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International Business Competing in the Global Marketplace 13e Copyright © 2020. McGraw Hill. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/17/2022 2:10 PM via HIGHER SCHOOL OF ECONOMICS AN: 2947576 ; Charles Hill.; ISE Ebook for Hill International Business Account: s4954272
Globalization LEARNING OBJECTIVES After reading this chapter, you will be able to: LO1-1 Understand what is meant by the term globalization. LO1-2 Recognize the main drivers of globalization. LO1-3 Describe the changing nature of the global economy. LO1-4 Explain the main arguments in the debate over the impact of globalization. LO1-5 Understand how the process of globalization is creating opportunities and challenges for management practice. part one Introduction and Overview 1 Qilai Shen/In Pictures Ltd./Corbis/Getty Images Copyright © 2020. McGraw Hill. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/17/2022 2:10 PM via HIGHER SCHOOL OF ECONOMICS AN: 2947576 ; Charles Hill.; ISE Ebook for Hill International Business Account: s4954272
How the iPhone Is Made: Apple’s Global Production System of strengthened glass, but finding a manufacturer that could cut those panes into millions of iPhone screens wasn’t easy. Then, a bid arrived from a Chinese factory. When the Apple team visited the factory, they found that the plant’s owners were already constructing a new wing to cut the glass and were installing equipment. “This is in case you give us the contract,” the manager said. The plant also had a warehouse full of glass samples for Apple, and a team of engineers available to work with Apple. They had built onsite dormitories so the factory could run three shifts seven days a week to meet Apple’s demanding production schedule. The Chinese company got the bid. Another critical advantage of China for Apple was that it was much easier to hire engineers there. Apple calculated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers involved in manufacturing the original iPhone. The com- pany had estimated it would take as long as nine months to find that many engineers in the United States. In China, it took 15 days. Also important is the clustering together of factories in China. Many of the factories providing components for the iPhone are located close to Foxconn’s assembly plant. As one executive noted, “The entire supply chain is in China. You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need a screw made a little bit different? That will take three hours.”* All this being said, there are drawbacks to outsourcing to China. Several of Apple’s subcontractors have been tar- geted for their poor working conditions. Criticisms include low pay of line workers, long hours, mandatory overtime for little or no additional pay, and poor safety records. Some former Apple executives say there is an unresolved tension within the company: Executives want to improve working conditions within the factories of subcontractors, such as Foxconn, but that dedication falters when it conflicts with crucial supplier relationships or the fast deliv- ery of new products. In addition, Apple’s outsourcing decisions have been criticized by President Trump, who argues that the company is guilty of moving U.S. jobs over- seas. While Apple disagrees with this assessment, it has responded by increasing its investment in U.S. facilities. In 2018, for example, the company announced it would invest $30 billion over five years to create 20,000 new Apple jobs in the United States. Most of these jobs, however, are expected to be in software development and data center operations, not manufacturing and assembly. *C. Duhigg and K. Bradsher, “How U.S. Lost Out on iPhone Work.” The New York Times, January 22, 2012. Sources: Sam Costello, “Where Is the iPhone Made?" Lifewire, July 14, 2018; David Barboza, “How China Built iPhone City with Billions in Perks for Apple’s Partner,” The New York Times, December 29, 2016; Gu Huini, “Human Costs Are Built into iPad in China,” The New York Times, January 26, 2012; Chuck Jones, “Apple’s $350 Billion US Contribution Was Already on the Cards,” Forbes, January 19, 2018. OPENING CASE In its early days, Apple usually didn’t look beyond its own backyard to manufacture its devices. A few years after Apple started making its Macintosh computer back in 1983, Steve Jobs bragged that it was “a machine that was made in America.” As late as the early 2000s, Apple still manu- factured many of its computers at the company’s iMac plant in Elk Grove, California. Jobs often said that he was as proud of the Apple’s manufacturing plants as he was of the devices themselves. By 2004, however, Apple had largely turned to foreign manufacturing. The shift to offshore production and as- sembly reached its peak with the iconic iPhone, which Apple first introduced in 2007. The iPhone contains hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, rare metals from Africa and Asia, and the gyroscope used for tracking the iPhone’s orientation comes from Switzerland. Apple’s major subcontractor, the Taiwanese multinational firm, Foxconn, assembles half of all the iPhones sold in the world today at a huge factory in China. Foxconn also has factories devoted to iPhone assembly at several other locations, including Brazil and India. Another Taiwanese- based company, Pegatron, also assembles iPhones for Apple at a factory in China. Apple still employs some 80,000 people in the United States, and it has kept important activities at home, includ- ing product design, software engineering, and marketing. Furthermore, Apple claims that its business supports an- other 450,000 jobs at U.S.