Why isn’t the iPhone made in America?

by on January 22, 2012 at 7:48 am in Economics, Web/Tech | Permalink

This is an excellent article, and perhaps it will win one of David Brooks’s Sidney Awards, excerpt:

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.

…Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes.

Foxconn Technology has dozens of facilities in Asia and Eastern Europe, and in Mexico and Brazil, and it assembles an estimated 40 percent of the world’s consumer electronics for customers like Amazon, Dell, Hewlett-Packard, Motorola, Nintendo, Nokia, Samsung and Sony.

“They could hire 3,000 people overnight,” said Jennifer Rigoni, who was Apple’s worldwide supply demand manager until 2010, but declined to discuss specifics of her work. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

Most of all, I like how the article shows that some Chinese economic advantages result from scale, speed, flexibility, and the supply chain, more than just from lower wages per se.  I believe we need a rethink of the current importance of economies of scale and scope, and what they actually consist of.

foosion January 22, 2012 at 8:10 am

>>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.>>

Do you like how the article shows that some Chinese economic advantage comes from government industrial policy and subsidies?

The Other Jim January 22, 2012 at 8:41 am

>government industrial policy and subsidies

By which you mean totalitarian communism.

Yeah, it’s great! You know… for us. It works out great for us.

Ted T. January 22, 2012 at 11:19 am

Having grown up in a communist country, calling China’s centralized oligarchy “totalitarian communism” displays pure ignorance or cheap rhetorics, take your pick.

Of course there it would be absurd for us to emulate China’s political system. That we shouldn’t borrow anything from the more successful aspects of their industrial policy on a matter of principal is equally absurd. Every time I contemplate the slow, ridiculously overpriced Amtrak Acela trip from New York to Boston I can’t help we could adopt a little bit of Western European, Japanese or Chinese industrial policy.

The fact that we no longer have an electronic manufacturing industry is just another aspect of the same thing.

Daniel Earwicker January 22, 2012 at 12:57 pm

Amtrak maybe not the greatest example of the classic American approach, having been created in Washington by nationalising the rail network, and owned/run by the US govt. ever since, and surviving on billions of dollars of Federal and state subsidies.

It’s actually more typical of post-war Eastern Europe, or China before they reformed.

Cliff January 22, 2012 at 3:14 pm

Yes, we can only hope to waste billions of dollars on high speed rail that few people use, made with inferior concrete resulting in derailments and death

Daniel Dostal January 22, 2012 at 3:28 pm

High speed rail in Japan and France are quite safe and money well spent going long.

maguro January 22, 2012 at 3:39 pm

The Shinkansen isn’t profitable, other than the Tokyo – Osaka route. The lines up north serving Niigata and Aomori are huge malinvestments that no one should want to emulate.

LauraNo January 22, 2012 at 4:29 pm

Expressways, highways, streets and roads are not profitable either, maguro.

maguro January 22, 2012 at 5:17 pm

Fair enough. I would still say that those Shinkansen lines were bad investments when you consider how much it cost to build them versus the utility they provide.

Max Kennerly January 22, 2012 at 9:35 am

I came here to write what foosion already wrote. The “advantage” of China is quite clear: low wages and terrible conditions for workers, plus government handouts for owners. Can economists stop lecturing us on how China is succeeding because of some productivity je ne sais quoi?

msgkings January 22, 2012 at 1:51 pm

+1, but add in sheer size which the article touches on. China will always have oodles more engineers and line workers than us, for obvious reasons. If you put the Chinese wage and handout model in a much smaller country you wouldn’t have another China.

China is the world’s factory floor. This isn’t necessarily ‘bad’ or ‘good’. The world is more interconnected all the time.

Adrian Ratnapala January 23, 2012 at 1:17 am

What is more important than the _numbers_ of engineers is their experience. These guys might not be the best trained, and they are probably no smarter than the average beer skulling jock; but they are the guys who know how to actually make smartphones (and tablets, and computers, and…_). Collectively, Chinese factory workers know all the thousand tiny tricks of black magic that make the things, and their assembly lines work.

If a demon comes and knocks out all of the computer industry’s physical infrastructure, while leaving human knowledge intact; then China (including Taiwan) will bounce back in a few years. The West will have to learn an awful lot from scratch.

Daniel Dostal January 22, 2012 at 3:30 pm

I’d suggest that low wages and terrible conditions for workers are symptoms of a populace that expects a job and a place to sleep with little else. We can’t have those things because we prize a liberal education for every kid.

Ray January 22, 2012 at 4:16 pm

I agree with Danie that it seems that awful working conditions seem to be the price of some of Chinese competitiveness. How is that something we can compete with? Shall we repeal workplace health and safety legislation?

A few other thoughts:

1. I don’t really understand why Tyler thinks the article is ‘excellent’. It doesn’t really explain what the problem really is. We used to the have a large ‘supply chain’ here is the USA. Didn’t we lose because of high costs? If so isn’t it odd that high costs are not the big reason we cannot compete.

2. The article claims “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.” Why is it that people with associates degrees in engineering cannot find jobs? Isn’t that what they want?

3. China achieved this through the use of industrial policy. Does Tyler think this an ‘excellent’ idea for the USA. As a fresh water economist I would have thought not.

4. in an era of high unemployment I am incredulous at this claim: “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. ” Nine months – I have my doubts.

