China made iPhone, iPhone made China?

Patrick McGee has written the definitive book on Apple’s relationship with China.

The short story goes something like this. 

Apple has always sought to build a deep moat around its products. It pursued a manufacturing strategy in China that followed this principle. Its design focus meant that many of its components were bespoke. 

Therefore, unlike its smartphone rivals, who used generic components off the shelf and could therefore hand over the design and outsource the entire manufacturing to contract manufacturers, Apple had to work very closely with its suppliers and contract manufacturers. Its obsessive focus on quality also made this an imperative. Accordingly, it sent its product designers and manufacturing design engineers from Cupertino to embed themselves with its contract manufacturers and suppliers, and transfer knowledge, skills, work practices, and work ethics. 

It set a very high standard for the deliverables from suppliers, who in turn acquired a reputation for being the best in class. This also meant that the employees in Apple’s supply chain had to undergo training and acquire a higher level of skills than was the case for others. 

Given the high employee turnover in the industry, Apple’s supply chain became a training ground for millions of manufacturing workers at all levels. McGee points to Apple’s own estimate that since 2008, a staggering 28 million workers have gone through Apple’s rigorous training, a number greater than the entire labour force of California! It may well be the single biggest skilling program that the world has ever seen, one that involved an American company imparting knowledge, skills, and practices to the entire Chinese electronics industry. 

Apple was not outsourcing as the word was commonly understood. Instead, it was sending its top product designers and manufacturing design engineers from California and embedding them into suppliers’ facilities for weeks or months at a time. There they’d whip local suppliers into shape, co-invent new production processes, and stay until the operations were up and running. “The think that really stood out was not just that it’s all in China, but that it’s the most vertically integrated manufacturing system in the world and yet they don’t theoretically own anything,” he says… Instead of selecting components off the shelf, Apple was designing custom parts, crafting the manufacturing behind them, and orchestrating their assembly into enormously complex systems at such scale and flexibility that it could respond to fluctuating customer demand with precision. Just half a decade earlier, these sorts of feats were not possible in China. The main thing that had changed, remarkably, was Apple’s presence itself. So many of its engineers were going into the factories to train workers that the suppliers were developing new forms of practical know-how.

Apple was also investing heavily in the production process to build moats around its manufacturing innovations, while rivals were just giving suppliers spec sheets and saying, “Build this.”… Apple did something totally novel. It purchased hundreds of millions of dollars of machinery, placed it in the factories of its supply partners, and ‘tagged’ it for Apple use only… The investments allowed its suppliers to operate at a level they’d otherwise be incapable of… As a former Apple manufacturing design engineer puts it: “The model we had developed was: We’re going to use your factory. We’re going to use your people. But we’re going to go in there and use them as our arms and legs. You know, ‘You do this, and you go do this,’ and ‘You set the dials here.’”… Apple’s engineers were deep in the weeds building, and even inventing those capabilities. Apple was doing this on such a scale that it created an entire organisation within Ops dedicated to the procurement, planning, and deployment of this capital-intensive machinery. 

All this also meant that Apple had complete control over its supply chain. In fact, it may not be incorrect to say that it did manufacturing, but without owning any factory!

In return for the capabilities development and tight guidance (plus, of course, the large volumes and the privilege of supplying Apple), Apple’s procurement division, headed by Tony Blevins, negotiated cut-throat deals that paid the lowest margins. Counterpoint Research has estimated that in 2016, even as Apple had a profit margin of 33%, its Chinese rivals Oppo, Vivo, and Xiaomi had 7%, 6%, and 2% margins. Foxconn’s margins fell to just 2.4% in 2011, and while its revenues more than doubled from $53 bn in 2007 to $107 bn in 2011, its profits barely rose from $2.41 bn to $2.53 bn. Apple’s suppliers realised that the skill acquisition, the massive volumes, and the reputation that comes with working for Apple compensated for the low margins. They could charge a premium for supplying to other smartphone makers.

Apple actively encouraged diversification among its suppliers by requiring that none of them should have more than half of their revenues from Apple. This was also for derisking since its models often involved radical shifts that obviated certain components that would have closed down suppliers, with all the negative press around job losses. This effectively meant that Apple’s suppliers were cross-subsidising their manufacturing for Apple by charging higher prices for their supplies to Apple’s rivals. 

McGee describes this relationship between Apple and its suppliers and contract manufacturers in terms of the Apple Squeeze

Apple’s engineering and operations teams would rigorously train local partners, in the process giving away manufacturing knowledge, in particular how to efficiently scale while maintaining the highest quality standards. In exchange, the local supplier would work for soul-crushingly low margins with the understanding that it could profit from the incredible volumes Apple demanded. It could also use these skills to win orders from other clients, charging them more for similar work.

Importantly, this condition also may have contributed to the birth of the Chinese smartphone industry. 

In 2009, the majority of smartphones sold in China were produced by Nokia, Samsung, HTC, and Blackberry. But as Apple taught the supply chain how to perfect multi-touch glass and make the thousand components within the iPhone, Apple’s suppliers took what they knew and offered it to homegrown companies led by Huawei, Xiaomi, Vivo, and Oppo. Result: the local market share of such Chinese brands grew by leaps and bounds, from 10% in 2009 to 35% by 2011, and then to 74% by 2014. It’s no exaggeration to say that the iPhone didn’t kill Nokia; Chinese imitators of the iPhone did. And the imitations were so good because Apple trained all their suppliers… Apple became the developer for China… Apple, in other words, set in motion a series of events that helped Chinese suppliers win more orders and advance their understanding of cutting-edge manufacturing. At the same time, Western manufacturing of electronics atrophied.

