One of the Taiwanese Original Equipment Manufacturers that works for Apple is Wistron. Another such OEM is of course Foxconn, the one we all know about. Both have been said to be opening manufacturing plants in India but it seems, according to this report, that it will be the Wistron one to be newly built in Bengalaru which will be producing for Apple in India. The initial reason for the plant seems to be to do assembly inside India’s tariff barriers and if it remains only as this then it’s most unlikely to have any great economic effect upon anything. The bigger question is whether doing local assembly then leads to the creation of a local supply chain–that could, and if it happened would, have a much more significant effect upon the Indian economy and the Make in India campaign.
The question here will, like almost all economic questions, depend upon how much value is being added locally. And the truth is that mere assembly adds very little:
Apple’s commitment to the Indian market has only been reaffirmed by reports that a Taiwanese OEM maker for Apple is setting up shop in Bengaluru.
Just to explain Apple’s production process. The company obviously designs the iPhones etc, organises for the production of all of the various components around the world and so on. Then it has them delivered to these OEMs almost all of which are operating in China (there is also a small Brazilian operation which will become important in a bit). The OEMs do the assembly–not, what we might call, manufacturing. The screens, chips, all of the expensive parts with high value add, are produced elsewhere. It is said that the value added in these Chinese sheds is some $8 per iPhone. Some 1% or so (roughly) of total retail price.
Now, there could be value in Apple getting this done inside India:
Currently, Apple holds a meagre 2 percent share in the Indian smartphone market and one of the prime reasons for this figure is the iPhone’s expensive price due to a high import tax. Currently, around 12.5 percent of import tax is levied on each iPhone sold in India.
Generally speaking components from which to assemble electronics enter India tariff free. Finished items pay that 12.5% tariff. This does not though, sadly, mean that simply doing the assembly in India is going to be cheaper by that 12.5%. India’s labour is cheaper than that in China, entirely true. But then so is general labour productivity lower–the two always go together, it is that general labour productivity which determines the wages of course. Whether the absence of the tariff will cover the productivity differential is unknown as yet. It’s not obvious as the Brazilian experience shows:
The iPhones now rolling off an assembly line near São Paulo, the only ones in the world made outside China, carry a retail price tag of nearly $1,000 for a 32-gigabyte iPhone 5S without a contract – among the highest prices in the world and about twice what they sell for in the U.S.
That’s inside a very high tariff barrier too. And in Brazil it simply has not sparked the creation of a local supply chain. In economic terms that’s the only important part of the process too. China earning $8 an iPhone inside a shed in Henan, India earning $8 an iPhone inside a shed in Bengalaru, this is not an important distinction nor is it relevant at the whole economy level for either country. What is important is whether it sparks that local supply chain:
When Apple CEO Tim Cook met Prime Minister Narendra Modi earlier this year, the latter had impressed on the need to start local manufacturing. Apple too agrees that India is an important growth market for the company. However, the need to source a certain percentage of raw material locally had become an obstacle for the same, as India does not have a robust component supply chain like in China.
We’re still talking about low value items here. Perhaps solder, capacitors, wires, these sorts of things. India does, of course, produce all of these. But that’s not the value of having a foreign manufacturer buying locally. The value is in driving up the standards of that local production so that it meets international standards. It is much, much, more about the knowledge of how to do it to world beating standards than it is about either the process itself or the value added.
Think about economic development for a moment. Just take a stylised view for a tad. The 300 million people of the US are not brighter, greater nor more special than any similar grouping of the 1.3 billion of India. They are though very much richer. The reason they’re richer is simply knowledge. The knowledge of how to be more productive. How to make things of higher value using fewer inputs–that really is what productivity is. And the greatest value that foreign customers bring to an economy is the demand that local production must start to meet those higher standards. That knowledge then spreads, slowly perhaps, out to other sectors of the domestic economy.
Thus the value to India of Apple producing in the country is not at all the value of what is produced. It’s the knowledge gained from doing the producing which is. And that in turn depends upon the creation of that local supply chain which gains that knowledge, not the existence of sheds putting together foreign components.
Apple plans to make iPhones for the Indian market in Bengaluru. Wistron, a Taiwanese OEM maker for Apple, is setting up a facility in Peenya, the city’s industrial hub, to manufacture the iPhones. The facility will start production from next April, according to industry sources.
Top sources in the company confirmed to TOI that Apple is “very serious” about beginning assembly operations —and thereafter full manufacture — in India by the end of next year. “Bangalore is being looked at seriously,” said multiple sources within the company.
I have absolutely no doubt that that assembly will be possible. Whether that moves on to something more is not obvious though. Full manufacture (ie, producing screens, processors etc) within India isn’t going to happen at all, but there could, possibly, grow that local supply chain in the way that China has done and Brazil hasn’t. We don’t know, Apple doesn’t know, the Indian government doesn’t know either. This is one of those things that just has to be done and then we’ll see. Precisely the point of our having a market economy of course, this is exactly the manner in which it all does work. People try things and then do more of what works and less of what doesn’t. That’s just the way that economic advance happens, via experimentation.
This article was sourced from http://cernews.com