The iEconomy

The NYT article on Apple and employment, How U.S. Lost Out on iPhone Work , offers valuable insights into the future of manufacturing. But there is a way out. The story sheds light on the huge manufacturing infrastructure—some 700,000 employees strong—that manufactures Apple products in Shenzhen, China, and around the world. This is the future of manufacturing; its not ours and will likely never be. Three aspects of this story deserve pointing out.

Scale, speed, and profitability

Last year, Apple sold 70 million iPhones, 30 million iPads, and 59 million other products, most of which were less than a year old (Apple updates its products roughly every 9 months). Having been a designer at Apple, and having brought up overseas manufacturing for products I designed, I know that the smallest mistakes can shut down a line and cost the company millions for each day’s delay. And that was when we were making a million products a year.

Now, every time Apple introduces a new model (5 iPhone models in 4 years), changes reverberate through its manufacturer’s factories and component suppliers with barely a bump. Foxconn’s ability to scale new Apple products with so much speed and so few hiccups is truly world-class, wherever in the world it is. Few companies in the world can match them. And, as the authors note, the company makes 40% of the worlds consumer electronics products (for Amazon, Google, and others), so anyone trying to compete must turn to the very same companies and suppliers (e.g., Foxconn) to do so.

As a former Apple executive said,

“The speed and flexibility is breathtaking. There’s no American plant that can match that.”

This is not simply a matter of where Apple chooses to make its products—there is a capability that few companies in the world are capable of.

No manufacturing is an island

That sort of manufacturing isn’t something companies can turn on or off. Manufacturing requires an vast ecosystem—the bigger the scale, the more dependent it is on this ecosystem. Expecting a single manufacturer to move jobs back into the US isn’t a fair question and hides the real issues around what makes for manufacturing jobs.

There was a reason why, when Ford Motor Company built the world’s first mass produced automobile, it vertically integrated. There is a reason why Edison, to build the first electric grid, had to form 12 companies. They had to in order to control all aspects of their supply chain—to ensure the pieces worked like they were supposed to, came together when they were needed, and cost what they promised. It was hard to build those systems and just as hard to change them. Edison’s network kept him from making the shift to AC. Ford had to shut its plant for 9 months just to retool from the Model T to the Model A in 1927.

In the 1970s and 1980s, advances like the Toyota production system made that easier. And over the last thirty years, the best minds in industrial engineering (that didn’t go to Wall Street) have been engaged in solving these same complex integration problems, but across networks of suppliers. An Apple Executive tells this story,

“The entire supply chain is in China now… You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

Try to build that in the U.S. Bringing manufacturing back requires bringing back not only the jobs, but also the particular suppliers and infrastructure (the skilled and unskilled labor, the suppliers, the ports, road and railways) that’s needed for any particular industry’s needs. All at a scale competitive with gargantuan hubs like Shenzhen.

It’s our bed

This brings me to the final point: the argument that companies like Apple could, or should, bring manufacturing back to the United States. The reporters bite:

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, executives say.

Seriously. This question—and the paired answer—is baldly wrong.

Apple is not alone in outsourcing manufacturing to China. This trend began long before Apple got onboard. In fact, Apple missed this train the first time around, when their local and highly inefficient manufacturing operations (and supply chain) built in the Silicon Valley in the 1980s kept them from competing with emerging PC manufacturers across the country.

Companies didn’t leave the US because there was no manufacturing workforce. There is no manufacturing workforce because companies long ago abandoned them. They left in the 1980s and 1990s in search of higher profits, and the workforce, the infrastructure, and the supporting regional economies long since collapsed. A direct result of the asset-light strategies that investors rewarded, that private equity companies exploited, and that management consultants evangelized.

It took American companies more than three decades to create the manufacturing ecosystem that is China today. Apple’s just the most recent beneficiary. So yes, Apple employs very few people relative to the number of products it sells—what do you think drives their stock price? We made this bed, and now we’re complaining about it.

We should be worried

I spoke this week before a gathering of governors’s staffs, on what states can do to foster innovation and entrepreneurship. On the surface, the manufacturing’s exodus reinforces the need for entrepreneurs—and the need for new, high-growth businesses that will replace all the jobs lost.

But if competing requires the same scale and flexibility that today’s leaders have, it means contracting with the same manufacturing suppliers; if we want local manufacturing, it means rebuilding an entire manufacturing ecosystem at larger scale than we had before; and if it means creating a return to investors, then we have to redefine value in a way that recognizes the long-term worth of local infrastructure and employment.

Under the current system of capitalism—that rewards the global consolidation of manufacturing capability—that’s a lot to ask. Companies that make things—GE, Cisco, United Technologies, Caterpillar—have been moving steadily moving overseas thoughout the 2000s. And new high-growth companies like Google (32,000) and Facebook (3,000) are, without manufacutring, not employing many people anywhere.

If we value long-term middle class employment, we need to find a new way to foster, reward, and value companies that compete against the pressures of consolidation. Speed and flexibility use to be mass-production’s achilles heel. Now it’s a distinguishing feature. As Jared Bernstein, a former economic advisor to the White House warned, “If it’s the pinnacle of capitalism, we should be worried.”

A local way out?

But what if this isn’t the pinnacle of capitalism? Eventually, such consolidation doesn’t just displace individual workers—it impoverishes communities and entire regions. Look no further than the empty towns of the wheat belt, or Detroit and the rust belt, to see what happens. So is there a way to avoid eeking out a living on the fringes of mass-flex production?

The very technologies that are enabling speed and flexibility at global scale may also enable almost-as-good, almost-as-cheap production at the local scale, but with the advantages of local community, local infrastructure, and local jobs (and fewer middlemen). Eventually, the cost and quality gap will close (or even cross, when you factor in the sacrifices we make for mass design, production, and distribution).

Take our local Yummy Dummy Chocolate Company that, for six years, was run here in town. The company made chocolate bars and sold them in local Davis stores. It wasn’t Hersheys but, then again, it was enough for them and for us. Sure, making chocolate isn’t the same as making iPads but cut them some slack, they were six 12 year-olds. They shut down when they left for college. There are hundreds of local microbrews competing perfectly well with the mass-meisters, and that’s just within a 50-mile radius. On-demand book printing sits in bookstores now, a machine smaller (and cheaper) than today’s office copiers.

Who’s to say the next wave isn’t producing (and servicing) low cost, local-scale manufacturing technologies? What would it take to revolutionize manufacturing by returning it to the local level?