The U.S. manufacturing picture, as scene through the history of the iPhone

Posted by scapozzola on 01/23/2012

The New York Times ran a major article yesterday that looked at the history of the iPhone, and how its eventual production in China summarizes the changing face of the American economy.  The article made a big impact-- the kind of thing that gets emailed around and posted on Facebook: "Hey, did you see this NYT article?  Pretty heavy, huh?  Kind of depressing."

What the article really shows is that low labor costs are the not the principal reason for Apple outsourcing its production to China.  Rather, it's a combination of factors, with the U.S. having fallen behind in innovation and engineering skills.

Frequently at ManufactureThis, we make mention of America's continuing struggle with illegally subsidized competition from overseas.  China and other trading partners employ practices like currency manipulation in violation of world trade law.  An undervalued currency, combined with massive government subsidies, has enabled China to exponentially expand its manufacturing operations while simultaneously undercutting U.S. manufacturers.

The problem isn't just trade policy, though.  The U.S. has no comprehensive focus on manufacturing, no manufacturing strategy to prioritize and enhance production in key industrial sectors.

Essentially, the chickens are now coming home to roost.  As the New York Times article shows, America's dwindling industrial capacity is feeding a domino effect of lost opportunities.

Here are some key points from the New York Times article:

Massive foreign subsidies.  Beijing awards billions in subsidies to its manufacturers.  Essentially, this is free money-- used to launch new companies, to pay energy bills, to innovate and experiment:

The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

Sometimes brutal labor conditions.  We've frequently chronicled the oppressive workplace conditions at Foxconn, maker of the iPhone and iPod, where young workers sometimes resort to suicide rather than endure more abuse.  But these mass mills are the engine that drives mass production of Apple products:

 The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

The U.S. is losing its skilled workers.  As manufacturing declines, fewer students are motivated to seek the high-tech skills needed for 21st Century production.  Fewer skilled workers means an inability to innovate and less capacity to respond to changing market conditions.

Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said.

Supply chains move overseas to follow production.  More and more parts and components are being manufactured overseas in tandem with their supply chains.

But as that market has expanded, the bulk of Corning’s strengthened glass manufacturing has occurred at plants in Japan and Taiwan.
“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws, Corning’s vice chairman and chief financial officer. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

To reverse this trend, the U.S. must focus on skills, education, and innovation immediately.  Read more about this in an op-ed by Alliance for American Manufacturing (AAM) Executive Director Scott Paul.

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