By Nirvikar Singh
One piece of fallout from Donald Trump’s tariff chaos seems to be Apple’s announcement that it will shift more iPhone production for the US market from China to India. The Covid pandemic had already been a driver for firms to seek diversification of manufacturing sites. Apple began iPhone production in India in 2017, wooed by Indian policies to promote “making in India”. Over the years, Apple has shifted from making only older iPhone models in India to the latest versions. The import value of iPhones sold in the US is somewhere in the order of $50 billion. Sales or profit margins in the US domestic market would add another 50% or so to that, but would not be taxed. But tariffs on Chinese products would still almost double the iPhone price and choke off demand, so Apple has to act.
The sales figures are misleading for what the production shift directly brings to the Indian economy. Manufacturing in this case means final assembly, with almost all components, and certainly all the high-value, sophisticated components being imported from other countries. Of course, that is the essence of global production networks. The value of the manufacturing step is only about 2% of the total revenue, or roughly $1 billion. These are ballpark numbers, but are accurate enough to make the point that at least at this level, Apple’s move is not going to have a significant impact on the Indian economy. Some economists would argue that India cannot grow into an advanced economy based on this kind of low-value-added manufacturing, and it should focus on areas such as design. After all, Apple is worth $3 trillion because of its design capabilities, not because of its manufacturing prowess.
But an economy does not thrive on intellectual property alone. However much they involve automation, manufacturing (and service jobs connected to physical products) are still part of who we are and how we give meaning to our lives — homo faber and homo sapiens are intimately connected. The Trump tariffs and the fact that he got elected at all have their foundation in the decay of such jobs in what used to be the industrial heartland of the US. India needs more jobs of every kind and at every level that is beyond the low-skilled, low-productivity ones that too many of its citizens are trapped in.
There is a more fundamental reason why even assembly-type jobs in manufacturing, such as for the iPhone, are important. Even such jobs involve learning new skills, not just through directly performing the jobs, but also through observation of fellow workers, access to training opportunities, and chances to move up organisational ladders. In India, after eight years of manufacturing iPhones, worker productivity is still relatively low — yield rates, measured by defect-free assembly, still lag. Expanding production in India will require intensified efforts at worker training, and even setting up new factories will require knowledge that has yet to be acquired. Chinese engineers and managers may have to come to India to help in this process. One of the tragedies of Indian development has been the failure to give Indian firms the opportunities and the incentives to get to the best-practice frontier in a wide range of manufacturing activities. The Chinese did this with deliberation and speed. The Japanese did this in the late 19th century, when threatened by the West, and redid it after being devastated in World War II.
Increased iPhone production is an opportunity that could be an inflection point for India if government policies take advantage of this opening. It provides an excuse to reduce tariffs on the import of components (which will make India more competitive). It can accelerate the import and adaptation of manufacturing know-how. It can accelerate learning by doing. It can provide demonstration effects to other firms that India is a good bet for being a major node in global and regional production networks.
When Apple started manufacturing in China, the iPhone did not exist. The iPhone came into being in 2007 and was among the pioneers of the modern smartphone. The smartphone is now a mature product but with capabilities that keep increasing, thanks to incremental improvements in hardware and software as well as an ecosystem that is now built around it. But other product categories may see considerable innovation, along with new demand — medical devices and small-scale solar power systems are two examples. Manufacturing products domestically rather than importing them can create positive feedback loops for design, especially incremental innovations. Manufacturing processes can also benefit from experience, becoming more efficient as workers, engineers, and managers learn from that experience.
Admittedly, these effects are hard to measure and document, but successful firms pay attention to such factors, and at least some management education recognises and teaches these phenomena. What seems to have been missing in the Indian case is a strategic embrace of what it takes to become a modern manufacturing nation. Whether this has been because of cultural factors, the history of colonialism leading to a suspicion of openness to foreign ideas and investment, a suboptimal assignment of responsibilities and revenue between the Centre and the states, or other factors altogether is hard to pin down. Perhaps a bigger bite of the Apple will finally change things.
The writer is professor of economics, University of California, Santa Cruz.
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