My blog post “Apple, Offshoring and the Decline of the American Middle Class,” attracted several thoughtful responses that each deserve thorough discussions. I will try to address them in a series of posts here over the next few weeks, starting with an interesting question from Allen:
“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?”
Many products made in cheap-labor areas could, in fact, be produced here economically. Just three reasons why they are not include:
- Faulty cost accounting and flawed purchasing agent incentives.
- Low-wage manufacturers use a lot more labor than you might think.
- Reasons other than labor cost.
It starts with purchasing decisions. Most large corporations evaluate purchasing personnel on their ability to obtain the lowest prices (and to keep driving prices down further with every new order).
However, the unit price rarely captures the total cost. Lead times get extended and more units are in the pipeline, so it’s difficult to respond quickly and economically when fashions change or design problems show up. Headquarters personnel end up on conference calls in the middle of the night trying to communicate with supplier personnel who may not be proficient in English. Unexpected air shipping expenses occur when the supplier falls behind on production. Also, the failure rate out of low-wage factories tends to be higher because the only way to provide the cutthroat pricing without bankruptcy is by cutting corners, and there’s much more handling than in Western factories. And finally, in what may be the greatest hidden cost: Foreign suppliers tend to become competitors.
These are the kinds of meaningful costs that rarely get taken into account when purchasing decisions are made. Increasingly, companies here are getting smarter about the real costs of outsourcing, but it’s not easy to repatriate manufacturing once it has gone abroad.
Now, about the labor content… Quite simply, most factories in places like China don’t have nearly as much automation equipment as the usual American factory. Where American factories are always looking for machines to remove labor, outsourcing factories automate only where labor can’t do the job. After all, a machine that makes sense by replacing one worker in an American factory would need to replace at least five workers in a Chinese plant (and perhaps 20 in some areas that are less developed than China) to produce the same ROI.
Wages are not the only reason for the differing levels of automation. Flexibility is another. Hands are easier to reprogram than machines—and easier to replace. Contract manufacturers are not noted for loyalty to their workers. As soon as wages in what had been the lowest-cost area increase, contract manufacturers move production to the new lowest-cost area. When Japan became more expensive, factories moved to Taiwan, Korea and Mexico, then to China, and now to Thailand and Viet Nam.
Even within China, factories are moving inland from the coastal areas. (In some cases, factories are moved overnight—workers show up in the morning and find their employer has disappeared.) The cost of moving depends in large measure on the amount of equipment involved.
For the phones and iPods mentioned by Allen, some automation can’t be avoided. Humans can’t handle the tiny components used in most modern electronics. Placement, insertion and soldering of components to circuit boards requires machine precision. But humans are needed to connect the circuit assemblies, put them in cases, polish those cases, perform simple tests like on/off, and box the finished units. Those functions are why Foxconn employs hundreds of thousands of workers in some factory complexes.
The amount of labor involved in mass-producing electronics explains much, but not all, of why so few comparable factories remain in America. For example, the near total absence of environmental and worker safety regulations in much of Asia and Eastern Europe provides significant cost advantages. (Social welfare carries little weight in today’s boardrooms.) In electronics, the highly interwoven supply chain—developed with considerable American money and effort—is Asian-centric. Asian nations provide their factories with government subsidies, currency manipulation and protected domestic markets in everything from computers to toys. Our government, on the other hand, has shown no real interest in standing up to opportunistic trading partners.
Getting back to Allen’s question—“Why not make them here?”—the most reasonable answer is: “We could, but we won’t.” Reshoring won’t bring back the mass-manufacturing jobs that provided decent middle-class lives for the modestly educated. Most of what comes back will be lower-volume, higher-margin products requiring workers with knowledge and skills. That’s not good news for the unskilled unemployed, but it is realistic.
On a brighter note, the hollowing out of American industry seems to have ended. Young companies with exciting products are popping up in numbers that I haven’t seen in perhaps 20 years. The U.S. auto industry is thriving again. If the housing industry comes back from the dead—which is not as far-fetched as it seemed a couple of years ago—good things will happen in manufacturing. Older unemployed workers may never find decent work again, but there will eventually be opportunities for younger workers, especially those with better skill sets.
We will have a new industrial age. It just won’t be based on phones and iPods. Am I too optimistic? Or overly pessimistic? I hope you will 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.