It also birthed a high-quality Chinese contract manufacturing industry. By shifting orders from its Taiwanese contract manufacturers, Apple has allowed Luxshare, BYD Electronic, Goertek, and Wingtech to take significant shares of Apple’s supplier network. More than half its component suppliers are Chinese firms, and many of the rest manufacture in China. The spectacular success of China’s electronics manufacturing ecosystem owes no small measure to Apple. I have blogged here about iPhone’s domestic value addition in China. 

Given its bespoke components, obsession with quality, and the massive volumes involved, Apple often invested in the equipment and machinery for its suppliers. As McGree writes,

The value of its “machinery, equipment and internal-use software” – namely the instruments placed in third-party factories for production – totalled less than $2 billion in 2009, but then soared beyond $44.5 billion by 2016 – more than four times the value of “land and buildings” owned by Apple – as the company took unprecedented control of its supplier network.

All told, Apple invested a staggering $55 billion a year for five years from 2015, for a total of $275 billion, more than double the entire post-war Marshall Plan. In addition to the investments in equipment to suppliers and construction of its retail stores, this estimate includes a sizeable part of wages that Apple paid to workers across its supply chain as training costs for teaching new skills and processes to refresh its multidimensional product portfolio. 

I’ll let McGee summarise the Apple story

By investing in and teaching local suppliers, Apple was inculcating a corpus of hands-on knowledge, both in tangible skills and abstract concepts, which applied well beyond serving its own needs. True, this was fairly unintentional; Apple hadn’t designed its supply chain to spur innovation at its suppliers. Yet that’s exactly what it had accomplished. And Apple’s investments weren’t just large, they were ruthlessly efficient and narrowly targeted in the advanced electronics sector… Thinking of Apple’s investment like a government program is instructive. Year in, year out, China didn’t have the talent or expertise to build the products that Jony Ive’s studio conceived, but the engineers Apple hired out of MIT, Caltech, and Stanford, or poached from Tesla, Dell, and Motorola, routinely got them up to speed. Apple could send a calibre of talent to China – what one Apple veteran calls “an influx of the smartest of the smart people” – that no government program ever could. And the culture was such that the Apple engineers would work up to 18 hours a day. Moreover, whereas a government program could at best train a workforce to engineer products, it wouldn’t have the ability to actually purchase the goods. But Apple could and did.

In economic terms, Apple was creating the whole market – supplying inputs in the form of worker training and machinery, then purchasing the outputs. The suppliers who won Apple contracts were given a massive order book and were taught to ramp up at a pace none had ever experienced. Better still, Apple had put so much design, brand image, and superb marketing into its products that even without commanding a dominant market share, it nevertheless attained a dominant market style. A new Apple product would set into motion the look, feel, and substance of what a laptop or smartphone should be. So the processes it often co-invented with China-based suppliers were in great demand…

What Apple had realised was that, unwittingly, its presence in China was enabling technology transfer on an extraordinary scale… Apple wasn’t just creating millions of jobs in the country; it supported entire industries by facilitating an epic transfer of “tacit knowledge” – hard-to-define but practical know-how “in the art of making things, in organising practical matters, and in the way people produce, distribute, travel, communicate, and consume,” as the China-born Federal Reserve economist Yi Wen defines it… The technology transfer that Apple facilitated made it the biggest corporate supporter of Made in China 2025, Beijing’s ambitious, anti-Western plan to sever its reliance on foreign technology.

Some thoughts: 

1. While China’s manufacturing prowess undoubtedly arose from multiple factors, it may not be incorrect to highlight the point about the central role played by Apple’s iPhone manufacturing to claim that China made the iPhone, and the iPhone made China!

2. When history is written, Apple will be considered an icon of efficiency and profit-maximising capitalism. The cost-minimising contracts with suppliers, low-margin outsourcing, the transfer of inventory to the contract manufacturer, the tight oversight of its suppliers and contract manufacturers, and the concentration of everything in China meant that Apple could harvest economies of scope and scale in an unprecedented manner, and thereby maximise its profits.

3. The other side of efficiency and profit maximisation is that Apple will also be considered a totemic example of risk concentration. It has yoked itself so deeply and intimately to China that any exit is near impossible, and it’s now virtually at the mercy of the Communist Party and President Xi Jinping. McGee compares Tim Cook to Jack Welch, who laid the foundations for GE’s demise. 

4. As McGee writes, unlike Japan, Taiwan, Korea, and China, which first made components before getting into SMT, assembly, testing, marking, packaging, and higher value-added activities, India has jumped straight into SMT and ATMP. Manufacturing of components is hard and requires the development of several critical capabilities, besides a workforce with high productivity that can also produce with high quality. These tasks are not amenable to the kind of learning by doing skill and knowledge spillovers like actual manufacturing, even if of components. 

