A New York Times story, “How U.S. Lost Out on iPhone Work,” uses an Obama dinner with Silicon Valley titans to frame its tale of why the US middle class should roll over and die. I am of course exaggerating for effect. But not by as much as you might think. The story by Charles Duhigg and Keith Bradsher does a very good job of explaining why Asia, and China in particular, has come to dominate consumer electronics manufacture, using the iPhone as focus.
The problem with using the microcosm to illustrate the macrocosm is you need to choose the right microcosm. The danger in using the iPhone example is that (as I have discussed at length in prior posts) there are quite a few industries in which the case for offshoring and outsourcing is not compelling, particularly if you allow for the increased risk of extended supply chains, as Apple itself learned in the wake of the Fukushima nuclear disaster. But even in those cases, it still has the effect of transferring income from middle level and factory workers to the top brass. Thus the iPhone/consumer electronics example will have the effect of giving other businesses a free pass.
And not only that, even among computer and electronics firms, Apple was unusually demanding, and not always for good reasons. As much as Steve Jobs was revered for his fixation with design, it could interact with coming up with a final product in nasty ways. The Walter Isaacosn biography of Jobs is chock full of incidents of Jobs changing his mind to the point of wreaking havoc with getting a product out the door. For instance, one of Mac engineers, Chris Espinosa, designed a calculator to be included with the Mac OS. Jobs liked the idea but was not pleased with the appearance. Espinosa came up with new designs in response to Jobs’ input daily, only to get more criticism. He finally wrote a program, the “Steve Jobs Roll Your Own Calculator Construction Set” to put Jobs firmly in charge of finalizing the design. Similarly, on the first iteration of the NeXT computer, Jobs insisted that it be a perfect cube. I will spare you the details but that requirement caused all sorts of costly hassles.
Now consider this vignette from early on in 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.”
The authors fail to tell you what this means: changing a production design that late in the game is bad management, period. It’s the sort of stunt you see in a craft manufacturing business like the movie industry, not in one that deals with factory production. But the flexible near slave Chinese workers bailed out Apple’s ass.
Nor does it frame another section properly. Here Jobs has a more logical, if still daunting demand: he wants a phone with a glass screen that won’t scratch, since phones get shoved in pockets with keys and coins. But part of his ask was still unreasonable: “I want a glass screen, and I want it perfect in six weeks.”
Again, China delivered, but notice how:
For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.
Then a bid for the work arrived from a Chinese factory.
When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. 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.
The Chinese plant got the job.
So basically, the Chinese funded a completely non-economical glass R&D facility IN ANTICIPATION of getting the Apple order. There is no way anyone would build a factory like that unless the money was close to free. It already had glass samples in stock! The “some subsidies trickled down” sounds way too innocent. It sounds more like someone recognized the importance of Apple as a marquee customer, and whether the push came from the officialdom or businessmen with the right connections in high places, it doesn’t really matter. This project smells of having serious government backing. How can private businesses anywhere compete with that?
There is admittedly a lot of insightful discussion in the article. It stresses that Silicon Valley executives say that the cost of US labor is not what is driving their decisions. It is the responsiveness of the supply chain, which among other things means ability to recruit factory labor and engineers quickly (and to get the factory workers to put in Foxconn like hours). Thus the savings is in inventory costs rather than labor per se. Nevertheless, it is disappointing that to see the authors seemingly stumble on critical pieces of the puzzle that they fail to integrate into their commentary.
The US is going to have enough trouble rebuilding its industrial base as it is. Not understanding why and how the middle class is being sold out will only make that task more difficult.
This post originally appeared at naked capitalism and is posted with permission.