5. Could some of the zoning and environmental restrictions have caused some of the decline of manufacturing in the USA? (And not I am not advocating that we dump arsenic in the river, but wondering whether keeping a district because it is ‘historic’ as opposed to rebuilding it is costing jobs). The Endangered Species Act was passe in 1973, the wilderness acts were passed in 1964, 1970 and 1978 and the National Environmental Policy Act was passed in 1969. Could this have precipitated industrial decline by making it increasingly difficult to build new industrial plants? Do we ever consider a trade off between pristine habitat of a bird versus unemployment / poverty? If not, why not?

6. Zoning laws in each state and town have ballooned since the early 1970s as have opposition to new roads and infrastructure.
“Apple’s executives believe the vast scale of overseas factories” Could these laws have prevented the building of domestic scale?

7. “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,”” If domestic regulation didn’t inhibit this kind of thing perhaps this could happen here too?

8. “Last year, it earned over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google. ” So Apple and other companies could afford to pay their low paid workers just a little more. They could afford to pay people $20 / hour instead of $10 and it would impact < 5% of their profits. (Assuming that they shell out an average of an extra $15,000 per employee.) Perhaps we need stronger unions (private sector union density is only 7%)?

9.' “Companies once felt an obligation to support American workers, even when it wasn’t the best financial choice,” said Betsey Stevenson, the chief economist at the Labor Department until last September. “That’s disappeared. Profits and efficiency have trumped generosity.” ' I read this a lot about the good old days. I am suspicious that it is true. Human nature is pretty static. Perhaps someone can provide some data to either backup or refute this claim.

Dan Weber January 23, 2012 at 10:09 am

Nine months – I have my doubts

I’m sure there are 8700 industrial engineers available in America. Are they all in one place? How long to do an employee search and arrange relocation expenses? Will they have to sell their home in the old location first? How about finding their spouse a new job?

Scale is clearly one of China’s advantages.

JWatts January 23, 2012 at 4:44 pm

“What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

Wow, everyone on this site assumes that the answer is a long time. ;) It’s not. America is still a pretty competitive nation. We have a lot of engineers. And we can mobilize quickly when there is need.

My company was involved in the Gulf Coast Hurricane Katrina aftermath. There are a lot of industrial plants a few miles away from the coast. In one case, water flooded the 2nd floor of the plant. The first floor has a 20 foot ceiling. Within weeks, there were hundreds of engineers and thousands of workers rebuilding plants all along the coast. Within a year most of the plants were up to some substantial percentage of capacity and within two years they were at full capacity.

For the record, our people were living in trailers in the parking lot, running power off of diesel gens and food was trucked in from 45 minutes away. (All the local grocery stores were gone). Is that close enough to living in dorms? Granted, these were temporary conditions, but I doubt most of those Chinese workers are settling down for life in those dorms.

Idiot Savant February 4, 2012 at 5:01 pm

These are not real engineers, they are manufacturing line managers. They do not do engineering work, they manage people assembling electronics. Calling them engineers makes people think it would be that much harder to find these people than it really would have been. I agree, 9 months for people of this experience level is a joke.

Finding 8700 manufacturing line managers would have been quite easy.

As others have mentioned, finding them all in one place perhaps not so much. The fact that China knows companies want centralized manufacturing in a few number of “cities” allows them to move the labor to these locations for companies to easily move in. In the U.S., companies would have to find and move these people to one city.

The Other Daniel January 22, 2012 at 11:39 pm

Having worked as an analyst helping to turn around many different manufacturing/industrial companies the truth is that its not the oversea/chinese wages that kill manufacturing in the US, and, in general, this type of thought largely misses the real culprit. The main issue with manufacturing in the US are the absurd union work rules. These rules completely eliminate any flexibility of the workforce, and are the true cost centers to the businesses. Without experience in manufacturing its very difficult to understand to what extend (really its absurd) these rules limit a companies ability to use their workers’ to full capacity.

Not only are these rules costly, but they also bread a culture of entitlement and us against them mentality which often spirals into a vicious cycle. Ultimately, it ends with unengaged workers who couldn’t care less about the quality of their work. In fact, the main target of Six Sigma and LEAN (or Lean Six Sigma if you prefer) is exactly this culture. The goal is to capture the minds and really passions of the workforce to get them reinvested and thinking about the process. Almost all unions will fight this every step citing the absurd work rules that keep the floor guys from having any semi-leadership role or really needing to do anything other than just show up. Try to institute these policies in a traditional union environment and you get fought tooth and nail every steep of the way.

Its not like the workers are being asked to do unsafe practices either. Its really the opposite since it has been shown that safety and performance are very highly correlated, and injuries are very costly to companies. Any good manufacturing company will have an extremely low recordable injuries (typically world class is defined as a rolling year average of under 1 day).

chuck martel January 23, 2012 at 2:52 pm

You can go ahead and keep blaming the unions, which now represent a tiny fraction of the private American work force, or you can embrace reality. The fact is that companies establish work rules themselves, often in response to government directives. Bureaucratic rule-making is endemic to any advanced administrative system, making rules is what bureaucrats do. The most feared words that management can hear are that the employees will “work to rule”. By the way, almost every worker in China, even Walmart employees, are unionized.

Dan Weber January 23, 2012 at 9:38 pm

What you think of as “union” in China is very very different from “union” in America.

