More on Apple and the state of American manufacturing

Jan earlier this week posted on the news that has come out about Apple’s supply chain. Since then the New York Times has been piling on with a pair of articles. The first discusses how Apple’s iPhone supply chain ended up in China (How the U.S. Lost Out on iPhone Work, Jan 20); the second discusses the working conditions in the factories of Apple’s manufacturing partners (In China, Human Costs Are Built Into an iPad, Jan 26). There were also two accompanying videos (see here and here).

There are some interesting points to be made here. To begin, the first video asserts that US manufacturing jobs lead to more ancillary jobs than service jobs (i.e., there is a bigger multiplier on manufacturing jobs). This certainly makes sense. This is partly due to the disaggregated nature of manufacturing jobs while many service jobs are inherently more integrated. One auto worker cannot on his own really deliver much of value. He needs people to staff the rest of the assembly line. Even an assembly plant worth of workers is pretty much useless without an army of workers at suppliers. In contrast, one service worker on her own can actually create quite a bit of value. Think of a nurse practitioner staffing a walk-in clinic; on her own she can actually do quite a bit. So that’s why everyone talks about good manufacturing jobs. What highlighting a higher job multiplier though doesn’t say is where those jobs are located. In an integrated global economy, auto parts may be made in Mexico as opposed to Ohio.

A second point made in the video is that because of the need for design and manufacturing to interact, higher skilled jobs are prone to following low skilled ones overseas. That is an argument that has been around for years and it is hard to say it is wrong. Now there is arguably a new twist to it. Specifically, design work will naturally move to growing market. Sound like a crock? Check out this quote from a BusinessWeek article on how GM is using leveraging cars designed for China into models sold around the world (China Dictates Design as GM Sail Big Back Seat Goes Global: Cars, Jan 18).

Inconvenient Truth about Foxconn: Should Apple care about how its supplier operates??

A few days ago, Henry Blodget wrote :

We love our iPhones and iPads.

We love the prices of our iPhones and iPads.

We love the super-high profit margins of Apple, Inc., the maker of our iPhones and iPads.

And that’s why it’s disconcerting to remember that the low prices of our iPhones and iPads–and the super-high profit margins of Apple–are only possible because our iPhones and iPads are made with labor practices that would be illegal in the United States.

The article summarizes a recent episode of NPR’s This American Life which did a special on Apple’s manufacturing.  Foxconn, one of the companies that builds iPhones and iPads (and products for many other electronics companies), has a factory in Shenzhen that employs 430,000 people. Apparently, an estimated 5% of them are kids (12 to 14 years) old; the standard shift is 12 hours and can extend to 14 – 16 hours; while the reporter is in Shenzhen, a Foxcon worker dies after working a 34-hour shift; the hands of workers who are using the neuro-toxin Hexane (which evaporates faster than other cleaners) to clean iPhone screens are shaking uncontrollably; etc.  All this for a wage of less than $1 an hour.

Henry concludes:

The bottom line is that iPhones and iPads cost what they do because they are built using labor practices that would be illegal in this country–because people in this country consider those practices grossly unfair.

That’s not a value judgment. It’s a fact.

So, next time you pick up your iPhone or iPad, ask yourself how you feel about that.

A good question indeed and you should ask how you feel. (Interestingly, respondents to this story span the entire spectrum.)  But let me ask whether Apple should care about this?  The answer is an emphatic “but off course.” Anyone familiar with “non-market strategies” knows that even a small fraction of the population can provide sufficient activism to bring a company to its senses.  (If you are not familiar, read “Reputation Rules” by my colleauge Daniel Diermeier.)  The momentum is already building: this weekend Forbes asked whether this is Apple’s Nike moment? Of course we hold big, successful companies to a higher standard; tall trees catch much wind.

So what will Apple do?  Well, it seems it already mounted campaigns–recently it disclosed for the first time its list of suppliers (without any addresses we should add–they still don’t want to make it easy, but it’s a first step). More interestingly, however, is the question how they will deal with the Foxcon issue: even Apple may not (nor want to) be in a position to control a company that runs a factory with 430,000 people.  Indeed, in a follow-up blog my colleague Marty will write about another key reason (besides cost) that Foxcon is so attractive: fast response at massive scale.

