In defence of using China

Is it just cost advantage that drives tech companies to China? It is a fraction of the whole story.

This is very, very slightly off topic but worth a Friday afternoon (CET) rant about the 'China problem.'

Jason Perlow correctly points out that Apple is not alone:

So we should cut to the chase that Apple is absolutely not unique in having products made by workers which are paid far below that of Americans, that work unbelievably long hours in sweatshops using child labor under conditions that rival that of the worst factories during the industrial revolution in America and Europe of the late nineteenth century.

I have no idea whether there is historic truth in what he asserts and I'm not going down that road although it sounds sort of plausible. Where I am going to go though is in upending his argument about labor arbitrage as THE driver. Yes, costs are lower in China than most anywhere else on the planet apart, I suspect, from the as yet unexploited continent of Africa. But that is not the point.

I thought that in a tangental way, Perlow was going to nail it through a link to a piece he wrote back in February 2011 but even that misses the point. There he says:

How is Apple able to do this where nobody else can? It has to do with buying up the entire supply chain and being able to leverage quantity 10 Million+ manufacturing orders in advance with its partners in China like FoxConn and with semiconductor component suppliers such as LG, Samsung and Philips.

When you have 50 billion dollars in liquid assets, you can pretty much guarantee huge volume pricing discounts at that scale, as well as make those components scarce and expensive for your competitors to buy.

This ability to leverage economies of scale and large component pre-orders, enabling Apple to own all of its own inventory in advance of a major product release is something the company has been doing going back to 2001, when the first iPods were being manufactured.

Once again, while important, it is not the point. While the ability to leverage large scale for cost advantage is a clear opportunity, in Apple's case that is only one point of reference. Dell, HP and others could all make the same kind of point.

Anyone who knows about outsourcing as it has unfolded the last 20 years knows that its success in part depends on a race to the bottom where outsourcers in low cost economies are in a constant fight to keep labor rates low. There comes a point when you run out of places to go. We don't yet know what the long haul brings but such an approach only works for so long and that costs inevitably rise. So how did Apple really benefit where others have not done so well?

I think the best clue comes from an article I read in a weekend edition of the WSJ NYT the other week while traveling in the Bay Area. (Online version here) In the article the author tells the story of how, six weeks before the original iPhone launch, Steve Jobs tasked the team to find glass that would not scratch.

They had already looked at glass from Corning but there were technical difficulties in cutting to size. China was the only place where they could get the job done in time. In the report (as I recall) the Chinese supplier (not Foxconn) was able to provision a production line capable of delivering to Apple's quality standards in a few weeks. The supplier, it is said, had gone to the lengths of starting to provision in anticipation of winning the order. That's real risk taking in the supply chain. The rest, as they say, is history.

The author made the point that when Apple needs engineers, not just assembly workers, it needs them at such scale and in short order that China is the only country capable of meeting its needs. The comparison was made with the US where what would take less than three months in China would likely take 9-12 months in the US. It is those supply chain process dynamics where China has every other country licked.

This is a massively understated achievement that has resonance into software development. The other week I had an interesting meeting with a technology decision maker/buyer where he expressed amazement at how fast the Chinese are at assembling competent teams able to deliver at fractional cost yet without sacrificing code quality. For that person, China is a no brainer but a shock to the broader development community he also has to support. That is because his employed group is far more used to working at a leisurely pace. If you think that startups turn out code quickly then you've seen nothing. More to the point, business on both sides of the buyer/seller divide are all going to have to adjust to the new pace of innovation being driven out of China.

As a darker side note, this week I spent a fascinating hour with the leader of a large enterprise user group who visited China for the first time last year. If you think exploitation works one way then think again. This person said that the experience of being in China was horrible. Why? Taxis have no change, pretend they don't understand what you are asking for and even though the meter might have a price, you could end up paying anything the driver chooses. The same in hotels where prices you thought were booked and confirmed suddenly escalate for a range of hidden charges. The overall cost may not be important in the scheme of things. Does it really matter if a $60 a night hotel suddenly costs $80? It is the sour taste such experiences leave. It is what my guest described as the 'land of the scam.'


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