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A vast, boxy customs centre acts as a busy island of commerce deep in central China.
Government officers, in sharply pressed uniforms, race around a maze of wooden pallets piled high with boxes — counting, weighing, scanning and approving shipments. Unmarked trucks stretch for more than a mile awaiting the next load headed for Beijing, New York, London and dozens of other destinations.
The state-of-the-art facility was built several years ago to serve a single global exporter: Apple, now the world’s most valuable company and one of China’s largest retailers.
The well-choreographed customs routine is part of a hidden bounty of perks, tax breaks and subsidies in China that supports the world’s biggest iPhone factory, according to confidential government records reviewed by The New York Times, as well as more than 100 interviews with factory workers, logistics handlers, truck drivers, tax specialists and current and former Apple executives. The package of sweeteners and incentives, worth billions of dollars, is central to the production of the iPhone, Apple’s bestselling and most profitable product.
It all centres on Zhengzhou, a city of six million people in an impoverished region of China. Running at full tilt, the factory here, owned and operated by Apple’s manufacturing partner Foxconn, can produce 500,000 iPhones a day. Locals now refer to Zhengzhou as “iPhone City”.
The local government has proved instrumental, doling out more than $1.5 billion to Foxconn to build large sections of the factory and nearby employee housing. It paved roads and built power plants.
It helps cover continuing energy and transportation costs for the operation. It recruits workers for the assembly line. It pays bonuses to the factory for meeting export targets. All of it in support of iPhone production.
“We needed something that could really develop this part of the country,” said Li Ziqiang, a Zhengzhou official. “There’s an old saying in China: ‘If you build the nest, the birds will come.’ And now, they’re coming.”
American officials have long decried China’s support of its state-owned companies, calling the subsidies and other aid an unfair competitive advantage in a global marketplace. But the Zhengzhou operation shows the extent of China’s effort to entice overseas multinationals to set up production facilities in the country.
Local and provincial officials, in an effort to create jobs and drive growth, have courted manufacturers with incentive packages that make it easier and cheaper to do business. Beijing, for decades, has encouraged such efforts at the national level, by developing special economic zones that offer tax breaks to multinationals and exempt them from costly and cumbersome rules.
In this way, China is not unlike other countries, including the United States, where states and cities vie for companies. To compete in the era of globalisation, multinationals, which face pressures from shareholders and customers, must seek the best opportunities, increasingly by relying on a highly interconnected supply chain spread across the world.
But the reasons behind their choices are not always transparent. In China, the competition for companies is secretive and rarely exposed to public scrutiny or debate — and it is often focused on manufacturing partners, rather than multinationals themselves.
China’s lure is strong. Dell, Hewlett-Packard and Samsung have all flocked to China to lower their production costs, bolster their bottom lines and tap into the world’s largest consumer market. And many rely on local manufacturing partners like Foxconn.
While Apple came later than many technology companies, it now generates nearly a quarter of its revenues from sales in China and has some of the fattest profit margins in the business. As such, the Zhengzhou operation provides an especially illustrative look at China’s importance to American technology companies — and specifically iPhone production and more recently, Apple’s consumer sales.
A 32-gigabyte iPhone 7 costs an estimated $400 to produce. It retails for roughly $649 in the United States, with Apple taking a piece of the difference as profit. The result: Apple manages to earn 90% of the profits in the smartphone industry worldwide, even though it accounts for only 12% of the sales, according to Strategy Analytics, a research firm.
It is difficult to tally the total value of government benefits for the Zhengzhou operation, or to determine the exact effect on the profits of Foxconn or Apple. The subsidies aren’t disclosed by the Chinese government or Foxconn. They aren’t available in public records. And Apple says it was not a party to Foxconn’s negotiations.
The confidential government records obtained by The Times detail multiple meetings over several years in which Zhengzhou city officials discussed their “support” for iPhone production, calling the benefits a “preferential policy”. The records offer a snapshot of those benefits, including the specific aid for Foxconn in multiple areas, like infrastructure, labour, taxes and exports.
© 2016 The New York Times News Service