But this is not the first time Foxcon suicides are in the news (see May 2010 article) and Foxcon isn’t know for respect of its employees (recently the CEO called its employees “animals“). So Apple likely has been working on addressing this for a while.  Could the amazing $8 billion in announced capital investment at suppliers (see this earlier blog entry) include automation to reduce the human stress and risk factor? It surely would be in line with Apple’s strategic quest for high quality (i.e., consistency, low tolerances, etc.) while retaining high scale.  However, it would imply a faster-than-expected transition in China from low-level assembly by hand to higher job requirement for much fewer people.  Starts sounding like our job quandary?

The challenges of working in retail

When I teach my service operations elective, I inevitably spend time talking about managing front line service workers and the potential payoff from having a longer tenured workforce. Thus, I am always interested when Fortune puts out its list of the best companies to work for. The 2012 list was just published. There are some unsurprising names here such as Google and BCG. At a high level, these firms promise good pay, interesting work, and a dynamic environment. One of the striking features is how few conventional (as opposed to Internet-based) retailers end up the list. In the top 25, there are only three Wegmans (#4), REI (#8), and The Container Store (#22).

On the one hand, it may not be surprising that there are few retailers on the list. My first job was in the camera department of a Caldor store. It was boring and tedious with pretty minimal compensation. On the other, front-line employees are the face of a retailer and are what separate bricks-and-mortar stores from the on-line competition. Supposedly, “superior” customer service is a reason to go into Best Buy as opposed to just ordering on line. Indeed, there has been much in the press recently about how retailers are aiming for better service as a way to compete.

So why then does it seem like retailers are going out of their way to make life hard for employees?

Not All NonStop Flights Are Created Equal: Some Stop for Refueling

Wall Street Journal had several articles on Continental Airlines flights to the East Coast from Europe that have been forced to make unexpected stops in Canada  (and smaller airports on the east coast) to fill up their fuel after running into unusually strong headwinds. (“Nonstop Flights Stop for Fuel“, and “With Few Options, Continental Could Add Extra Tanks“) The stops are partly the result of a decision by United to use smaller jets on a number of long, trans-Atlantic routes.

United’s strategy works when the winds are calm, and it allows the airline to operate less expensive aircraft with fewer cabin-crew members to an array of European cities that wouldn’t generate enough traffic to justify larger planes. But by pushing its international Boeing Co. 757s to nearly the limit of their roughly 4,000-nautical-mile range, United is leaving little room for error when stiff winds increase the amount of fuel the planes’ twin engines burn.

American manufacturing follow up

A very brief follow up to last week’s post on American manufacturing. One of the articles discussed in that post is the cover story from the current issue of the Atlantic. The author of the article is part of NPR’s Planet Money team and they have devoted their weekly podcast to the article. Like the Atlantic article itself, it is very much worth checking:

While listening to the podcast, take a gander at this graphic on the evolution of American manufacturing from the Wall Street Journal (The Factory Floor Has a Ceiling on Job Creation, Jan 12).

Getting taken for a ride by dynamic pricing

The New York Times had an interesting article on Uber, a car service firm operating in several cities (Disruptions: Taxi Supply and Demand, Priced by the Mile, Jan 8). Uber allows users to order a car through their smartphone and have everything billed to a credit card on record. They also aim for quality service. Their website promises that your ride will come within five to ten minutes. That all sounds lovely, but how can deliver on that service goal when demand will be high. Think New Year’s Eve. How do you handle the spike in demand after the ball drops and folks want to go home? This quote from the Times gives an idea of how they did it:

On New Year’s Eve, Dan Whaley, a tech entrepreneur in San Francisco, got into a black Town Car and was driven one mile to a holiday party. The ride cost him $27. At the end of the night out, Mr. Whaley took a Town Car home from the party. This time, the exact same ride cost $135.

That’s right. Uber was using dynamic pricing, applying a multiplier to their basic rates depending on how much demand there was. Here is what customers saw when they ordered a car.

The Times article emphasizes that many customers were rather ticked by the seemingly exorbitant rates; because Uber prices by the mile and you don’t tell them where your going until the driver arrives, some amount of sticker shock at the end of your trip may be unavoidable.

But the Times actually sells short just what the firm is doing. Yes, dynamically raising the price chokes off some demand but it also brings more capacity to the market.

What will Ford do with all those cars?

It has been a while since we’ve talked about automobile inventory. A year or two ago there was a lot in the press about automakers in the US finding religion and keeping better control over their inventories. The argument was that greater labor flexibility for the US makers would allow them to keep from accumulating cars and being forced to offer margin-trashing incentives. (See, for example, this post and that post.)

