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OM in the News: China’s Secret Incentives to Land iPhone Manufacturing

January 5, 2017
The Chinese government is also spending over $10 billion to build an airport just a few miles from the iPhone factory.

The Chinese government is also spending $10 billion to build an airport near the iPhone factory 

The New York Times (Dec. 29, 2016) investigative reporting into confidential Chinese government records, showing billions in hidden perks to attract Apple manufacturing, is a timely reminder of the importance of location incentives (see Ch. 8).

The following package of sweeteners is central to the production of 500,000 iPhones a day in Zhengzhou : (1) Built/financed construction of the huge manufacturing complex at a cost of $600 million; (2) Spent $1 billion to build housing for hundreds of thousands of workers; (3) Provided a discount that reduces the cost of power by 5% annually; (4) Built infrastructure, including power generators and a 24-km pipeline; (5)  Eliminated corporate and VAT taxes for 5 years, then halved the rate for the next 5 years; (6) Granted a $250 million loan; (7) Helped recruit/train workers, and paid subsidies for new hires; (8) Lowered the amount of social insurance by $100 million a year; (9) Offered bonuses tied to the growth of exports; and (10) Paid out a subsidy to help defray the cost of shipping goods.

American officials have long decried China’s support of its state-owned companies, calling the subsidies 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.

Apple, like many multinationals, depends on a vast global supply chain that includes multiple companies and countries, each with its own expertise and advantages — a complexity often lost in the political debate over trade. The iPhone is a collection of intricate parts that are made around the world and assembled in China, spurring employment in many countries, including 2 million jobs in the U.S.

Classroom discussion questions:

  1. What incentives were recently offered Carrier to stay in Indiana?
  2. Would the U.S. offer packages similar to China’s to attract manufacturers?
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