When workers in China complain of poor working conditions to their union boss, they get blackballed.

The Original D January 22, 2012 at 4:12 pm

And the alternative is… what exactly? You’d rather those Chinese go back to subsistence farming? if the conditions are so terrible compared to the past, why does life expectancy in China keep rising?

Building dormitories for workers is similar to building roads for commuters. While I’m sure the glass thing is helpful, something tells me Apple would have worked with Foxconn anyway. The glass policy just corporate welfare of dubious value.

the spam robots are getting better and better January 22, 2012 at 5:46 pm

The alternative is for the Chinese to build things Chinese will consume instead of allowing them to hollow out America so Steve Jobbs could make an extra couple hundred million before dying. The point for most posters here isnt “Chinese are evil” but rather “Tyler you are being incredibly disingenuous/naive to think that the reason for all these factories being in China is China’s ‘expertise’ in ‘scaling’ and other ‘supply chain’ abilities’

ezra abrams January 23, 2012 at 7:35 am

good call , thanks

affenkopf January 22, 2012 at 8:15 am

Somewhat related:
Distribution of profits and costs for an iPad and why the US trade deficit is exaggerated.
http://www.economist.com/node/21543174

foosion January 22, 2012 at 8:22 am

Regarding government policy, I’d add the Chinese exchange rate policy, which lowers the value of their currency against the dollar, making their exports cheaper and favoring their workers against US workers.

Anon. January 22, 2012 at 9:03 am

The U.S. does beggar thy neighbor devaluation too, it’s just called QE…

foosion January 22, 2012 at 9:20 am

If QE were a devaluation policy, it should apply generally. Our currency has not decreased compared to the world. See, for example, the dollar compared to the Euro.

Most complaints about jobs concern China and other Asian countries and we haven’t meaningfully devalued against them.

Rahul January 22, 2012 at 11:07 am

Is this an argument for greater QE?

Anon. January 22, 2012 at 11:58 am

The Euro has been falling against everything so the lack of movement on EUR/USD is not evidence that QE isn’t devaluing the currency. Also, standard economic theory tells us that QE should lead to devaluation. Why do you think that is not the case?

Not to mention that the academic literature (http://scholar.google.com/scholar?q=quantitative+easing+devaluation&um=1&ie=UTF-8&hl=en&sa=N&tab=ws) disagrees with you.

Robert January 22, 2012 at 2:52 pm

I guess reality forgot to ask what standard economic theory thinks!

Cliff January 22, 2012 at 3:15 pm

“Devaluation” is relative. Where would the dollar be without QE is the question

The Original D January 22, 2012 at 4:13 pm

China raised hell over QE precisely because they wished to avoid devaluation relative to the yuan.

harumpf January 22, 2012 at 8:30 am

Well, it is not news that the NYT celibates the “efficiencies” of Communism in China.
They, after all, would love to see the destruction of the Middle Classes in America.
It is somewhat more irksome when you do so. Do you really believe that the Chinese “Advantage”, such as it is derivese from “scale, speed, flexibility, and the supply chain”. How naive can one be.

Should we too adopt slave labor, and be ruled over by our “Socialist betters”.

“Convince them to live in dorms”? What hilarity.

Only in the hard Left confines of the NYT, can someone with a straight face deceive themselves that the PRC “convince” people too do anything.

BTW, this an absurd statement: “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

The notion that it takes 8k plus engineers to do this is equally absurd as is the idea that one cannot find them.

1) This substantially broadens the definition of engineer. what they mean are production mangers, QA and high level tool makers and machinists,
Are we really to believe that a phone requires this many “engineers”? A car does not require so many.

2) We are driving engineers out of the profession in this country. what they really mean is they cannot find that many engineers will to be docile and work for slave wages.

A complete white wash of the truth. It is no wonder that a manufacturer of consumer items such as Apple is now one of our largest corporations, given these tactics. What is a shame is that they get away with it. That, and the simple fact that once we manufactured real thing, not what are essentially rival consumer gadgets, and that is all an iphone really is, a trivial gadget.

Paul Rain January 22, 2012 at 8:38 am

Um… it is true that many of these ‘engineers’ are highly skilled machinists who may have undergone some kind of technically-focused ‘engineering’ training. They may well be better at doing quick calculations in their head than finding solutions to oversimplified equations taught at a professional engineering school. They may not know all the best rules of thumb.

That doesn’t mean that a US production facility could easily pull in nearly 9,000 such people. If the morons that run the US media had their way, every person in the country would have to do a three-year arts degree before they would be allowed to start on the three-five years of training required to develop the skills that a company like Apple needs in their second-tier production workers.

The Other Jim January 22, 2012 at 8:43 am

Don’t forget government licensing requirements and forced unionization.

the spam robots are getting better and better January 22, 2012 at 10:02 am

so…the reason why America doesnt have highly skilled machinists is the ‘US media’? wow.

Andrew' January 22, 2012 at 11:12 am

Would it take 9000 US “engineers” regardless of meaning? I’m suspicious of a lot of accounting used to justify outsourcing. I think a lot of it really is intended to hide “just low wages.”

Rahul January 22, 2012 at 3:12 pm

That’d mean if Apple hadn’t outsourced they’d have made even more profits on the Iphone?

