American Public Media’s Marketplace had an interesting take on global supply chains by tying it to the launch of the iPhone in China. The iPhone is made in China, so they ask “Who benefits when you buy an iPhone?” (Oct 28) They tackle that question by taking apart an iPhone and seeing where parts come from. The “touchscreen digitizer” comes from Sharp. The flash memory from Toshiba and they are part of why Japanese firms capture about 14% of the iPhone supply chain profit. Korea also gets a slice since Samsung supplies the processor. China, however, ends up with the short end of the stick — only about $4 out of the $300 or so the phone goes for in the US.
Of course, who gets the lion’s share of the profits is not surprising if you have seen Apple’s recent earnings . Steve Jobs and Co. are estimated to get 50% or so of the pie. The story’s conclusion:
From China’s perspective, here’s the moral of the iPhone story: the dominant players in the global economy are the inventors and the brand owners: whether it’s electronics, or cars, or clothing.
That is emphasized by a follow-up story from today on what it’s like to make iPhones (China’s iPhone workers face hard times, Marketplace, Oct 29). It doesn’t sound like a lot of fun. In the words of one worker:
Each of us is like an ox. We never stop working. The factory is over 100 degrees. We go for 12 hours a day.
If nothing else, the report drives home that there is nothing particularly special about cheap labor. Sitting in the West it makes sense to move low skill, labor intensive tasks overseas (if you can look askance at labor issues). If you are in the business of supplying cheap labor, however, there is only real money if you can move up the value chain.
That brings us to another interesting global supply chain story (also from a slice of public radio). NPR presented a three part series on the international outsourcing of airframe maintenance (Flight Mechanics: The Business of Airline Repairs, Oct 19 – 20). The FAA requires that commercial airplanes every two years. We’re talking stripping out all the seats and overhead bins to check all the metal and wiring. Turns out, that’s expensive:
If an airline fixes its own planes in the U.S., it spends up to $100 per hour for every union mechanic, including overhead and other expenses, according to industry analysts. The airline spends roughly half as much at an independent, nonunion shop in America. And it spends only a third as much in a developing country, such as El Salvador.
Currently, 20% of these major overhauls happen outside the US with Central America getting a sizable slice of the business. There is, of course, concerns with quality here. Overhauling planes does not qualify as low skill work and when, say, mechanics cannot read English well enough to understand the client airline’s manual, you might worry.
For my money, the most interesting part of the series is the third part which focuses on American Airlines (Bucking Trend, Airline Keeps Repairs In-House). AA has bucked the trend and still does all its overhauls in-house. Indeed, it takes in work from other airlines. How can it be competitive if its unionized workforce is so much more expensive? Speed!
Facing intense competition from foreign maintenance companies, American and its mechanics have collaborated to cut the time and number of workers needed to complete a major overhaul called a “heavy check” — during which mechanics strip the interior of the plane all the way down to the skeleton. The overhaul now takes 12 days instead of 22, and a little more than 300 workers, down from 700.
This is just an interesting story. It’s a service setting but it really is playing out like manufacturing. What manufacturing is left in the States has gotten by wits, guile, and above all productivity. And that is what is letting American compete with low cost rivals. That said, one wonders how long it can last. There are a limited number of basic airframes out there. An overseas servicer does not need to be super competitive on every airframe. It just needs to be fast and effective on the high volume ones (say, 737s). It seems that if the overseas firms were willing to focus on limited offerings, they should be able to cut into American’s time advantage.