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).

“In the future, what is made for the Chinese will also be made for the world,” said Burt Wong, chief production designer at the Pan Asia Technical Automotive Center in Shanghai, the research and development joint venture between GM and its Chinese partner SAIC Motor Corp. …

In the past, Detroit-based GM had brought models designed for the North American market and adapted them to Chinese needs, Wong said. Now, the center cooperates with Michigan colleagues as early as four years in advance on new and refreshed car designs, he said.

Detroit and Shanghai-based engineers worked together to design the 2010 Buick Lacrosse, with the Chinese center taking the lead in interior design. The Shanghai center, which employs about 2,000 staff, is currently developing a new sport-utility vehicle for global introduction, Wong said.

Now to the NYT articles. “How the US Lost…” has some really interesting observations about why Apple (along with pretty much every other electronic manufacturer) is in China.

For over two years, the company had been working on a project — code-named Purple 2 — that presented the same questions at every turn: how do you completely reimagine the cellphone? And how do you design it at the highest quality — with an unscratchable screen, for instance — while also ensuring that millions can be manufactured quickly and inexpensively enough to earn a significant profit?

The answers, almost every time, were found outside the United States. Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China. …

In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

So you do assembly in Asia because everything else is there. Further, you get unbelievably flexibility. Here is probably the most scandalous part of the article.

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

Which gets us back to Jan’s post. Yes, American politicians love the idea of manufacturing jobs but I doubt that few would subscribe to the idea that workers should be on call to ramp up at the whim of some buyer. These are not “good” manufacturing jobs. The question is whether the average American cares that someone in China has to put up with such work conditions enough to stop buying Apple products.

The article “In China, Human Costs…” further discusses working conditions in factories building shiny i-devices. The interesting part here is how much sway Apple has over its suppliers.

Apple typically asks suppliers to specify how much every part costs, how many workers are needed and the size of their salaries. Executives want to know every financial detail. Afterward, Apple calculates how much it will pay for a part. Most suppliers are allowed only the slimmest of profits.

So suppliers often try to cut corners, replace expensive chemicals with less costly alternatives, or push their employees to work faster and longer, according to people at those companies.

“The only way you make money working for Apple is figuring out how to do things more efficiently or cheaper,” said an executive at one company that helped bring the iPad to market. “And then they’ll come back the next year, and force a 10 percent price cut.”

The question then is what can give. Apple will not sacrificing quality or using second-rate components. That puts worker safety high on the list of things that can be cut.

And again we circle back to what Western consumers will put up with. Truth be told, I have toured some US-based high tech factories that seemed pretty miserable places to work. Back when IBM made personal computers, their North Carolina assembly plant was run with almost 90% temp workers and even the plant manager had to walk through a metal detector when entering or leaving the factory floor. It didn’t really strike me as a great environment. But that said, workers could be pretty confident that their pay check would be calculated correctly and that basic safety issues had been addressed. The same cannot be said of China. Of course, while Name Your Favorite Non-Apple Tech Company has not been under the same scrutiny as Apple, I have not seen a really compelling analysis that shows that HP or Samsung has problem free operations. That to some extent is the real conundrum for consumers. If one wants a modern life with a smartphone and a tablet, it is not clear that any device is really guilt-free.