How China built ‘iPhone city’ with billions in perks for Apple’s partner

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A vast, boxy customs center 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 — 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: 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 best-selling and most profitable product

It all centers on Zhengzhou, a city of six million people in an impoverished region of China. Running at full tilt, the 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 for meeting 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 globalization, 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 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 percent of the profits in the smartphone industry worldwide, even though it accounts for only 12 percent 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.

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The Zhengzhou customs operation is inside a so-called bonded zone, where products can beIMPORTED and exported virtually. CreditGilles Sabrié for The New York Times

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, labor, taxes andEXPORTS.

As China’s largest private employer, Foxconn, a Taiwanese company, has enormous leverage in the negotiations for those incentives. The company’s size and scale — and the sway that they afford in China — is connected to Apple. Foxconn is Apple’s largest. Apple is Foxconn’s largest customer.

The two companies are intertwined in Zhengzhou. When the factory opened, Apple was Foxconn’s only customer here. Even now, the American technology company accounts for almost all of the production at the Zhengzhou plant, where about half of the world’s iPhones are made. Apple is also the main exporter using the customs facility here.

In response to questions, Apple said it was aware of the government’s infrastructure support. But the company added that it had no knowledge of specific grants, subsidies or tax breaks given to its manufacturing partner.

Foxconn, in a separate statement, said it was grateful for the support of the government, noting that it was “no different than similar tax breaks all companies get in locations around the world for major investments.”

A growing backlash against globalization puts Apple and other big multinationals directly in the sightlines of two increasingly combative giants: the United States and China.

President-elect Donald J. Trump has vowed to bring down the full force of the government on American companies that move jobs overseas, threatening punitive tariffs on the goods they sell back at home. Apple has been a frequent target of Mr. Trump, who said during the campaign that he would get the technology company to “build their damn computers and things in this country.”

China, under the leadership of President Xi Jinping, is growing less tolerant and more suspicious of Western influence, particularly American technology companies and the huge influence they have over Chinese consumers. A state-owned publication called Apple one of the “guardian warriors” that have “seamlessly penetrated” China and may pose a threat to national security.

Details on NYTimes