-based suppliers. For example, the glass for the iPhone is manufactured at Corning’s U.S. plants in Kentucky, Analog Devices in Massachusetts produces chips that enable the iPhone’s touch display, and a Texas Instruments plant in Maine makes electronic com- ponents that go in the iPhone. However, over 1.5 million people are involved in the engineering, building, and final assembly of its products outside of the United States, many of them working at subcontractors like Foxconn. When explaining its decision to assemble the iPhone in China, Apple cites a number of factors. While it is true that labor costs are lower in China, Apple executives point out that labor costs only account for a small portion of the total value of its products and are not the main driver of location decisions. Far more important, according to Apple, is the ability of its Chinese subcontractors to respond very quickly to requests from Apple to scale production up and down. In a famous illustration of this capability, back in 2007 Steve Jobs demanded that a glass screen replace the plastic screen on his prototype iPhone. Jobs didn’t like the look and feel of plastic screens, which at the time were standard in the industry, nor did he like the way they scratched easily. This last-minute change in the design of the iPhone put Apple’s market introduction date at risk. Apple had selected Corning to manufacture large panes 3 Copyright © 2020. McGraw Hill. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/17/2022 2:10 PM via HIGHER SCHOOL OF ECONOMICS AN: 2947576 ; Charles Hill.; ISE Ebook for Hill International Business Account: s4954272
4 Part 1 Introduction and Overview Introduction Over the past five decades, a fundamental shift has been occurring in the world economy. We have been moving away from a world in which national economies were relatively self- contained entities, isolated from each other by barriers to cross-border trade and invest- ment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. We have moved toward a world in which barriers to cross-border trade and investment have declined; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is start - ing to look similar the world over; and national economies are merging into an interdepen- dent, integrated global economic system. The process by which this transformation is occurring is commonly referred to as globalization . At the same time, recent political events have raised some questions about the inevi - tability of the globalization process. The exit of the United Kingdom from the European Union (Brexit), the renegotiation of the North American Free Trade Agreement (NAFTA) by the Trump Administration, and trade disputes between the United States and many of its trading partners, including most notably China, have all contributed to uncertainty about the future of globalization. While the world seems unlikely to pull back significantly from globalization, there is no doubt that the benefits of globalization are more in dispute now than at any time in the last half century. This is a new reality, albeit perhaps a temporary one, but it is one the international business community will have to adjust to. The opening case illustrates how one company, Apple, has taken advantage of globaliza- tion. Apple has created a global supply chain to efficiently produce its icon iPhone. While product design and software development are undertaken in California, component parts are manufactured all over the world, and the final product is assembled for Apple by Foxconn in factories in China, Brazil, India, and elsewhere. In configuring the production system of the iPhone in this manner, Apple is trying to partner with the most efficient subcontractors, wherever in the world they might reside. Apple could not have configured its production system in this manner had it not been for the systematic reductions in bar- riers to cross-border trade and investment that have occurred over the last half century. At the same time, Apple has been criticized by President Trump for placing too much productive activity outside of the United States. Moreover, trade disputes between the United States and China have raised the possibility that China may at some point not be the optimal location for assembling the iPhone. Apple has started to adjust its strategy to account for the potential risks here, establishing assembly operations outside of China (in India, for example), increasing its investment in the United States (in 2018, Apple an - nounced it would invest $30 billion over five years in U.S. facilities, creating 20,000 new jobs in the process), and working with U.S.-based suppliers to help them become efficient Apple partners (Apple has established a $5 billion fund to help those suppliers upgrade their capabilities). Thus, Apple is taking advantage of globalization, and simultaneously hedging against any possible pullback from the level of globalization that existed in 2016, which for now at least may have been a high-water mark, albeit a temporary one. Proponents of increased global trade argue that cross-cultural engagement and trade across country borders is the future and that returning back to a nationalistic perspective is the past. On the other hand, the nationalistic argument rests in citizens wanting their country to be sovereign, self-sufficient as much as possible, and basically in charge of their own economy and country environment. We will touch on many aspects of this debate throughout this text’s 20 integrated chapters. Globalization now has an impact on almost everything we do. For example, an Ameri- can medical doctor—let’s call her Laurie—might drive to work at her pediatric office in a sports utility vehicle (SUV) that was designed in Stuttgart, Germany, and assembled in Leipzig, Germany, and Bratislava, Slovakia, by Porsche from components from parts sup- pliers worldwide, which in turn were fabricated from Korean steel and Malaysian rubber. Laurie may have filled her car with gasoline at a Shell service station owned by a Copyright © 2020. McGraw Hill. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law. EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 5/17/2022 2:10 PM via HIGHER SCHOOL OF ECONOMICS AN: 2947576 ; Charles Hill.; ISE Ebook for Hill International Business Account: s4954272