5. Finally, the book is a story about how conventional theories of institutions and the rule of law to attract foreign investors break down completely in the context of China. If anything, as McGee highlights with several examples, China followed the opposite model of Rule by Law, where everything was subordinate to national interest as defined by the Party. Western multinational corporations invested and remained in China despite these problems.

Weekend reading links

1. India's airline industry

No-frills airlines, of which Indigo is one of the world’s best examples, accounted for half the total seat capacity in 2014. A decade later, their share had shot up to over two-thirds, helped in no small measure by full-service carrier Jet Airways’ collapse in 2019... China has seen a bigger decline in airfares since 2011—45%—than India. That’s partly a function of how competitive the market is. China has 146 operating airlines, including global ones, compared with 91 in India. The latter had over 100 pre-Covid. Go First, formerly Goair, was the last prominent airline to bite the dust when it declared bankruptcy in 2023. Over 15 Indian airlines have failed in the past two decades, according to IATA.

2. The Ken has a story on Indian automaker's rare earths dependence.

India imported about 2,270 tonnes of rare earth minerals in FY24, up 15% from the previous year. According to Volza, a platform that tracks import data, there were 42 Indian buyers in 2024, sourcing from 43 suppliers around the world.

Rare earths have a critical role in EV manufacturing

Rare earth elements (REEs) include 17 elements, mostly placed on one side of the periodic table. These are what make permanent magnet synchronous motors (or PMSMs) go. PMSMs are the de facto standard for EVs, especially in two- and three-wheelers. Other REEs like Yttrium and Lanthanum quietly show up in your battery cathodes and electrodes... Electric vehicles are powered by lithium batteries. But to actually move, they need magnets. Not just any magnets—rare-earth permanent magnets made from things like neodymium and praseodymium. They sit inside motors and quietly make everything spin... the rare-earth permanent magnet is the invisible hero of modern mobility—sitting inside motors, power steering systems, infotainment units, even automatic window mechanisms. Basically anything that makes EVs feel like tomorrow’s tech instead of just today’s transport.

3. Consulting firms have become the major sources of CEO recruitment in the US.

General Electric. Procter & Gamble. IBM. For years, those companies and a handful of others were held aloft as “CEO Factories,” admired for their ability to recruit and mold corporate chiefs. Over a 20-year span, just three dozen companies produced one-fifth of the chief executives in the entire S&P 1500 index... the dominance of the traditional CEO factories is fast becoming a thing of the past. The companies most notably taking their place: consulting firms. Alumni of Accenture, Deloitte, PwC, EY and even little-known Swiss staffing firm The Adecco Group have all grabbed a bigger share of global CEO roles over the past 15 years, according to an exclusive analysis of the career paths of the CEOs at more than 4,300 global public companies. Meanwhile, the influence of storied CEO factories like GE and IBM has diminished, according to the analysis by Live Data Technologies.

4. Oil prices and the Indian economy

According to the Reserve Bank of India’s (RBI’s) projections, a 10 per cent increase in oil prices from the baseline assumption can push up the inflation rate by 30 basis points and reduce the growth rate by 15 basis points. A substantially higher increase in oil prices would inevitably have a bigger impact. The RBI’s Monetary Policy Report in April had a baseline assumption for crude oil (Indian basket) at $70 per barrel for 2025-26.

5. India's use of anti-dumping duties (ADD) to combat "material injury" to domestic industries arising from dumping.

From 1995 to 2023, India initiated over 1,100 investigations — more than the US or European Union — targeting not only China but also the EU, Switzerland, South Korea, Japan, and others. In 2024 alone, India launched 47 trade remedy investigations — 37 aimed at Chinese products like aluminium foil, vacuum flasks, and steel... In the past five years, India has imposed 133 anti-dumping measures on 418 products, many in the chemicals sector. Firms that rely on these chemicals as inputs face a constant threat of sudden duties, resulting in price volatility and supply disruptions.

6. Indian economy facts

Private final consumption expenditure (PFCE), which makes up nearly 60 per cent of India’s GDP, fell from a growth rate of 6.8 per cent in the pre-Covid years to 4.1 per cent in 2019-20 (FY20). After a brief post-pandemic recovery, it fell again: To 5.6 per cent in FY24, according to the RBI, and an even weaker 4.4 per cent, according to the National Statistics Office... Since mid-2023, growth in personal loans has fallen off the cliff — from 22 per cent then or 10 per cent or so now — reducing consumption... merchandise exports, which fell 12.8 per cent in FY24 and are expected to grow by only 2 per cent in FY25... According to the Forward-Looking Survey of the Ministry of Statistics and Programme Implementation, actual intended private-sector capex will fall from ₹6.56 trillion in FY25 to ₹4.9 trillion in FY26, a fall of 26 per cent... According to the government data, net payroll addition under the Employee Provident Fund was -5.1 per cent in FY24 and -1.3 per cent in FY25. The Naukri Jobseek Index of white collar jobs has flattened since FY23.

7. Disturbing data on a surge in Chinese exports despite all the trade war restrictions.

This year so far, China’s trade surplus with the world is nearly $500 billion — a more than 40 percent increase from the same period last year... China has made 45 percent more electric vehicles this year, even as Chinese companies are engaged in a vicious price war at home because of flagging consumer appetite. Exports of electric vehicles have soared 64.6 percent this year, according to the Chinese Association of Automobile Manufacturers.