NAME REDACTED January 22, 2012 at 3:25 pm

Nah the wages aren’t a big deal, its how long it takes to do anything due to lower flexibility in the US.

Cliff January 22, 2012 at 3:18 pm

An iphone is a trivial gadget??? Not a real thing? This is the height of absurdity.

I hope people reading this blog realize how fast Chinese wages are rising. They are higher than elsewhere in Southeast Asia and India, but China remains the place to go for manufacturing.

Daniel Dostal January 22, 2012 at 3:33 pm

Sounds like a bubble to me.

the spam robots are getting better and better January 22, 2012 at 5:47 pm

America was a place to go manufacturing too, until it wasnt.

@rianlikebrian January 22, 2012 at 8:46 am

It does help when a majority of these workers are kids without spouses or other such responsibilities to account for in the hiring process. I’m sure there are no negotiations either. Take the job or not, next!

My biggest gripe is actually with Apple. It’s all about profit, not what is best for America or the consumer for that matter. Apple knows why they are in China, no hassles with human rights, employee unions or government beauracracies, and an undervalued currency, NOT lack of engineers.

Jobs made his feelings on the matter quite clear by NEVER going to China. He did not respect the market, would be my guess.

I would bet that there are more qualified engineers along the west coast of America than ALL of China. If not, China’s companies would look very different than they do.

FYI January 22, 2012 at 10:35 am

What? Jobs was defending Apple’s decision to go to China sometime ago:
http://www.dailymail.co.uk/sciencetech/article-1283389/Apple-boss-Steve-Jobs-defends-China-Foxconn-factory-conditions-10-suicides.html

Also, all companies in the US are ‘all about profit’ in case you didn’t know. It is pure marketing when any of them say otherwise.

mishka January 22, 2012 at 11:28 am

but that what they should be, as an economic entity, looking to maximize self interest? that’s what our system is all about, isn’t it?

FYI January 22, 2012 at 12:42 pm

If it is in their own self interest to do anything else but to maximize profits they will do it. Or do you think that you know better?

mishka January 22, 2012 at 1:12 pm

yup. it’s called “fiduciary duties to shareholders”.

FYI January 22, 2012 at 3:06 pm

That is not what that means. It is actually quite the opposite: it is the idea that one shareholder should not benefit at the expense of the other. Since the ‘benefit’ here is clearly defined as share value, this has nothing to do with morality or where the jobs of that company are created.

Cliff January 22, 2012 at 3:20 pm

FYI, you are wrong about that. The fiduciary duty means you have an obligation to pursue the maximum possible profit for the shareholders.

Daniel Dostal January 22, 2012 at 3:34 pm

You’re all wrong. It’s whatever the better lawyer in the room wants it to mean.

FYI January 22, 2012 at 3:47 pm

Cliff,
How is that different from what I said? The maximum profit is by definition about money and not morality or the unemployment rate of the company’s home country.

Dan Weber January 23, 2012 at 12:48 pm

I’ve known boards of directors to explicitly favor one shareholder over another. If this violates fiduciary duty then please give me some case law that says so.

Barnley B January 22, 2012 at 11:30 pm

“With over 800,000 employees, Foxconn’s suicide count is actually lower the Chinese national average of 13.9 per 100,000.”

http://en.wikipedia.org/wiki/Foxconn_suicides

Rahul January 22, 2012 at 11:34 am

What exactly does “respect the market” mean?

Ted Craig January 22, 2012 at 8:48 am

This sounds like 19th century America. We chose as nation over the past 100 years to trade most of these advantages for rights and rules. Also, is there really a shortage of skilled workers or too much competition to easily staff Apple’s plant at a price they are willing to pay?

Jan January 22, 2012 at 9:56 am

This.

A factory like Foxconn’s operations simply would not be legal to run here. Not because Americans are dumb, inefficient, unskilled or over-regulated. It’s human rights.

This is the system in which hundreds of workers threaten to commit suicide because the conditions are so bad. They have no recourse. http://www.thisamericanlife.org/blog/2012/01/mass-suicide-threat-at-foxconn (also, please

Ted T. January 22, 2012 at 11:24 am

You do know that Foxconn has a lower suicide rate than the United States, right? Or lower than New York University’s suicide rate for that matter?

Try again, please.

Robert January 22, 2012 at 2:55 pm

That may be true, but if you spent a year at New York University you would understand X-D

(go violets!)

Jan January 22, 2012 at 2:59 pm

Mr. T, it is hundreds threatening to jump at once because of their working conditions–this they have said directly.

I think it is pretty clear that their jobs have much to do with all the others who have already jumped. Foxconn recognized this and has attached nets to some of its buildings to catch those that wish to end their lives. Neither NYU, nor any other group in the US, has seen the need to include suicide nets in their building design.

You do understand now, don’t you?

Cliff January 22, 2012 at 3:22 pm

Threatening to jump and actually jumping are not the same thing. If suicide by jumping was more popular in the U.S., I imagine there would be more nets around.

Noah January 22, 2012 at 7:45 pm

It’s doubtful that they have a lower suicide rate than NYU or America in general. They do if you only count suicides from jumping out of windows at work. Foxconn is not going report non-public suicides at work in their statistics, nor are they going to report suicides by their employees outside of work. You’re being naive if you accept their official PR spin of the events.

