaseacrossyears. Indeed,webelieveAppletocontinuediversifyingits

finalassemblycontractornetworkbystrengthening itsrelationwith itsotherpartnersand

by finding new contractors. We especially think that these partners will more and more

possessplantselsewherethaninChina.Therefore,thealliancebetweenAppleandFoxconn

willnotbebrokenyetbutacrossyearsthisrelationshipwilldiminishandAppleproductfinal

assemblywillbemoreanmoredoneabroad.Moreprecisely,weexpectAppleproductsto

beproducedindifferentcountriesdependingonthemarketwheretheywillbesold.Infact,

tax on transportation and pollution and the transition phase in Chinawill gradually push

Appletochangeitssupplychain.

90

91

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9.Annexes

Annex1:Apple’sfinalassemblyfacilities

Finalassemblyfacilities

Location

Products

AppleInc. Ireland MacBYDCompany China AccessoriesCompalElectronicsInc. China iPadFlextronics USA MacFoxconn China iPhone,iPodFoxconn China Mac,iPad,AccessoriesFoxconn China iPadFoxconn China AccessoriesFoxconn China iPhoneFoxconn China iPhoneFoxconn Brazil iPhone,iPadInvenecAppliancesCorporation

China iPod

PegatronCorporation China iPhonePegatronCorporation China iPhone,iPadQuantaComputerInc. China Mac,WatchQuantaComputerInc. China iPode,WatchQuantaComputerInc. USA MacWistronCorporation China iPhone

Source:Apple(2016,c)

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Annex2:ListofFoxconnworkerswhocommittedsuicide

Source:Ngai,P.,&Chan,J.(2012)