Domestic value addition in manufacturing - iPhone in China

As Patrick McGee has shown in a brilliant new book, the partnership between Apple and Foxconn to make the iPhone may have been a primary contributor to the emergence of China as the factory of the world. It may be no hyperbole to say that China made the iPhone, and the iPhone made China!

This post will highlight some aspects of the domestic value addition of the iPhone in China. 

The value addition chain for any product was described by the founder of Acer Stan Shih in terms of the smile curve. It says that the highest value is at the beginning and end of the value chain, while manufacturing, the middle stage, contributes less value. Yuqing Xing has a very good description of the manufacturing value addition smile curve. Outsourcing starts with the lowest-value assembly and moves to the manufacturing of non-core components, and then to more complex electronic components. The highest value-added activities like design, R&D, and branding remain with the original equipment manufacturers (OEMs). 

Yuqing Xing and Shaopeng Huang tore down and analysed the value-added by country for three mobile handsets assembled in China - Apple iPhone X, Xiaomi MIX 2, and OPPO R11s. They write

We adopt two baselines: production costs and retail prices. In terms of the production costs, it is found that the shares of domestic value-added for the three handsets are 25.4%, 15.5% and 16.7% respectively. For the iPhone X, Chinese firms collectively captured more value-added than the first generation iPhone 3G and performed relatively sophisticated tasks beyond simply assembly. For MIX 2 and OPPO R11s, the teardown analyses further reveal that no indigenous Chinese firms are involved in the manufacturing of components mounted on printed circuit board assembly. In terms of retails prices, the shares of domestic value-added for Xiaomi MIX 2 and OPPO R11s are 41.7% and 45.3% respectively, higher than the corresponding figures for production costs, suggesting that developing indigenous brands before overcoming technology deficiency is an alternative strategy to move up the value ladder along the value chains.

This graphic captures the respective domestic value addition for the three phones.

The high level of value added as a share of retail price in the case of OPPO and Xiaomi arises from branding.

However, using retail price as the benchmark, it is showed that there is strong evidence that Chinese firms have climbed up the ladder of value chains in the smile curve, more by building a strong brand name rather than developing advanced technological capabilities. More specifically, by taking advantage of (1) the size of the Chinese market; (2) their familiarity with the preferences of low- to mid-income customers; (3) the availability of modular production system and technological platforms, Chinese smartphone vendors have pursued a less conventional locus of upgrading, jumping directly to brand development before acquiring sufficient technology capacity. Such a strategy enabled them to overcome technological disadvantage and take a short-cut to catch-up with their foreign rivals.

But even for the Chinese brands, the major components are almost completely sourced from foreign firms. 

The domestic value added as a share of manufacturing cost is 15.5% for Xiaomi (total manufacturing cost of $293.18) and 16.7% for OPPO ($335.98). Even for Huawei, with its in-house chip, the domestic value added is only 38.1%, mainly due to the Kirin processor of HiSilicon, a Huawei subsidiary, and the OLED display made by BOE Technology. 

Xing traces the change in value addition as a share of manufacturing cost and retail price across iPhone 3G (2009) and iPhone X (2010). The table captures the tasks done by Chinese firms for the two models.

And the graphic below captures the respective value added in the two models. 

However, it’s interesting that while manufacturing value added in China has increased, the share of the iPhone’s total cost coming from Chinese firms has remained tiny, even for the latest models. Just 2.5% of the total cost came from Chinese firms, whereas over 80% came from US, Korean, Japanese, and Taiwanese firms. 

This graphic captures the country-wise headquarters of the suppliers of iPhone.

Though the cost-to-retail price ratio for iPhone models has been rising, it was still only 49% and 52% for the 15 Plus and 15 Pro models. This points to the dominant share of value added going to R&D and branding. 

In another paper, using the data for value-added for iPhone X, Xing shows (also this) that the standard trade statistics, which use the gross value of exports, overestimate the US trade deficit with China by attributing all gross value generated to the exporting nation. 

According to that principle, whenever China ships one iPhone X to the US, the current system of trade statistics calculates it as a $409.25 export to the US. The teardown data reveals that the total value of the parts imported from the US for assembly of the iPhone X is $76.5. Hence, importing one iPhone X from China generates a $332.75 ($409.25–$76.5) trade deficit for the US… However, Korea, Japan, and other countries are also involved in the production of the iPhone X and supply more than 45% of the parts and components. In other words, the $332.75 consists of not only value-added originating in China but also that contributed by Korea, Japan, and other non-US countries. It should be considered as a trade deficit between the US and all other countries involved in manufacturing the iPhone X, not just China. 

In terms of value-added, the US deficit with China for the import of one iPhone X is only $104, less than one-third of the figure based on gross value. For every iPhone X imported by the US, current trade statistics mistakenly add $228.75 to its trade deficit with China. In 2017, American consumers bought 42.2 million iPhone units. Using that figure as a reference, the iPhone trade alone exaggerated US trade deficit with China in 2018 by $9.65 billion, about 2.3% of its total deficit with China.

He also shows that, given the high share of foreign value added, China would need to depreciate its currency by a large percentage to offset tariffs by the US. 

