APPLE’S GLOBAL ADVANTAGES

This case underscores the comparative and competitive advantages that Apple has cultivated, resulting in Apple being synonymous with innovation and creating its monopolistic advantage by controlling cutting-edge technology.

Since its inception, Apple has sold more than 1.2 billion iPhones in 120 countries. Apple achieved worldwide sales of $230 billion dollars in 2017 with a net income of more than $48 billion dollars. North and South America account for about 40 percent of total sales, followed by Asia with 30 percent and Europe with 25 percent. After the United States, China is Apple’s best market, providing about 20 percent of total sales. Apple products were once made entirely in the United States. Now, almost all of them are manufactured outside the United States. Through global sourcing, Apple contracts with suppliers around the world, where more than 700,000 engineers build and assemble its products. One of Apple’s key goals is to use comparative advantages from different countries. Comparative advantage is the ability of a specific country to produce a given product or service better or for a lower cost than other countries. For example, Apple bases most of its iPhone manufacturing in China because of the country’s high-quality, low-cost labor.

Consumers are one of the primary drivers of global trade, and they demand the best quality at the lowest prices. Global sourcing occurs when firms, striving for competitive advantage, capitalize on the comparative advantages of select countries to meet that demand. This results in increased imports through global trade. Apple exemplifies superior innovation, including new product designs and more efficient production methods. It conducts most of its own research and product development in company-owned facilities in California. Innovation increases Apple’s productivity, a gauge of how efficiently products are manufactured. Higher productivity allows firms like Apple to lower their production costs, which in turn increases profits and builds competitive advantage. An iPhone contains hundreds of parts, 90 percent of which are produced outside the United States. Apple sources semiconductors from South Korea, memory chips from Japan, motion sensors from Italy, and rare metals from Africa. Apple then manufactures its products in China, the Czech Republic, and other low-cost locations to minimize the cost of its products. A lower price tag for iPhones or iPads stimulates sales, which in turn requires Apple to produce in high volumes. Manufacturing large quantities usually results in economies of scale—the larger the quantity produced, the lower the cost per unit to produce.

Global manufacturing and trade can also produce negative consequences. Apple’s biggest supplier is Foxconn, a Taiwanese manufacturer that employs more than a million workers in its Chinese factories.

Employees there have complained about long hours, low wages, and crowded dormitories. Some have even committed suicide. In response, more than 250,000 protesters signed a petition demanding better labor conditions for Apple contract workers abroad. Foxconn responded by increasing worker wages. This action reduced China’s comparative advantage, but it also told the world of Foxconn’s commitment to social responsibility. Apple also moved some production to India to take advantage of less expensive labor there. Apple, like many other firms, struggles with the right balance between economic considerations such as low-cost manufacturing and ethical issues such as ensuring safe and proper working conditions

Questions

1. Explain why most Apple products are made outside the firm’s home country, the United States.
2. What is comparative advantage? How does Apple benefit from comparative advantage?
3. Describe the problems that Apple experienced with its supplier Foxconn. What steps did Apple take to resolve the problems?