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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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Would If I Could

Elenor
August 1, 2012
The quandary I see -- as owner of a (very) small manufacturing co.-- is that I CAN'T 'onshore' until there are suppliers here who can and will make what I need, at a price I can afford. IF there were an American plant willing to make my small numbers of quality microscopes for a price I could afford, I would use them. There isn't. To the extent I can, I 'buy American' -- but that extent is restricted by a complete lack of suppliers to meet my small-order, high-quality, reasonable-price needs. Someone (in the microscope biz!) suggested" 'oh,there are lots of out-of-work optical engineers up around Rochester.' So? I can't set up a factory for them -- I need to FIND a factory that can do what I need. But how can those engineers start? If those engineers try to set up a factory -- who provides seed money? Won't be Apple -- or any of the big companies! Won't be the govt -- they're busy bailing out domestic and foreign bankers! *I* can't help them -- and they can't help me. (Does that sound like despair?)

Only If It's Profitable

Carlos
August 1, 2012
Short answer is they won't until it is profitable. How to make it profitable? One way to do it is by regulation, freight cost and infrastructure. One example is Wind Industry: 1) The Wind Credit offers manufacturers a way to reduce the customer cost of the turbines. 2)These are huge machines that are cannot be manufactured overseas, shipped to the US and installed at a profit. 3)The plants that produce them need to be centrally located to reduce expensive specialized truck transport. Because of the above, most Wind Turbine manufacturers have assembly facilities here. At the end of the day, a business must make money to survive. Despite the best of intentions, the World Darwinian business model favors only the strong and fittest. The strong and fittest is a function also of political influence and strategic interest of a nation. That is why McDonnell Douglas needs not to worry of a Foxconn getting the contract for advance avionic targeting system on the F-22.

U.S. production possible task team

Tony
August 2, 2012
We can and do make things cheaper here than in China, but the need here is for immediate profit with minimum outlay - ie immediate gratification vs the long term effect of overseas shipments to us here. We ask manufacturers to look at the design we submit vs what could be an easier design for lower product costs. Perhaps the concept of a "US production possible task team" would be a "not too far off" suggestion before we allow overseas manufacturing without the high tarriffs we could charge for out of country manufacturing.

Where are the machine shops?

Tony
August 2, 2012
You don't see young engineers coming out of school looking to open a precision machine shop anymore. Those days are long gone. I had seen the death coming 30 years ago when I was working part time and full time during high school and college, learning the Tool and Die and Machining trade.

Consumers Are Kings

Karen
August 3, 2012
One area that needs looked at beyond price and profit...is the price of humanity and price of reputation. I wil not buy an iPhone or iPad because I know what is going on at the factory oversears that is manufacturing their products. I do not want my money to be a contributing factor to that scene. Consumers are the Kings, they can change what products they purchase. Would you pay and extra percentage for something knowing it was the best and most responsible choice?

Elenor
August 3, 2012
The "price of humanity"? I need to stay in business to pay for (my) food and housing! I need to buy parts and products at prices that keep ME in business! I'm sorry that folks in other countries are working in less-than-optimal conditions (so am I; even if my definition of optimal isn't theirs) -- but that is SO not my problem! They need to deal with their own country's problems. (American consumers not buying Chinese goods will NOT lead the Chinese to clean up their air and water! Chinese folks beginning to resist their govt may -- but WE don't control that, and we can't!) And Karen, I'd ask: do you *know* "what's going on at the factory overseas" because you have actually been and looked at those factories -- or because some news media has published sensationalistic stories about how terrible it is? Yes, some young Chinese folks are killing themselves -- so are some young American folks, and some young French folks and German folks and Japanese... It is the HUMAN condition, not (necessarily) the "Chinese factory" condition that leads some people to do bad things to themselves. I would pay for American-made products -- IF someone in America was making what I need. They aren't, I can't, so I buy where I can -- in order that *I* may stay in business, and hopefully continue being one of the few American manufacturing companies left. I'm not sure it's not a pipe-dream to believe that some-few-Americans can make a change in a foreign country by not buying whatever all the other American's are buying. (I'm not sure it's entirely responsible to try to make a change in a foreign country: Iraq war anyone!?) And if "not buying" harms American business -- is that a worthwhile trade-off? (All the "refusing to buy" clothing and textiles made overseas is NEVER going to "re-create" an American textile industry. So, should we do without clothing to make a statement about the "price of humanity"? And that will, fer shure, make a statement -- but *I* am staying indoors with the shades drawn!

you misunderstood

Karen
August 3, 2012
Elenor, you misunderstood the intentions of my note. Change must start at the consumer level. It will take time to rebuild, but it can happen. Consumers are in charge of choices. And I can bet anyone will clean up their act anywhere if the business shrinks over undesirable issues. If the choice of some products do not exist in the states today, well then, what a perfect spot to seize the moment to startup. We cannot fix what is broken overnight....but we let it get 'broken' over a period of time too....it is up to us. And Elenor, if you spend time to look around, US made products are out there. My house is filled with US furniture, appliances, autos, etc. I could have bought for price only, but I chose not to. That is the power of the consumer.