The large portion of the foreign value-added embedded in the iPhone X greatly weakens the effectiveness of yuan depreciation in counterbalancing Trump’s tariffs. When the Chinese yuan depreciates against the US dollar, only the $104 Chinese value-added of the iPhone X will be affected. The rest of the iPhone X’s production cost—$305.25, the sum of all parts and components imported for assembling the iPhone X—will remain constant and not be affected whatsoever. However, if President Trump decides to levy a 25% tariff on the iPhone X, the tax base will be $409.25, i.e. the sum of both Chinese and foreign value-added. To offset the tariff burden due to the foreign value-added, the yuan should depreciate much more than 25%.

The horizontal axis denotes the percentage of foreign value-added embedded in Chinese exports.

Farok J Contractor of Rutgers Business School has updates on this analysis of the trade deficit arising purely from value-addition. His value-added numbers are much smaller than those of Xing. 

For a start, he writes that the components of the iPhone 16 may be sourced from as many as 43 countries, and Foxconn receives just $14 for the final assembly. 

He estimates the Chinese value added in the total cost of a finished and assembled iPhone 16 of $563.73 to be just $38.89. Taking the 62 million iPhone 16 imported to the US from China, the US-China trade deficit caused by iPhone comes to $33.6 bn.

The estimates show that the value being added in China is only $2.41 billion annually (for the battery, case, and assembly of each phone). The value added in the US is for the US-sourced components ($1.35 billion), plus the gross margin of Apple Inc. ($22.32 billion) and its distributors and retailers ($9.30 billion), totalling $32.97 billion.

He points to how tariffs on the finished import is deeply distortionary.

We can see in the Apple example how the value added in China amounts to only $38.89 in an iPhone 16. But the US customs department may assess a punitive tariff on the entire $563.73 FOB import value of the phone because all the components were finally assembled in China and shipped to the US from there.

Contractor also draws attention to an important point about how much value is captured by non-manufacturing activities, raising the question of whether the iPhone is predominantly a product or a service. 

Is this gross margin of $359.97 the profit per iPhone? No. The gross margin totaling $22.32 billion is used to pay for Apple’s 80,000 American employees – brilliant R&D scientists, technicians, designers, IT specialists, managers, marketers, supply chain personnel, etc. – who are talented enough to earn a median $127,000 salary annually. Only after paying for its US employees, US domestic transportation, distribution costs, marketing, and other overheads can what is left over be called “profit.” True, the great majority of Apple’s value added in the US is in high-end, valuable services – such as research, design, clever management, and orchestration of international supply chains and marketing – and not manufacturing or production, which is done abroad. Hence the earlier rhetorical question: Is the iPhone a product or a service?

Kun Cai, Zhi Wang, and Shang-Jin Wei have a new paper where they examine the trajectory of domestic value addition (DVA) in Chinese exports disaggregated on several dimensions and finds that industrial policies helped with the increase in DVA. This graphic shows the evolution of DVA of processing exports (those involving the export of goods with imported intermediate inputs, of the kind involving the iPhone) of manufactured goods. 

Direct value addition is that coming from the industry itself and not from other industries. The paper shows that the share of DVA did not increase sharply even over the 13 years of peak Chinese manufacturing growth. 

But the biggest story in value addition is how it has helped in the emergence of Chinese component makers, contract manufacturers, and branded OEMs in the mobile phones industry and beyond. Kyle Chan writes,

Apple’s Chinese suppliers are moving up the value chain. YMTC is the most striking case. State-backed semiconductor firm Yangtze Memory Technologies Co. (YMTC) is China’s most advanced NAND flash memory maker. In 2022, Apple was planning to use YMTC’s NAND chips for its iPhones, which are reportedly 20% cheaper than its competitors’ chips… Sunny Optical… became China’s leading optical parts manufacturers… Apple started using Sunny Optical in recent years to make the main camera lens for its iPhones, which had previously come from Taiwanese companies like Largan Precision and GSEO. Interestingly, one of Sunny Optical’s rising competitors is another Chinese company, AAC Technologies, which already makes acoustic and haptic components for the iPhone… Then there are Chinese companies like Lens Technology that have grown up with Apple over time… The company got its big break making the cover glass for the first iPhones in 2007. Over time, Apple has shared manufacturing technology from foreign firms with Lens Technology, like a new scratch-resistant screen material, to help the Chinese company improve its products. Today, Lens Technology is the world’s largest supplier of touchscreens, not only for most Apple products but also for Samsung, Huawei, Xiaomi, Oppo, and Vivo…

Historically, Apple relied on the big three Taiwanese contract manufacturers to make its products in China: Foxconn, Pegatron, and Wistron. But the past few years have witnessed the rise of homegrown Chinese contract manufacturers, such as Luxshare and Wingtech, which have been taking on a growing share of Apple’s manufacturing… This supplier base, which Apple and Foxconn helped to develop, later empowered China’s own smartphone companies like Huawei, Xiaomi, and Oppo. Apple’s suppliers in China—like Samsung, SK hynix, Sunny Optical, and Lens Technology—supply similar components to its Chinese smartphone competitors. The kicker is that even as companies like Apple try to move away from China, China’s manufacturing ecosystem will continue to be supported and pushed forward by its own homegrown smartphone companies. And now these same Chinese suppliers are already supporting China’s expansion into other industries, like semiconductors and EVs.

