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Reshoring

Apple, Offshoring and the Decline of the American Middle Class

July 31, 2012
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Working conditions continue to be an issue at the Foxconn factories in China where Apple makes its best-selling electronic gadgets. On June 19, a young man who worked at one factory jumped to his death from a neighboring apartment building. Shockingly, it was the 19th such suicide since January 2010.

Opinions on the issue fall into two camps. Human rights activists condemn Foxconn for exploiting workers. Globalization apologists claim life would be harder in China without all the jobs that have been outsourced from the West. However, neither camp has addressed the issue of what offshoring has meant back here.

I have had my fill of the sanctification of Steve Jobs who, after all, merely gave us shinier toys and bad manners. To be fair, however, offshoring isn’t entirely an Apple story. If it’s electronic and produced in batches of more than a few thousand units, odds are it came out of a factory in Asia. Apple didn’t invent outsourcing to China, but it did make the practice chic, and Apple has made Foxconn what it is today (and what it is, isn’t pretty).

There’s a noteworthy passage in Walter Isaacson’s 2011 biography of Jobs that recounts an exchange between the Apple CEO and President Obama:

“Apple had 700,000 factory workers employed in China, he [Jobs] said, and that was because it needed 30,000 engineers on-site to support those workers. ‘You can’t find that many in America to hire,’ he said. These factory engineers did not have to be Ph.D.s or geniuses; they simply needed to have basic engineering skills for manufacturing. Tech schools, community colleges, or trade schools could train them. ‘If you could educate those engineers,’ he said, ‘we could move more manufacturing plants here.’”

That’s more than a little disingenuous. It’s more truthful to say that America doesn’t have 30,000 engineers and 700,000 factory workers who are willing to work more than 60 hours a week, live in squalid dormitories, get pulled out of bed in the middle of the night to change a critical part, and earn $3,000 or less a year. And we shouldn’t have.

We do have thousands of Americans who are desperate to work hard for a living wage. In June, for example, more than 20,000 people applied for the 877 new jobs that Hyundai needed to fill a third shift at its assembly plant in Montgomery, AL.

I have been in Chinese factories, and I didn’t like what I saw. Too often, they toed the line of physical abuse. That is not the way humans should live.

Nonetheless, working conditions in China are basically an issue for China. The focus here needs to be on what offshoring has done to America. Quite simply, offshoring has gutted the American middle class. The top end—more than the well-known 1 percent, but less than 10 percent of all Americans—is doing splendidly. The bottom 25 percent is doing as sadly as ever and possibly worse, due to government cutbacks of food programs and other subsidies. It’s the two-thirds of the population between the bottom 25 percent and the top 10 percent who are getting slammed.

According to the Federal Reserve, median family income was $49,600 in 2007 but only $45,800 in 2010, a drop of 7.66 percent in just three years. In 2010, the median American family had no more wealth than it had in the early 1990s.

It is not by accident that this country has laws governing minimum wage, workweek hours, workplace safety, child labor and environmental protection. Decent wages translate into decent neighborhoods and taxes that support critical services like schools that, in turn, should lead to even better wages and better neighborhoods. All of our most pressing social concerns ultimately come back to jobs and education.

It took more than the presence of several hundred million unemployed Chinese to make offshoring feasible. Some are technological, some are cultural. They include:

  • Smaller and lighter products. Transportation costs increase with bulk.
     
  • More efficient transport systems. Think UPS, FedEx and container shipping.
     
  • Virtually free communication. The Internet has lowered the cost of communication close to zero.
     
  • Decay of corporate community ties. It seems quaint today, but as recently as 25 years ago, corporate leaders who shuttered factories were not held in high esteem at the country club.
     
  • Greed. Ignore Gordon Gecko; greed is not always good. Greed causes corporations to pay a few executives thousands of times the average employee’s income, cut environmental corners, terminate employees with decades of loyalty, and even force domestic workers to train foreigners to take their jobs. (Thirty-five years ago, the CEO of the large corporation where I was a middle manager earned seven times as much as I did. I don’t think he felt underpaid. The CEO of Caterpillar, which is seeking wage concessions from striking workers at its factory in Joliet, IL, was paid $16.9 million last year, or 300 times more than the best-paid hourly worker there.)
     
  • “Free trade.” There’s no free trade, except for foreign competitors who enjoy remarkably unfettered access to U.S. markets.
     
  • Currency manipulation. Chinese goods are cheap to a great extent because China is willing to lowball the yuan, just as Japan undervalued the yen for decades. The results include massive stockpiling of U.S. debt by Beijing, jobs for a lot of Chinese workers, and cheap everything at Walmart. Despite what you’ve been told, U.S. debt in China’s hands is China’s problem, not ours. When you owe the bank $1,000, it’s your problem. When you owe the bank billions, it’s the bank’s problem—and China has become America’s bank.
     
  • Dumping. Vast quantities of Chinese goods are sold here below the cost of materials and production. That’s illegal, but only if our government is willing to impose sanctions.
     
  • Stupidity. I can’t think of another word to describe the failure of American companies to recognize that the total cost of offshoring is much greater than the quoted piece price. Communication issues and time-to-market factors greatly affect total price, but they never seem to get taken into account when sourcing decisions are made. More importantly, few CEOs consider that today’s offshore supplier could become tomorrow’s domestic competitor. In 1960, the United States had 29 domestic manufacturers of television sets. Thirty years later, after those OEMs decided to put their names on products made in Japan, the United States has no domestic television manufacturers.

Is it too much to hope for a revival of “Buy American”? If the millions of unemployed and underemployed university grads who make up so much of Apple’s customer base decided to boycott iPhones and iPads until a reasonable amount of manufacturing returned, it would definitely make a difference. A boycott needn’t be confined to Apple, of course, but Apple has such a high profile that an effective movement should start there.

Ultimately, we have to pin our hopes on the promising trend of reshoring—companies bringing production back from places like China. I’ve been encountering more and more repatriation operations. They tend to be small, but collectively they are making a difference. New ventures that would once have turned all production over to foreign manufacturers are thinking twice and producing in-house. Businesses tend to be followers. When they see their competitors succeeding with reshoring, they will become converts as well.

What do you think? Am I being too hard on Apple? Do you see offshoring as a threat? How can we encourage U.S. OEMs to bring work back from overseas? Share your thoughts.


Editor’s note: Before “Shipulski on Design,” “Leading Lean,” and “Uncommon Sense,” there was ASSEMBLY magazine’s longest running and most controversial back-of-the-book column, “Unconventional Wisdom” by Jim Smith. A nationally known expert on electronics assembly, Smith never hesitates to question the sacred cows of manufacturing and economics. You can read more from him at his “Science of Soldering” blog.

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