Barnley B January 22, 2012 at 11:40 pm

They do count suicides outside of work . See the list here http://en.wikipedia.org/wiki/Foxconn_suicides#Suicides
It isn’t lower than the US in general, but it is lower than many places for instance, France.

Noah January 23, 2012 at 9:08 am

That article does not specify between suicides at work and those away from work. Further if you were to control for age you’d find rates are substantially higher than western rates.

Barnley B January 23, 2012 at 8:30 pm

That article does not specify between suicides at work and those away from work.

Yes it does. Not all are described, but read the descriptions e.g., “Fell from the sixth floor of a dormitory building”, “Fell from apartment building”. Given that many (most?) live on site in dormitories I’m not sure there is a great distinction to be made.

Further if you were to control for age you’d find rates are substantially higher than western rates.

Suicide rates are higher amongst the elderly. Foxconn workers are young, but I’m not sure how much of an effect this would have. The gap has been closing in many western nations. Why compare to western nations? Why not compare it to Japan or South Korea? Or for that matter the rest of China? In which cases it is favorable.

JWatts January 23, 2012 at 4:49 pm

“In response, Foxconn substantially increased wages for its Shenzhen factory workforce, installed suicide-prevention netting, and asked employees to sign no-suicide pledges.”

I’m not sure I trust the statistics that say Foxconn has a lower suicide rate that the US. You’ll note the installed suicide prevention netting and had people sign no-suicide pledges. That tends to lead me to doubt the official statistics.

Noah January 24, 2012 at 9:53 am

Barnley B,

I should have been more clear, but my point is that Foxconn is only going to report suicides that happen on their property (ie. company dorms, apartments, factories), that article doesn’t make any distinctions as to whether or not those suicides occured on company property (or as I, probably unclearly, referred to as ‘at work’). They’re unable to cover up intentionally public suicides on their facilities, they have no incentive to report suicides outside their facilities which may increase their rates even higher.

As far as the suicide rates, I only compared them to western rates because I was referring to Ted T.’s (incorrect) post that stated that Foxconn’s suicide rates are no higher than the United States or NYU.

anon January 22, 2012 at 9:59 am

I believe you meant to say, “to easily staff Apple’s plant at a price the consumers of Apple products are willing to pay for those products?”

If so many people are troubled by Chinese working conditions, why do so many people make voluntary individual decisions to buy Apple (and other) products manufactured under those conditions?

the spam robots are getting better and better January 22, 2012 at 10:04 am

because most people are selfish when the costs of their personal well being are externalized. If Apple had a Chinese kid they shot once a year in front of each Apple store in America I doubt that many hippies would run over to hand over 500 bucks for the next version of the iphone.

maguro January 22, 2012 at 10:20 am

That might actually appeal to the hippies, remind them of the days when they carried Mao’s Little Red Book around. The power of nostalgia, ya know.

Daniel Dostal January 22, 2012 at 3:37 pm

What hippie has $500 lying around? That word seems to have evolved into meaningless drivel…

Max W January 22, 2012 at 3:47 pm

i dont know about hippies, but i do know that the iphone is the preferred smartphone of hipsters.

Ted Craig January 22, 2012 at 10:22 am

Don’t forget – Apple shareholders like that 25 percent margin.

mishka January 22, 2012 at 11:31 am

… and that means most of us. and most of US (index funds, all high on AAPL, IBM, etc).

wannabe January 23, 2012 at 1:50 pm

Bring in the robots (along with a universal index fund) !!

Millian January 22, 2012 at 12:07 pm

Apple has a monopoly on its unique design features. If you want that, it’s Apple or nothing. Most people are poorly-informed about the details of treatment of workers by employers, and more so for workers and employers on the other side of the world. This easily explains the problem you raise. People don’t have perfect information.

Mort Dubois January 22, 2012 at 2:11 pm

It’s perfectly rational for me to buy Apple. I receive the value of using the well-thought out and useful items I purchase, as opposed to other choices that I like less. If that could be quantified, the trade deficit numbers would look very different. Also, missing from the article was the part where Foxconn laborers are commandeered at gunpoint from their collective farms. Wait, that didn’t happen? They line up for those jobs instead? I guess that working under those conditions is a decision that makes sense to them. Do I know their lives and choices better than they do?

I own a small factory in Philadelphia, and it would be very convenient for me to be able to pay $17/day for workers. But there aren’t any available at that price, and few that are qualified at any price. Instead, I have a small number of workers making from $20 to $40 an hour, with benefits, and a lot of machines. If I don’t run my business that way, I’ll disappear. The same thing can happen to Apple. Let’s check back in 20 years and see what happens.

anon January 22, 2012 at 5:05 pm

+1

from a different poster:
“A biggest difference between the US and China here is union.”
Oh, they have a “union” in China. It is called the Communist Party.

Also, the “problems” at Foxconn and other Chinese manufacturers and assemblers have been well publicized, at least in the tech community. And many techies still buy Apple products.

the spam robots are getting better and better January 22, 2012 at 5:49 pm

Yes, if only your workers could be impoverished, put through a civil war, a mass starvation period and then 30% inflation to make sure they dont get uppity about wages. You poor oppressed job creator. Its so brave of you to keep going on instead of packing up and moving to somewhere less oppressive for heroes like you.

