Parsing the NYT’s Apple Outsourcing Article

Today, the NYT published a major story on Apple’s global supply chain for the iPhone that tries to answer the question that people have been asking over the last twenty or thirty years on trade: “Why are American companies outsourcing jobs, and what – if anything – can be done to change it?”

I immediately tweeted the article out as a must-read (those of you following @WashingtonTrade already knew that), but I’ve been thinking a lot about what’s in this article and I wanted to try and get at some conclusions. Here’s a go, and I welcome your thoughts and responses in the comment section.

First, let’s talk about some definitions. When people talk about trade, they’re really talking about two things: exports and imports. Very few people have any problems with US businesses exporting as much as possible. We all agree* that it’s something that creates jobs, as it’s merely companies going beyond our borders to sell their goods and services to the 95% of customers outside the United States.

So, what people express opposition to is imports, but here again we need to parse: there are three main types of imports – 1) products that are made by foreign companies which we buy (say, Japanese televisions), 2) parts imported to American companies that are then assembled in the United States and exported (think Boeing airplanes), and 3) products made by suppliers of American companies for sale to Americans (like the iPhone in this article).

Now, if we made everything that we needed in the United States, then we’d certainly have no need for trade, but that’s not necessarily the best outcome. Basic economic theory tells us that there are efficiencies in the comparative advantages of specializing in certain things; not only does Japan therefore develop the capacity to make televisions that might be better and/or cheaper than ours, but us buying their televisions gives them the money to then buy our software and airplanes. Even more importantly, there’s an expectation of mutual benefit. For example, as Boeing CEO Jim McNerney has said, “Very few customers today are willing to purchase aerospace products or services without expecting some form of industrial partnership, through global supply chains.”

So, let’s ignore the first two and focus on the third: products made by American companies for American consumers (and let’s pretend for now that it’s only American consumers that are the target market for the iPhone.) The conventional wisdom is that the only reason that Apple assembles their product in China is to maximize profits by paying lower wages to foreign workers. But, according to this article, it’s that Apple executives don’t seem to believe that it’s possible to do that work in America anymore:

It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products(emphasis added)

This statement takes the outsourcing debate out of the realm of ethics, in which people bring up issues of national pride (“US companies have an obligation to build things here”) or workers rights (“it’s not acceptable for a US company to build products using workers that work 6 days a week, 12 hours a day for less than $17 day”). And Apple has been impacted by those arguments to some extent; just last week, Apple became the first tech company to join the Fair Labor Association. But, to really address the issue of trying to bring some of those jobs back to the US, the quote above forces us to have the outsourcing debate as a business question: how could we be a place that Apple executives would invest in? To pull another quote that parses the profit motive vs. capacity point:

It is hard to estimate how much more it would cost to build iPhones in the United States…up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward. But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. (emphasis added)

In particularly, the Apple executives seem to make three points:

1) That factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.”

2) That, “though Americans are among the most educated workers in the world, the nation has stopped training enough people in the mid-level skills that factories need.”

3) And that we don’t have enough engineers: “Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States. In China, it took 15 days.”

(They also make a fourth point, which is that – by outsourcing some of the work – they create the innovation and services jobs in the US in the areas that Americans are qualified for…not only at marketing and software folks at Apple, but with entrepreneurs who make apps.)

Let’s take these first three points as true, although there are certainly those who would challenge them; to a certain extent, it doesn’t matter if they’re true, as long as Apple executives believe them to be true. Regardless, what these quotes don’t capture is what China did to get to this point:

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.

To put it in simple terms, they invested in infrastructure and education. Interestingly enough, in the same Sunday NYT today, there were two other unrelated articles that suggest these as fixes to our current economic condition. One, an article on the dangers of our country’s debt, talked about how it’s a matter of making better federal investments:

In the early 1950s, government devoted about 1.2 percent of gross domestic product to infrastructure; by 2010, that amount had fallen to just 0.2 percent. Meanwhile, federal spending on research and development dropped from a high of nearly 2 percent in 1964 to 0.9 percent in 2009.

The other, about the need for a better trained and more mobile workforce, pointed out that:

If you have no specialized skills, there’s little reason to uproot to another state and be the last in line for a low-paying job at a new auto plant or a burgeoning green-energy cluster. The surprise in the census data, however, is that the immobile work force is not limited to unskilled workers…Until now, a B.A. in any subject was a near-guarantee of at least middle-class wages. But today, a quarter of college graduates make less than the typical worker without a bachelor’s degree…[Now, t]o compete for jobs on a national level, they [must] be armed with the skills that emerging industries need, whether technical (computer science) or not.

If the US invested significantly more in infrastructure and education, would those Apple jobs come back? In the article, Steve Jobs says that they might, to some extent: “Mr. Jobs even suggested it might be possible, someday, to locate some of Apple’s skilled manufacturing in the United States if the government helped train more American engineers.”

Clearly, that’s not the entire answer. For example, in Tuesday’s State of the Union, the President will propose “tax breaks for companies that “insource” jobs back to the United States.” Plus we need to look at our immigration policy, so that 1) we stop educating a bunch of engineers at US universities and then send them back to their home country to compete with us, or 2) allow companies to bring in more H1-B visa workers which is a major job creation multiplier.

And of course we need to ensure a level playing field, so that countries like China aren’t using their currency to artificially make themselves more competitive or violating US intellectual property as a way to gain advantages for their own industries. I point this out because, while there’s a huge group of folks that criticize Free Trade Agreements, the US doesn’t have an FTA with China…and some of those competitiveness issues (and worker standards) would ostensibly be improved if we did.

Here’s my ultimate takeaway: A lot of folks will read this article and come away with the conclusion that Apple is a heartless or that they should be ashamed of their profit motivation. I read it as mostly a blueprint for how we need to think about US competitiveness and a roadmap to successfully bring back some of those jobs.

 

(*With notable exceptions, like concerns about exporting coal.)

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