This is a good presentation by Yuqing Xing on how China’s role in the Global Value Chains emerged over time and the role of processing exports (those mainly made of imported intermediate inputs) in Chinese exports. 

The short lesson for India is this. Since its launch in 2021, the Production Linked Incentive (PLI) scheme helped create a large ecosystem of surface mount technology-based assembly in India, the starting point in the manufacturing race. But all the electronic components and PCBs, and the vast majority of electromechanical, mechanical, and other components are being imported and then assembled here. The natural next stage is to focus on the domestic manufacture of the purely mechanical non-core and then the other non-electronic components. This will require a PLI 2.0 that focuses exclusively on domestic value addition by targeting a few products and following a realistic pathway as mentioned above. I blogged about it here. 

Some thoughts on reviving manufacturing

Manufacturing has undergone transformational shifts in the last three decades. Technological advances, liberalisation of global trade, the practice of outsourcing manufacturing activities and offshoring them, and the emergence of China as the overwhelmingly dominant offshoring destination, have brought forth a quarter century or more of remarkable economic stability and prosperity. But this has also obscured severe economic damage and serious national security vulnerabilities that are now very evident and are convulsing domestic politics across countries. 

These trends have triggered debates on the future of manufacturing. On the one hand, some argue that reshoring manufacturing activities and reviving manufacturing jobs is a futile pursuit, and countries should instead focus on their services sector jobs. On the other hand, others, notably in the US, favour restoring manufacturing to its old glory. While the former tend to think that outsourcing and offshoring were largely a free lunch and there’s something irreversible about it, the latter see the revival of manufacturing jobs in terms of raising tariffs and making everything domestically. This post will seek to put the ideological debate in its perspective. 

The Economist has a very good fact-filled article which argues that pursuing manufacturing jobs may be futile and inefficient. It shows that the US manufacturing economy remains formidable, traditional manufacturing jobs pay less than others, and thanks to automation and other factors, even if there is a reshoring, the old jobs are unlikely to return.

Manufacturing produces more than in the past with fewer hands—a transformation much like that undergone by agriculture. Accessible, middle-class work of the sort that once drew crowds to the factory gates in America’s Fordist heyday has all but vanished. According to our analysis, the most similar work to the manufacturing jobs of the 1970s is not to be found in factories, which are now automated and capital-intensive, but in employment as an electrician, mechanic or police officer. All offer decent wages to those lacking a degree.

Whereas almost a quarter of American workers were employed in manufacturing in the 1970s, today less than one in ten is. Moreover, half of “manufacturing” jobs are in support roles such as human relations and marketing, or professional ones such as design and engineering. Less than 4% of American workers actually toil on a factory floor. America is not unique. Even Germany, Japan and South Korea, which run large trade surpluses in manufactured goods, have seen steady declines in the share of such employment. China shed over 20m factory jobs from 2013 to 2023—more than the entire American manufacturing workforce. Research from the imf calls this trend “the natural outcome of successful economic development”.

As countries grow richer, automation raises output per worker, consumption shifts from goods to services, and labour-intensive production moves abroad. But this does not mean factory output collapses. In real terms, America’s is over twice as high as in the early 1980s; the country churns out more goods than Japan, Germany and South Korea combined. As the Cato Institute, a think-tank, points out, America’s factories would, on their own, rank as the world’s eighth-largest economy.

Even a heroic reshoring effort eliminating America’s $1.2trn goods-trade deficit would do little for jobs. In the production of that amount of goods, about $630bn of value-added would come from manufacturing (with the rest from raw materials, transport and so on). Robert Lawrence of Harvard University estimates that, with each manufacturing worker generating $230,000 or so in value added, bringing back production to close the deficit would create around 3m jobs, half on the factory floor. That would lift the share of the workforce in manufacturing production by barely a percentage point. Assume this was done by levying an average effective tariff rate of 20% on America’s $3trn of imports, and it could cost an extra $600bn, or $200,000 per manufacturing job “saved”. That is a high price for jobs that are not as attractive as in the past…

Today factory-floor work lags behind non-supervisory roles in services on hourly pay. Even if you control for age, gender, race and more, the manufacturing wage premium has collapsed. Using methods similar to the Department of Commerce and the Economic Policy Institute, we estimate by 2024 the premium had more than halved since the 1980s. For those without a college education, it has gone entirely, even though such workers still enjoy a premium in construction and transport. Productivity growth has fallen, too: output per industrial worker is now rising more slowly than per service-sector worker, suggesting wage growth will be weak as well…

A job in industry is also now harder to attain. Modern factories are high-tech, run by engineers and technicians. In the early 1980s blue-collar assemblers, machine operators and repair workers made up more than half of the manufacturing workforce. Today they account for less than a third. White-collar professionals outnumber blue-collar factory-floor workers by a wide margin. Even once obtained, a factory job is far less likely to be unionised than in previous decades, with membership having fallen from one in four workers in the 1980s to less than one in ten today. 

What are the modern equivalents of factory workers?

What offers decent pay, unionisation, requires no degree and can soak up the male workforce? The result: mechanics, repair technicians, security workers and the skilled trades. Over 7m Americans work as carpenters, electricians, solar-panel installers and in other such trades; almost all are male and lack a degree. The median wage is a solid $25 an hour, unionisation is above average and demand is expected to rise as America upgrades its infrastructure. Another 5m toil as repair and maintenance workers—think HVAC technicians and telecom installers—and mechanics, earning wages well above the factory-floor average. Emergency and security workers also show similarities; over a third are union members.

