Even Google Proves That You Can't Make Smartphones in America

Telecom & Wireless

Published: May 31, 2014 10:45 am

It was once a hot button issue (for a few hours) that President Obama asked Steve Jobs of Apple Inc. (NASDAQ: AAPL) what it would take to manufacture iPhones in the United States. Well, it seems that Google Inc. (NASDAQ: GOOG) is coming to the same answer — the costs to produce in America are just too high compared to elsewhere. The difference is that Google’s Motorola Mobility unit went big into production here in America.

Reports started coming out on Friday that a factory under Google’s Motorola Mobility unit near Fort Worth, Texas, was being shut down. This factory was the one making Moto X smartphones, and it was only open for a little over a year. It originally had 3,500 workers, but that is down to 700 now. Most are employed by Flextronics International Ltd. (NASDAQ: FLEX).

As a reminder, Google did sell its handset business to Lenovo Group in China for $2.9 billion in recent months. That move will help the transition from the U.S. manufacturing back to China and elsewhere.

The culprit here in America is not just that our wages are higher than they are overseas. Even the cost of shipping was cited, all hurting economies of scale. There were only some 900,000 Moto X smartphones that were sold in the first quarter. That is not even 4% of the number of iPhones sold in the period.

Before thinking that this is the only domestic effort, it is far from it. Even Apple has started to do some of its component work at plants in the United States.

What is interesting about this failure to succeed in America is that it plays right into the minimum wage debate. Being cost competitive and having economies of scale matter in a global world. It will be interesting to see how a $10.10 or a $15.15 minimum wage plays into this in the months and years ahead.

One last consideration to make is that Google has a tendency to run many side projects. Many of these projects will have zero value long-term, and even the successful ones will have massive costs tied to it.

For Larry and Sergey to decide to close down the U.S. smartphone manufacturing effort, you would have to think that the losses from the effort were more than just a line-item.

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