Invest in Technology

Paula
August 3, 2012
At the company I work for, The Rodon Group (one of the largest plastic injection molding companies in the U.S.), we have benefited from the higher costs of buying from China. We invested a great deal in new technology so that we can offer our "Cheaper Than China" pricing. American manufacturers need to stress the upside of doing business stateside. Better quality, faster turnaround, better pricing. Everyone can win if we all work at supporting manufacturing in this great Nation of ours.

Elenor
August 3, 2012
Hi Karen, In purchasing from (in this instance) China, I am not a "consumer" (as you seem to define it) with a choice in what I buy from whom and where. I'm a small manufacturing business requiring quality (and inexpensive!) microscopes to be used in the devices I make and sell. I can't wait and hope someone will start up an American microscope factory AND be willing to (custom-)build my specialized part, and for a price that doesn't put me out of business. (The American company that used to 'make' them -- in Japan, as it turns out -- stopped making them. No one else does.) I need to find a factory that will custom-build the exact scopes I need right now, and at a price I can afford, to make my specialized gauges to keep my company in business. Trying to force China to 'clean up their act' by not buying what I cannot get anywhere else just puts my company out of business! Trying to make business decisions on the basis of "the price of humanity" is (in my view) too broad (and thus, useless). Your question: "Would you pay ... knowing it was the best and most responsible choice?" is very nice, very humanitarian. However, my FIRST responsibility (and thus, my best choice) is to my company, my family, my country; not to people across the globe who may or may not be willing or able to change (or even interested in changing) how their country functions. (Dyah not see the sense of "I know what's best for other peoples/countries" inherent in the idea that "we need to 'help' these folks to live the way WE think they should be living"? This whole "bringing democracy to the world" (and, it seems, usually at the point of the sword -- or a Global Hawk missile!) implies that we know best FOR THEM; that "we" somehow have a special dispensation to remake everyone in our image (whether they want that or not!). My question would be: is it "the best choice" to treat other people(s) as children ("here, honey, let me fix that country for you, cause *I* know how you *should* be doing it"), or is it "the most responsible choice" to provide an example (which other peoples / countries may choose to emulate -- or may choose NOT to, as it best suits them), and work on our OWN country to take care of our own folks? I doubt this is the kind of quandary you and I will ever agree on. I do not believe we can "bring civilization" (however defined) to people(s) who have not chosen it / created it on their own. I'm reminded of the Cubans who escaped to Florida to get away from the censorship and restrictions of Cuba -- and then try to vote into (FLA) law the SAME kinds of censorship and restrictions! Or the Muslims who come here to escape their own version(s) of control and denial -- and then want to enshrine in (our) law *here* the same kind(s) of control and denial. If we "allow" open elections in these countries we're trying to "fix," and the people vote in a (religious) dictator -- who are WE to declare their election invalid? "Not buying stuff" made by "the people" in a country does not change their governance. Only they can change their governance, and we may be doing more damage than "good" by thinking we can change how they run their countries. (Iran (and China, among others) wants to stop having the USD be the reserve currency.... wanna bet "we" will NOT allow that?! That's what all those carriers are for!) Sorry folks, I expect this is not the place to have this discussion... but I am struggling very hard to KEEP an small American manufacturing company in business (and in America!). I am doing what I can to help American businesses -- but my first responsibility and my best choice is to keep MY firm in business. "My" govt is wasting "my" money on crap that does not serve me or us, and is actively harming what should be American manufacturing in order to "make over" other countries. That is SO not my problem!

tear up NAFTA

Donald
August 21, 2012
We need to add tariffs back to imported goods (like the Chinese do) to penalize outsourcing and encourage manufacturing at home. Tearing up NAFTA treaty would be a great start, too.