Still, these jobs differ from manufacturing in one important way: there is no such thing as an hvac company town. Factories once powered whole cities, creating demand for suppliers, logistics and dive bars. The new jobs are more dispersed and, as such, less likely to prop up local economies. Yet although the benefits are more diffuse, they are almost as large. Nearly as many people are employed in such categories as held manufacturing jobs in the 1990s. With better wages, less credentialism and stronger unions, they may look more attractive than modern factory jobs to working-class Americans… Skilled trades and repair workers should see growth of 5% over the next decade, according to official projections; the number of manufacturing jobs is expected to fall. The fastest-growing categories for workers without degrees are in health-care support and personal care, which are expected to grow by 15% and 6%, respectively. These include roles such as nursing assistants and child-care workers, and do not look anything like old manufacturing jobs owing to their low pay.

There’s no disputing the point being made here that it’s a futile pursuit to restore the old manufacturing status in terms of jobs. However, that does not detract from the importance of focusing on manufacturing, especially in specific sectors for economic and strategic reasons. Further, given the circumstances involving China, any attempt to reshore manufacturing requires industrial policy and must be supplemented with protectionist barriers. Finally, no one country can match China's manufacturing dominance, and the only way out is to build within a coalition of allies a broad manufacturing base at a scale that can compete with China. None of these is mutually exclusive. 

Manufacturing is critical for several reasons. Historically, industries such as textiles, footwear, steel, cement, electricity generation, heavy equipment, consumer durables, electronic devices, and automobiles have been the mainstays of job creation and economic growth in both developed and developing countries. The economies of small towns to large regions have been built on these industries. They also tend to create 2-5 (or more) indirect jobs for every direct manufacturing job. An estimate by the Economic Policy Institute in the US shows that the number of indirect jobs lost for every 100 direct jobs lost is 744.1 for durable manufacturing compared to just 122.1 for retail trade. Services sector industries have far lower job multipliers. 

Manufacturing is also unique when compared to other sectors insofar as its industries have spillovers that go beyond job creation. Making things requires more things, which are made elsewhere by others. It spawns ecosystems of suppliers and intermediaries. Manufacturing involves technologies and practices that generate learning spillovers, which enhance productivity. Most importantly, it creates the conditions for innovations and technological progress, which in turn further boost productivity. Finally, manufactured goods are tradeable and therefore subject to the competitive pressures of a world economy, thereby rewarding efficient producers and punishing laggards. As economists like Dani Rodrik and others have written, manufacturing creates multipliers and productivity improvements unlike any other sector. 

Patrick McGee’s new book on Apple brilliantly illustrates how Apple transformed Foxconn by embedding its engineers and building capabilities, which in turn transformed Shenzhen by creating the foundations for an ecosystem of world-class manufacturing, which in turn transformed China itself into the factory of the world. 

The journalist James Fallows, who lived in China in the late 2000s, has argued that Terry Gou ranks second only to Deng Xiaoping in transforming China into an industrial behemoth over the previous fifty years. This is an extraordinary claim, but one backed up even by Gou’s rivals. “The reason Shenzhen is Shenzhen is Terry Gou,” says a high-ranking contract manufacturing executive. “Without his ambition, Shenzhen wouldn’t be the manufacturing power it is.

The book also quotes Intel’s Andrew Grove lamenting the trend of outsourcing of manufacturing work by the US PC makers.

Andrew Grove would later diagnose the problem as “a general undervaluing of manufacturing - the idea that as long as ‘knowledge work’ stays in the US, it doesn’t matter what happens to factory jobs.” But as Grove warned: “our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs - we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”

Most importantly, and especially so given recent events involving China, there’s a strategic aspect to the reviving manufacturing imperative. The pandemic exposed countries to their extreme dependency on China for everything from face masks to active pharmaceutical ingredients (APIs) and formulations. Such concentrated health risks pose existential challenges, and it’s not in the national security interest that countries expose themselves to such vulnerabilities. Besides, in recent years, countries have come to realise their excessive dependence on China for all kinds of manufacturing, including entire interconnected industries like green technologies. This kind of dependence on one economy has not been seen even when the US was the dominant manufacturing economy.

This dependence becomes a serious national security threat when faced with rising geopolitical tensions and trade wars. In recent years, China has abandoned Deng Xiaoping’s policy of ‘hide your strength and bide your time’ to pursue an aggressive foreign policy and precipitated border conflicts with neighbours. It has shown that it’s not averse to weaponising its dominance in manufacturing to restrict trade with its perceived adversaries, most famously manifest in the country’s policy on the exports of rare earth minerals. 

In December 2024, China announced a ban on the export of dual-use critical minerals like gallium, germanium, antimony, and superhard materials, which are used in the production of semiconductors and batteries as well as communications equipment components and military hardware such as armour-piercing ammunition. The country produces 98% of the global supply of gallium and 60% of germanium. In January 2025, it imposed restrictions on the export of technologies related to lithium extraction and the making of advanced battery materials.