Mort Dubois January 22, 2012 at 9:20 pm

How many people are on your payroll? I have 14. It doesn’t bother me to pay good wages to hard working people. I do it every week. If you can say the same, I’d like to hear about it.

anon January 23, 2012 at 6:31 am

@spam robot:

How many people are on your payroll? I have 5. It doesn’t bother me to pay good wages to hard working people. I do it every 2 weeks, and when the revenue doesn’t quite match up to expenses it is my compensation that goes down.

If you can say the same, we’d all like to hear about it.

Suggest you read these 2 posts by Steve Hsu:
Outsourcing vs technological innovation (an oldie but a goodie)
http://infoproc.blogspot.com/2004/11/outsourcing-vs-technological.html
US manufacturing jobs (also read the linked article in The Atlantic)
http://infoproc.blogspot.com/2012/01/us-manufacturing-jobs.html

After that, please come back and tell us how you have avoided being labeled what is commonly called a “Luddite”. And also how magical thinking creates jobs.

msgkings January 22, 2012 at 1:59 pm

@ Ted Craig:

Yes it is quite similar to 19th century America. That’s when we were the big ‘emerging market’ in the world. China’s development path isn’t particularly unprecedented. By the law of large numbers their growth rates will plateau and decline, their wages will rise, democracy will grow, and their people will ‘move up the chain’.

None of that will happen overnight, and it won’t be in a straight line either.

Daniel Dostal January 22, 2012 at 3:40 pm

The problem here is their government. Ours went protectionist at times, but bubbles tended to pop on their own. Chinese bubbles continue to grow, and that’s a much larger deck of cards than American bubbles in the 19th century. What comes after these bubbles start popping is anyone’s guess.

Matt Waters January 22, 2012 at 4:37 pm

Workers in both China and 19th century America had lower salaries and poorer working conditions because they produce far less than American workers today. Better working conditions do not come out of thin air. They come in place of a worker’s salary. If the salary plus the money spent on better working conditions is lower than the value of the employee’s output, the employer will not be in business much longer.

The simple fact of the matter is that simple assembly is very low value-added work which is usually done by robots in the US. The US not having to use hundreds of thousands of workers is a feature not a bug, in the same way we have fewer farmers.

On a theoretical level at least, the fact that they make stuff in China instead of the US means that hundreds of thousands of Chinese manual laborers are more efficient than a far more mechanized process in the US. If Say’s law holds, then the highly skilled engineers who would have worked on mechanized processes are doing more efficient things like software programming.

In other words, we get more iPhones and more software engineering through specialization and free trade compared with both the US and China insourcing, which is exactly what you would expect from basic Ricardian trade theory.

Unemployment is high today due to tight money and sticky wages, creating a case where Say’s law doesn’t hold. But that doesn’t change the fact that the market should determine the most efficient sourcing of products and not government distortion.

msgkings January 23, 2012 at 12:28 am

+1

Payam January 23, 2012 at 11:49 am

+2

sam January 22, 2012 at 8:48 am

@Tyler

Most of all, I like how the article shows that some Chinese economic advantages result from scale, speed, flexibility, and the supply chain, more than just from lower wages per se.

Rigggght.

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.

Anybody know if there’s Chinese version of Metropolis?

Henry January 22, 2012 at 12:21 pm

If American workers will just give up on having a personal life… but damn hippies and lefties and unions ruin everything .

For America to return to greatness all it has to do is to abolish the labor legislation and ban unions. Bring back the company town and the company store If american workers don’t like it then allow companies to hire internationally.

Now all these, will just levels the field with China, if we want to go one up, then we should establish a market for engineers, so if somebody needs engineers overnight he just places a bid in the market, if prices go up enough many manufacturers will think they are better off selling some pf theirs.

JWatts January 23, 2012 at 4:57 pm

You should look up the term ‘strawman argument’.

ccz January 22, 2012 at 9:07 am
JWatts January 23, 2012 at 5:06 pm

Here is a better article that really covers the issue:
http://www.nytimes.com/2011/12/30/business/us-manufacturing-gains-jobs-as-wages-retreat.html?_r=1&pagewanted=2

I’m familiar with GE’s Appliance Park in Louisville. The site is huge. It was set to disappear, but it may now have turned the corner. GE has said with the new wage rates ($12 to $19 an hour versus $21 to $32 an hour for longtime workers) the lines are profitable.

Is this good or bad? Probably a little bit of both. But I expect in the long run that the 3rd world wage rate will keep rising faster than the 1st world wage rate, which may well mean we are at the low water mark for outsourcing.

Ed January 22, 2012 at 9:19 am

Naked Capitalism has a pretty good post on the same subject: http://www.nakedcapitalism.com/2012/01/new-york-times-tells-us-only-chinese-near-slave-labor-could-handle-steve-jobs-demands.html

Yves Smith pointed out that the empty glass plant, constructed in anticipation of the Apple contract, was an obvious government subsidy.

One of the commentators also made the claim that while the iPhone may be mostly manufactured in China, the precision instruments used by the Chinese in the process tend to come from Germany, South Korea, and Japan.

jpd January 22, 2012 at 9:21 am

can we start making our economists over there too?

CFG in IL January 22, 2012 at 11:00 pm

How ’bout our CEOs? Cause they’re *really* overpaid.

NAME REDACTED January 22, 2012 at 9:24 am

US HR rules have made the US workforce too inflexible.

