Opinion | So, Why Has Apple Stuck To Its Chennai Plan Despite Trump's 'Warning'?

There is a Tamil idiom that comes in handy as we discuss US President Donald Trump and his engagement with a global technology giant like Apple: "Like trying to extricate a saree from a thorny shrub". Trump may be well-advised to consider the saying as we discuss Apple's manufacturing plans for its iconic iPhone or other products that spell brand value, utility, style, and cutting-edge innovation.

The decision by Foxconn, which makes iPhones for Apple Inc., to go ahead with a plan to manufacture components in Tamil Nadu does not surprise me, though I am mildly impressed by the timing of the news. But then, there is a lot more to this than Trump and Apple CEO Tim Cook that makes economics more important than politics.

Why Foxconn Didn't Hit Pause

Foxconn, Apple's top supplier, is moving ahead with its planned investment of $1.5 billion at its factory near Chennai. News is not officially out on Foxconn's Tamil Nadu plans, but government officials have confirmed to London's Financial Times that a new plant to assemble display modules will come up next to an existing iPhone assembly unit at Oragadam, an emerging Chennai suburb.

For those of us used to Nehru-era licensing and socialist controls, it would seem logical for Apple to take a pause after Trump, in his sweeping style, said recently that he wanted Apple to manufacture in the US and not India. That certainly raised eyebrows in India, which has been nurturing ambitious plans to shift global manufacturing units at least partially from China to India as part of a "China Plus One" strategy, under which manufacturers diversify facilities to reduce risks amid a trade war between China and the United States.

Trump almost sounded like a whimsical boss as he said on May 14, "I had a little problem with Tim Cook yesterday. I said to him, 'My friend, I treated you very good. You're coming here (to the US) with $500 billion, but now I hear you're building all over India. I don't want you building in India.'"

Now, he has even threatened a 25% tariff if the phones sold in the US weren't made in the US. "I have long ago informed Tim Cook of Apple that I expect their iPhones that will be sold in the United States of America will be manufactured and built in the United States, not India, or anyplace else...If that is not the case, a Tariff of at least 25% must be paid by Apple to the US," Trump said in a post on Truth Social.

Trumpism Has Its Limits

We need a detailed context to understand how Trump's words make little sense.

First up, Trump is known to come with all guns blazing, whether it is illegal immigration, American jobs, his dubious role in India-Pakistan conflicts or, of late, a security crackdown on the prestigious Harvard University to stop it from admitting international students. Trump likes to grab headlines, but the aftermath is not as easy. Court cases against his efforts stand testimony to that.

That takes us to the backdrop of both the American economy and its long-cherished gains (and advocacy) of globalisation, a term that gained ground after the 1980s. Technically, that refers to the interdependence of nations through the exchange of goods, services, information, and capital. For individual companies, however, globalisation is something that helps them make the best stuff at the most efficient costs anywhere possible on the planet, and sell it where they can get the most profits. This no-barrier approach to business has, over the decades, resulted in carefully-built supply chain networks that involve huge investments and giant factories, in which China, with its strong infrastructure, welcoming state policies, and low-cost skilled labour, has been a major gainer.
Suddenly turning away from China because Trump wants it is difficult enough, like pulling off a saree from a thorny shrub. It is more complicated when cost differentials and government attitudes are conducive in India as an alternative base, not to speak of increasingly comparable cost advantages as wages rise in China.

Tim Has More Important Things To Care About

Equally, it is pertinent to think of Apple as a global (and not just American) company, as also as one whose stakeholders include worldwide employees and a vast tribe of shareholders, which includes the likes of legendary investor Warren Buffett, whose Berkshire Hathaway holds 300 million Apple Inc shares worth around $60 billion; it remains the investment vehicle's biggest stock despite it having sold off the bulk of its holdings. 

Activist shareholders and analysts are critical for Wall Street capitalism. Tim Cook is likely bothered more about what they think of the way he manages his company's huge cash pile (estimated at well over $300 billion) than an oddball statement from Trump.

Relationships and ownerships form critical angles of the globalisation web. Apple proudly labels its products as "Designed by Apple in California" to highlight its business philosophy that runs on innovation and creativity. Partners like Foxconn have worked for long years to build layers of scale and efficiency, which rake in profits for Apple. Any future investment by Apple in the US - as envisaged by the Trump-Cook conversation - must likely focus on the future without compromising Apple's legendary emphasis on a fine mix of innovation and maddening efficiency. Last but not least, customer service is also important, for which Indian IT service companies are already helping Apple.

Too Big A Wall To Dismantle

One must also remember that Foxconn, though it has its tentacles spread into China, is effectively a Taiwanese company (Hon Hai Technology Group) and is the world's largest electronics manufacturer with 200 subsidiaries in 20 countries, including India. It owns more than 54,200 patents.

How can one possibly dismantle such a vast, intricately built network of innovation and efficiency spread across the planet just because a temporary incumbent at the White House wants it?

Manufacturing costs at American wages can be high, while everything from shipping costs to the availability of innovative manufacturing partners poses the challenge of keeping it all in the US, as Trump wants, which could be rather impossible. Political dreams sometimes simply do not make economic sense.

Can't Leave China Too Easily

Even if he wants to, Tim Cook cannot easily untangle Apple from the Chinese dragon's clutches. The Indian foray with a Taiwanese partner is only a carefully calibrated step, part of a long-term strategy.

For India, the challenge is to enter Apple's extended network with matching rhythm and efficiency despite its perceived advantages. Apple eventually wants to make about a quarter of its global iPhones in India over the next few years. Chinese plants currently assemble an estimated 80% of iPhones.

"With a strong talent base, a large pool of consumers, and continuously improving infrastructure, the country offers many opportunities for multinational companies over the next decade," global consulting giant McKinsey said in an article on India last month, underlining its vibrant digital economy, low labour costs and increasingly pro-business environments as positive factors to boost business in the country.
In any case, Asian economies are also now home to millions of Apple consumers. The technology giant can, at best, hope to offer a few small slices of its global pie to please American employees and Trump.

Emerging disruptions, such as the rise of artificial intelligence, are prompting Apple to enter new plans and partnerships. Trump's thoughts may influence some of them. However, his political dreams do not make sufficient long-term economic sense. The US president probably knows this. Politicians love headlines. CEOs prefer bottom lines.

(Madhavan Narayanan is a senior editor, writer and columnist with more than 30 years of experience, having worked for Reuters, The Economic Times, Business Standard, and Hindustan Times after starting out in the Times of India Group.)

Disclaimer: These are the personal opinions of the author