Then, in response to the US reciprocal tariffs of April 2, the Chinese government imposed export restrictions on six heavy rare earth elements that are refined almost entirely in China and magnets made from them, of which 90% are made in China. Their exports are now licensed, and obtaining these licenses has become the point where leverage is being exercised. Further, reaffirming its intent, Beijing has also been cracking down on illegal trade.

More generally, it has also been creating hurdles to exports to certain countries. For example, India has been targeted selectively with several restrictions. Chinese authorities have been making it difficult for Foxconn, the Taiwanese contract manufacturer of Apple, to send machinery and Chinese technical managers to India to help build its supply chain. Customs delays and other obstacles are being raised to impede the flow of components and equipment.

For all these reasons, it’s a legitimate, even essential, requirement for productivity improvements, long-term economic growth, and, most importantly, national security for a country to have a deep and diverse manufacturing base. It’s important to acknowledge this requirement and view it separately from the ongoing debates and controversies about how to address the problem. The challenge should be about developing a strong manufacturing base (and not reviving some bygone labour share in manufacturing) in the least distortionary and inefficient manner.

Economists and experts who point to the beneficial effects of free trade tend to overlook the necessity of a domestic manufacturing base for both economic productivity and national security reasons. They harp on the benefits of free trade by looking at the last three decades. In this period, globalisation and the emergence of China helped expand global economic output at an unprecedented pace for a sustained period. It has enabled the biggest poverty reduction episode in history. Consumers have benefited from the globalised market and cheap Chinese imports, which kept inflation down for over three decades. The goldilocks of low inflation and high growth was achieved during this Great Moderation. In addition, China’s spectacular manufacturing capabilities have been central to the successes of the green transition, especially in the rapid scaling of renewable electricity generation technologies.

It’s therefore only natural that, when seen in isolation, experts see a resounding case for the continuation of the status quo. But they make the mistake of not stepping back and taking into account the unmatched benefits of manufacturing and its central importance for innovation, and the serious national security vulnerabilities that are surfacing amidst the growing geopolitical tensions between China and the US.

Finally, it’s a mistake to view the idea of restoring the manufacturing base as each country trying to bring back all manufacturing. Instead, the objective should be two-pronged. One, independent of the current geopolitical circumstances, all large economies should strive to have a strong manufacturing base, especially with capabilities across all strategically important sectors. This is important not only for economic reasons but also for strategic and security reasons, which are discussed earlier. 

Two, instead of the futile pursuit of each country (read the USA) trying to develop domestic manufacturing capabilities to match China, the objective should be to create the full suite of manufacturing capabilities within a broad coalition of like-minded countries. There are serious limitations to acting alone, and therefore, the necessity to mobilise a coalition of like-minded partners. No one country, even one as powerful and economically dynamic as the US, can break the stranglehold of China’s manufacturing dominance. The only realistic strategy to counter China’s dominance is to develop manufacturing capabilities across major industries within the coalition. 

Kurt Campbell and Rush Doshi (also this) have argued in favour of America forging alliances with like-minded partners to create a meta-economy that can outcompete China and manufacture at scale. 

To achieve scale, Washington must transform its alliance architecture from a collection of managed relationships to a platform for integrated and pooled capacity building across the military, economic, and technological domains. In practical terms, that might mean Japan and Korea help build American ships and Taiwan builds American semiconductor plants while the United States shares its best military technology with allies, and all come together to pool their markets behind a shared tariff or regulatory wall erected against China. This kind of coherent and interoperable bloc, with the United States at its core, would generate aggregate advantages that China cannot match alone...

For Washington, three realities must be central to any serious strategy for long-term competition. First, scale is essential. Second, China’s scale is unlike anything the United States has ever faced, and Beijing’s challenges will not fundamentally change that on any relevant timeline. And third, a new approach to alliances is the only viable way the United States can build sufficient scale of its own. Altogether, this means that Washington needs its allies and partners in ways that it did not in the past. They are not tripwires, distant protectorates, vassals, or markers of status, but providers of capacity needed to achieve great-power scale. For the first time since the end of World War II, the United States’ alliances are not about projecting power, but about preserving it.

During the Cold War, the United States and its allies outclassed the Soviet Union. Today, a slightly expanded configuration would handily outclass China. Together, Australia, Canada, India, Japan, Korea, Mexico, New Zealand, the United States, and the European Union have a combined economy of $60 trillion to China’s $18 trillion, an amount more than three times as large as China’s at market exchange rates and still more than twice as large adjusting for purchasing power. It would account for roughly half of all global manufacturing (to China’s roughly one-third) and for far more active patents and top-cited journal articles than China does. It would account for $1.5 trillion in annual defense spending, roughly twice China’s. And it would displace China as the top trading partner of almost all states. (China is today the top trading partner of 120 states.) In raw terms, this alignment of democracies and market economies outscales China across nearly every dimension. Yet unless its power is coordinated, its advantages will remain largely theoretical. Accordingly, unlocking the potential of this coalition should be the central task of American statecraft in this century.

But unfortunately, the Trump administration’s policies are pulling in exactly the opposite direction in terms of antagonising and decoupling from its traditional alliances.

Any effort to revive manufacturing will be costly. Consumers, businesses, and taxpayers must bear those costs. These costs are an internalisation of the costs of the negative externalities imposed by the practice of outsourcing and offshoring to China. I’ll blog separately on this.