Daniel Dostal January 22, 2012 at 3:43 pm

American exceptionalism has made the US workforce too inflexible. FTFY

Ray January 22, 2012 at 5:35 pm

What work rules would you like repealed then?

dearieme January 22, 2012 at 9:25 am

“What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

The way your government is trending, it’ll just introduce press gangs.

Bill January 22, 2012 at 11:09 am

I think the place you could assemble 3000 young workers to live in dorms, eat dorm food and work is George Mason.

Just think. You could apply Tyler’s idea of low wages with evening classes.

How many signers?

Andrew' January 22, 2012 at 11:14 am

You just described universities, where people actually pay to be so treated.

maguro January 22, 2012 at 12:00 pm

Except for the working part.

Engineer January 22, 2012 at 9:26 am

I have done a fair amount of work with Chinese hardware and software engineers. These are on the development side, whereas this article is about the production side.

The Chinese engineers are still simply not as good as the Americans. They are enthusiastic and willing to learn, but less aggressive about diving into new technologies. They tend to be less creative, and when they are creative they are more likely to come up with a design-by-committee which is simply a poor solution.

They have improved a lot however in the past 7-8 years and are hiring a lot of foreign consultants.

But most importantly the Chinese engineers are _cheap_.

Rahul January 22, 2012 at 11:31 am

>>>Chinese engineers are still simply not as good as the Americans.<<<

That's precisely the point. They don't have to be as good as Americans for them to be competitive; there's a whole range of abilities available at different wage-points; for every task the firm's going to look at what ability it needs and what it wants to pay.

Daniel Dostal January 22, 2012 at 3:45 pm

This is the Apple model. Creative forces in America, manufacturing in China. This fits neatly into comparative advantage.

Richard January 30, 2012 at 2:47 pm

Except that many (most?) of Apple engineers in America are Chinese. Sorta turns the argument of inferior Chinese engineers on its head.

Adam January 22, 2012 at 9:28 am

A good deal of China’s comparative advantage comes from a multi-millenium cultural tradition of willingness to give up one’s personal freedoms and pleasures for the greater good of family, clan, and nation.

anon January 22, 2012 at 9:53 am

China’s “cultural tradition” is an important point often overlooked. And not easily understood by many people in other parts of the world.

Also, here is Henry Blodget’s take, titled “This Article Explains Why Apple Makes iPhones In China And Why The U.S. Is Screwed”
http://www.businessinsider.com/you-simply-must-read-this-article-that-explains-why-apple-makes-iphones-in-china-and-why-the-us-is-screwed-2012-1

But having lived with and dealt with Chinese people for more than 30 years, I believe Blodget makes the opposite mistake of assuming the Chinese “cultural tradition” will go on unchanged forever.

The Original D January 22, 2012 at 4:21 pm

Exactly. Thing how much China has changed just since 1980.

Millian January 22, 2012 at 12:10 pm

Every culture on Earth has had this multi-millennium collectivist tradition, at least up to 400 years ago; it was useful for rulers and it was the only way for isolated groups of humans to survive catastrophic events.

It is absolutely not clear that it leads to a “greater good”, because part of that tradition is authoritarianism.

Robert January 22, 2012 at 3:01 pm

“Cultural Traditions” often mean a lot in people’s economic or political theories… until they don’t. Adam, “cultural traditions” is the explanation that people give when they want to ignore rigorous analysis.

Daniel Dostal January 22, 2012 at 3:52 pm

Although you are right, you also haven’t said anything interesting. What you really said:
China’s comparative advantage comes from its agrarian culture.

Which isn’t China’s comparative advantage. Its the agrarian culture mixed with their rapid industrialization. When one is no longer true, the comparative advantage is gone. Compare to Japan and America, where creative culture has only taken hold in specific urban areas, which also happen to be the only economically active places.

JWatts January 23, 2012 at 5:10 pm

“Compare to Japan and America, where creative culture has only taken hold in specific urban areas, which also happen to be the only economically active places.”

I can’t speak for Japan, but your remark doesn’t resemble America. Not unless your definition of specific urban areas is very broad.

Simon Bostock January 22, 2012 at 9:37 am

“Are we really to believe that a phone requires this many “engineers”? A car does not require so many.”

“I would bet that there are more qualified engineers along the west coast of America than ALL of China. If not, China’s companies would look very different than they do.”

Wow. Really, @rianlikebrian and @harmumpf? I’m trying to work out whether these fall into category of comprehensible-because-deeply-counterintuitive ignorance or something less complex. I’m plumping for the latter.

Daniel Dostal January 22, 2012 at 3:59 pm

Frankly, I blame linguistics. There are so many different names to give my current and previous jobs. Engineer has often been one of them, but it has meant anything from “watch these server probes and call someone if they turn red” to “deconstruct the inventory system, correct all corrupted data, and ensure corrupted data doesn’t happen again.” One of these was grossly under my pay grade, one was grossly over my pay grade. The word engineer can mean many, many things. And it seems engineering as a creative vocation is a recent change, rather than the opposite.

eddie January 23, 2012 at 12:39 pm

Once upon a time it was pretty straight-forward: an engineer is someone who makes an engine work.