Reshoring is lean and green

Pankaj
August 21, 2012
There are points for and against offshoring. However, lean manufacturing advocates minimum transportation and minimum inventory, which would seem to advocate domestic manufacturing. Making products where you sell them would also help the environment, since less transport means less carbon emissions. We should attempt to reduce material movement to whatever extent possible.

consider other factors

Kirk
August 21, 2012
The cost of manufacturing in China is already greater than in Mexico. Labor cost is the only advantage. Freight, quality (or ability to create expedient corrections), support, and IP controls should also be considered.

reshoring is easy

Chris
August 21, 2012
Reshoring is relatively easy. All it takes is the right combination of manufacturing inputs to make it profitable to manufacture here. (Manufacturing inputs are: labor, capital and materials). Getting the manufacturing employment up to previous levels, however, is probably impossible, because the technology and capital inputs that will yield the right mix will involve much higher levels of automation and less direct labor content. See the examples of the US agricultural sector or the German manufacturing sector. We live in open and free markets now, and the manufacturing wages that fueled the growth of demand and the middle class may be gone for quite a while, if not forever! I wrote some thoughts on this back in 2005. They’re still pertinent I think, but more complicated now in our post-recession times. http://www.massmac.org/newsline/0609/article11.htm

domestic suppliers can compete

Will
August 21, 2012
When looking at the cost of parts from China or other overseas countries, you need to include the total cost; not just the piece part cost. Many manufacturers make that mistake. How much does it cost to buy parts with a 4-6 month lead time and then stack 10-15 containers full of materials in storage or fill a warehouse with material? How much do you spend on the square footage required, storage cost, material handlers, inventory transactions, damage, obsolescence? What if you discover a quality problem with the delivery? You have an awful lot of product to deal with and a long time to get good stuff to replace it. Domestic suppliers that are excellent, lean manufacturers can compete on the total cost of delivery. If the piece part cost is slightly higher (in many cases, the best can actually sell for less), but you can get deliveries once or twice a week, you are far better off. If there is a quality problem, you can be at their plant (or they can be at your plant) tomorrow; not next month. The problem can get resolved quickly and you can get good stuff quickly. I have seen companies have to deal with some overseas quality problems by reworking on the fly, figuring it's cheaper and quicker than rejecting the shipment, sending back overseas and trying to get a replacement delivery. Someone with an excellent network of domestic manufacturers in their network should be able to help find those suppliers willing and able to get you what you need. It might take a lot of digging but they are out there.

businesses are about profit

Uriel
August 21, 2012
I agree with Elenor. Businesses are about profit, and there is no profit on selling cheap, what is expensive to manufacture. The USA and most places in the developed world have the same problem: high labor costs. For the cost of one person in the USA, a Chinese manufacturer can pay 10 people, and those people will have less downtime and be more productive than the US worker. Perhaps US manufacturers can compete, but they’ll have to do it with cheaper, lower-quality materials.

It's simple economics

Mark
August 23, 2012
Really short answer. The decision to offshore was made because it made economic sense at the time. The decision to return is being made because it makes economic sense to do so now. There is really nothing more or less to it than that. Biggest factors are wages and price of oil. Not much of anything could be accomplished one way or the other with government policies.

Automation

Allen
August 23, 2012
What I don't understand about making phones and Ipods overseas: It's all done by automation, right? No one is placing or soldering tiny microelectronic components by hand. I'm sure even odd-forms are placed by machine. I have to believe that labor content is relatively small with these devices, so why not make them here?

Ann Grackin
September 10, 2012
Love your article—no you are not too hard on Apple. Each company makes decsionsion and is accountable for them. And they clearly are making the kind of profits that can afford to share those profits with the workers. To add, along with Elanor comment--we have had big summits in Massachusetts for clean energy innovators. They have patents and funding to start companies but not the Mfg talent. There is a mismatch between manufacturing demand and worker supply. Many new businesses cannot find the talent for 'small batches' businesses that are the key to start-up. Where did the talent go? MA used to be the home a mega technology manufacturing talent. I am sure Rochester has the same issue. That talent may be there--they may have moved on. The issue may be how to organize engineering, industry and manufacturing talents? And the problem will probably get worse since schools are churning out the next UI designers—not operations. We need to find ways to encourage young people to love manufacturing. That is the long term. The short term we need to find ways on the local level to organize talent. Part of that challenge is that we business owners have to reach a bit beyond just focusing on our own problems and help the community in order to help ourselves.

Engineering Manager

Michael Reinhold
September 26, 2012
The cost of doing business is higher in US even without the labor differential. 10 years ago I moved printer manufacturing from US to China for a $24 million annual cost savings. It was $5 per printer less expensive in China even when our total US labor content was only $2 per printer. The government here doesn't understand they are the biggest cause of the cost differential.

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