Monday, August 29, 2011

Manufacturing, Outsourcing and Jobs

Forbes recently ran a series of blog posts examining, among other things, how Dell's focus on short-term profits led to their outsourcing more and more of their business, to the point that the company to which they had outsourced their operations effectively became a competitor. The issue, according to the author, is less that Dell outsourced and more that they focused on costs and profit margins without considering what they were bringing to the consumer experience:
This comment is in fact an illustration of the mental guide-rails generated by cost accounting. There is an automatic assumption that when faced with a market challenge the way to be more competitive is to cut costs. The possibility of adding more value is unconsciously eliminated. It would be wrong though to say that cost accounting is the main cause of these problems. But it is a contributing factor. With decisions and thinking and values based on cost-accounting and short-term profits, Dell’s fate was sealed. If decisions and thinking and values had been based on how could Dell deliver more value to customers sooner, the outcome would not have been predetermined, as Apple [AAPL] has shown.
The articles explain how, due to outsourcing, an economy can bleed high tech jobs to the locations at which the outsourcing occurs:
The U.S. has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the U.S., even if Amazon wanted to:
  • The flex circuit connectors are made in China because the US supplier base migrated to Asia.
  • The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing.
  • The highly polished injection-molded case is made in China because the U.S. supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China.
  • The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets.
  • The controller board is made in China because U.S. companies long ago transferred manufacture of printed circuit boards to Asia.
  • The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers.
An exception is Apple [AAPL], which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.”
The series is offered under the theme, "Why Amazon Can't Make A Kindle In the USA", which, as the counter-example of Apple indicates, is not the principal problem. The problem is that when you outsource high tech manufacturing, you make it more likely that a lot of the jobs associated with any given technology will end up being located in the foreign nation. It's much less of a concern that Kindles (and Apple products) are assembled in Asia, or even that components of those products are manufactured in Asia, as compared to the loss of the industrial design, software, and similar jobs associated with the products and industries. This is the source of my skepticism of the conceit of Michael Boskin, that it is irrelevant to our nation's future whether we manufacture computer chips or potato chips. It may be that on the factory floor, there's little difference between making $10/hour frying potatoes as opposed to $10/hour assembling iPods, but when you start thinking about what our economy needs to sustain a healthy middle class, let alone to be a future leader in the design and production of high tech products, you need to avoid exporting the design and manufacturing expertise associated with those products. The articles note that even as our nation talks about developing future technologies, we tend not to ignore the fact that the associated manufacturing job opportunities are most likely to arise in other nations:
The lithium battery for GM’s [GM] Chevy Volt is being manufactured in South Korea. Making it in the U.S. wasn’t feasible: rechargeable battery manufacturing left the US long ago. Some efforts are being made to resurrect rechargeable battery manufacture in the U.S., such as the GE-backed [GE] A123Systems, but it’s difficult to go it alone when much of the expertise is now in Asia.
It's not "all bad" to export manufacturing jobs, particularly low-skilled jobs in dirty industries. Leaving issues of the environment and worker exploitation in those countries aside for the moment, there is a domestic gain in obtaining certain components and products from other nations at lower prices, while minimizing the domestic impact of many of the environmental issues associated with those industries. Even back in the 1980's, computers were packed full of components manufactured in overseas factories.
The view that the migration of mature manufacturing industries away from developed countries like the USA is just part of the healthy natural process of economic evolution that allows resources to be redeployed to new, higher potential businesses is certainly widespread. It is however mistaken. As Pisano and Shih point out in their HBR article, “It ignores the fact that new cutting-edge high-tech products often depend in some critical way on the commons of a mature industry. Lose that commons, and you lose the opportunity to be the home of the hot new businesses of tomorrow.” For instance: once silicon-processing and thin-film deposition capabilities are gone, it’s hard to become a major player in solar panels.
As the author puts it, focusing on "short-term financial gain at the expense of core capabilities is a very dangerous way to go if the company wants to survive." Apple almost died at the hands of its bean counters who, having forced Steve Jobs out, neglected product development and quality control, and authorized clone-makers only to yank the carpet out from under them the moment they realized that the clone-makers were building cheaper and arguably better machines. I don't know if Jobs had to remind people of that history as he rebuilt the company, or if by the time Apple was again turning real profits the major shareholders decided that you don't argue with success. While I have no particular reason to be optimistic, let's hope that at least some U.S. companies are taking a longer view of profit and asking, "Why can't we be more like Apple?"


  1. Leaving issues of the environment and worker exploitation in those countries aside for the moment

    "But other than THAT, Mrs. Lincoln, how was the play?"

    No, I understand you were making a different point. But these are huge issues well beyond the wage cost that drive manufacturing overseas.

  2. And they turn around and bite us in the posterior, with potential Republican presidential nominees calling for the elimination of the EPA and whining that U.S. workers get paid too much, while their state-level counterparts attack the unionized civil service.

  3. Hmmm... Outsource production to countries that don't respect intellectual property laws and then find yourself amazed when all your secrets and technology is stolen. How could it possibly happen?

    Of course, American CEOs are the most short-sighted among executives. They're simply concerned about meeting quarterly targets and getting bonuses to actually think about a company's long-term future.

  4. "Leaving issues of the environment and worker exploitation in those countries aside for the moment

    "But other than THAT, Mrs. Lincoln, how was the play?"

    Oh wow, that made me laugh.

    I thought the Forbes series was a very interesting read, I think manufacturers (and I'm not talking about the big guys, I'm talking about small-mid-sized businesses that are what keep America running) feel like they need to outsource to stay competitive. We need to come up with bigger and more innovative solutions to solve the issues at hand, rather than expect a return to the good ol' days. If manufacturers felt they had other options (a U.S. sponsored automation movement comes to mind) then maybe they wouldn't feel so pressured to compete via outsourcing to other countries. Then we could focus on training our people here in more specialized automation-management mfg roles.

  5. There's plenty of automated manufacturing in the U.S.A.

    Outsourcing to reduce manufacturing costs generally involves the production of goods that remain labor-intensive. There can also be regulatory and environmental reasons for outsourcing but, Michelle Bachmann's yammering about the EPA aside, most people don't want to live in a trashed environment and thus will oppose the type of deregulation that might lead, for example, to a return of domestic tanneries.