With that background, check out this graphic from today’s Wall Street Journal (Small Cars Test Ford Resolve, Jan 11):

So Ford has a lot of small cars. As the article notes, the party line in the industry is that 60 days is the “right” amount of inventory. Ford currently has 126 days of Fiestas and 92 days of Focuses (or should that be Foci?).

Here is the author discussing Ford’s problem.

Manufacturing in America

American manufacturing has been in the news a lot lately.  The Economist (Hard times, lean firms, Dec 31), the Wall Street Journal (In U.S., a Cheaper Labor Pool, Jan 6), Businesweek (It’s a Man vs. Machine Recovery, Jan 5), and the Atlantic (Making It in America, Jan/Feb — currently not now available on-line) all have had articles on the state of US manufacturing. The articles have delivered some interesting numbers. From the Journal, we have:

U.S. manufacturing labor costs per unit of output in 2010 were 13% below the level of a decade earlier as workers became more productive, according to the U.S. Bureau of Labor Statistics. The U.S. outperformed Germany, where unit labor costs increased 2.3%; Canada, where they rose 18%, and South Korea, up 15%.

The graph at right illustrates the change. There are a couple of issues behind this are worth mentioning. First, changing work rules and greater employee flexibility is part of this. The article highlights labor disputes between US manufacturers and Canadian workers that in some instances have resulted in the closing of Canadian factories. Navistar, for example, closed an Ontario plant in part because its American workers (represented by the UAW) agreed that any of Navistar’s plants should be able to build Navistar’s products.

The second point is that exchange rates matter. The Loonie, in particular, has appreciated against the US dollar and that has made making stuff in the Midwest more attractive. Of course, that advantage is more fleeting that changes in work rules and increases in productivity.

Improving airline performance

So the Wall Street Journal’s travel column this week ranks US airline performance (The Airline That Loses Bags, Cancels Flights, Jan 5). The idea here is to build an index that weighs things like on-time performance, complaints filed with the feds, etc. For those of us in Chicago, the bad news is that American is the worst and United-Continental is barely better.

The more interesting points in the article, however, are what Alaska and Delta — two of the worst performers in past surveys — have done to improve performance.

Alaska, which launched an operational overhaul in 2007 after several years of dismal reliability, was first among major airlines in on-time arrivals. The carrier has set internal standards: There are 50 different check points on a timeline for each departure, with data collected on each one. Flight attendants have to be on board 45 minutes before scheduled departure; customer-service agents board the first passenger 40 minutes before departure, and 90% of passengers need to be boarded 10 minutes before departure. What time the fuel truck hooks up and what time it disconnects its hose are measured. When flights arrive, the time the belt-loader pulls up to the plane is tracked. The cargo door is supposed to be opened three minutes after arrival; the first bag needs to be dropped on the carousel before 15 minutes after arrival.

“There are so many moving parts. You just can’t tell people to get the airplane out on time,” said Ben Minicucci, Alaska’s chief operating officer.

Using RFID to eliminate airport queues

How should airlines get passengers through airports with minimal delay? One possibility is to provide loads of capacity. There are two ways to do that. One is hire lots of staff or put out lots of kiosks. That requires both money and space. The Wall Street Journal reports (The Trump Card at Check-In, Dec 29) that Qantas has found an alternative way to expand check-in capacity on its domestic routes: Use technology to greatly reduce the processing time so the same number of kiosks can process far more customers. This graphic summarizes their revised process.

Radio-frequency ID cards (RFID) chips are key to making this work.

The system, built around radio-frequency ID cards (RFID), is similar to toll tags used on highways and bridges. Top-level frequent fliers get an ID card that is flashed at a kiosk in the ticketing area. In seconds, the system finds the reservation for that day, assigns a seat based on personal preferences if one wasn’t pre-selected and checks the passenger in. When everything is good to go, a beacon illuminates.

To check luggage, the passenger goes to a baggage drop point, flashes the frequent-flier card in front of a reader and drops luggage on a baggage belt. The bag is weighed, and lasers measure its dimensions to make sure it complies with limits.

Top-level frequent fliers have heavy-duty RFID tags called “Q Bag Tags” for their bags that replace paper luggage tags. The technology reads the bag’s “identity” as it moves from luggage belts to carts to airport tarmacs. This ensures luggage gets loaded on the same flight as its owner. Other travelers get a paper tag for their bag with an imbedded RFID chip.