Dan Weber January 23, 2012 at 1:01 pm

I still don’t have the hat. :(

Blag the Ripper January 22, 2012 at 10:06 am

People like Tyler are always puzzled when the inevitable backlash happens. Hope he’s got his passport in order.

Cliff January 22, 2012 at 3:26 pm

What does that mean? I am sure he anticipated the type of comments it would receive.

Peter January 22, 2012 at 10:11 am

It would take months for a company in the United States to hire 9,000 engineers. On the other hand, it could hire 9,000 liberal arts graduates or 9,000 law school graduates in a matter of hours.

Ted Craig January 22, 2012 at 10:12 am

Probably not.

derek January 22, 2012 at 1:08 pm

You are right. It would take 3 months to define “liberal arts graduates”.

Vicky January 31, 2012 at 9:53 am

First bnyiug attemp was a failure, it was done though a 3rd party.Second bnyiug OK via Amzon.The book arrived OK and on time.It has not been so helpfull since I do not have all the requiered stuff to perform as indicated.Rating: 4 / 5

wnuyqrrungd February 3, 2012 at 12:11 pm

zJ0qXL vwfdpdcoshsp

Robert January 22, 2012 at 3:03 pm

Probably true, and at least in the movie industry this is exactly what happens. Almost all of the world’s major productions are produced in the U.S. and they are never at a lack for finding people for their films.

Ted Craig January 22, 2012 at 3:35 pm

That’s a pretty dumb example.

Daniel Dostal January 22, 2012 at 4:03 pm

I would say that’s exactly an American analogue. Hollywood is an American industry exactly as electronics manufacturing is a Chinese industry. They both have global comparative advantage due to heavy cultural bias. The desirability of each in their respective cultures ensures a flood of eager applicants at a moments notice.

The Original D January 22, 2012 at 4:26 pm

Hollywood is both a cultural force and cultural mirror. It’s hard to outsource the process of creating culturally resonant content. (The possible exception is comic blockbusters with their universal good vs. evil plotlines.)

Relatedly, marketing and advertising will always be localized.

Daniel Dostal January 22, 2012 at 4:51 pm

Not exactly true. It is a cultural mirror for itself, but has had little explanatory power for the life of a Montanan (ie me). This is even more true when Indian children watch Hollywood movies. Bollywood is still trying to compete with Hollywood in India. The cultural mirror has collapsed into reflecting Hollywood itself, which is a culture apart from the rest of America.

And then marketing and advertising are localized, but often after the creative team has done it’s work. People are people everywhere, and appealing to basic human emotions in any culture is often just a translator away.

The Original D January 22, 2012 at 5:13 pm

I disagree. There are lots of decent movies and TV show every year that just tell good stories that are set in our cultural context. They’re not blockbuster’s, but they’re relevant.

Ironically, Brokeback Mountain was directed by Ang Lee.

Ray January 22, 2012 at 5:38 pm

I never did understand this. If there is such a demand for them why are wages stagnating for scientists and engineers? I bet if wages went up far more people would go into it.

JWatts January 23, 2012 at 5:21 pm

“If there is such a demand for them why are wages stagnating for scientists and engineers? ”

Are you sure wages are stagnating for engineers? They are certainly rising and the only data I’ve seen (though a little old) indicates that nominal salaries rose between 1970 to 2000.

Ray January 23, 2012 at 6:27 pm

I am referring to real wages between 2000 and 2011.

Ted Craig January 22, 2012 at 10:15 am

Here’s another point: factory work sucks. I’m not talking about the conditions, I’m talking about the work itself. It’s repetitious. So why would a bright young person in the U.S. give up a job working at an Apple Genius Bar to work in an iPhone factory? The Genius Bar gig isn’t as intellectually challenging as, say, rocket science, but it beats the factory job.

anon January 22, 2012 at 9:35 pm

Modern unskilled “factory jobs” are disappearing in the US for a wide variety of reasons, including increasing automation. My guess is that sometime within the next 10-15 years, it will be less expensive to assemble iPhones and many other goods and devices in automated factories than in labor intensive factories, like those run by Foxconn.

See this:

“We do still make things here, even though many people don’t believe me when I tell them that. Depending on which stats you believe, the United States is either the No. 1 or No. 2 manufacturer in the world (China may have surpassed us in the past year or two). Whatever the country’s current rank, its manufacturing output continues to grow strongly; in the past decade alone, output from American factories, adjusted for inflation, has risen by a third.

Yet the success of American manufacturers has come at a cost. Factories have replaced millions of workers with machines. Even if you know the rough outline of this story, looking at the Bureau of Labor Statistics data is still shocking. A historical chart of U.S. manufacturing employment shows steady growth from the end of the Depression until the early 1980s, when the number of jobs drops a little. Then things stay largely flat until about 1999. After that, the numbers simply collapse.”

“Making It in America,” by Adam Davidson, The Atlantic, Jan/Feb 2012
http://www.theatlantic.com/magazine/archive/2012/01/making-it-in-america/8844/?single_page=true

teh US than in China.

Brett January 22, 2012 at 11:07 pm

That was an interesting read. Apparently the US still has a major advantage (particularly in the South) in building both precision parts and variable “small” orders. I wonder if the advent of 3D Printers will enhance that advantage, particularly if they become cheap enough for people to do a whole range of small manufacturing orders.

eccdogg January 23, 2012 at 9:43 am

And what is unique about the South?

Brett January 23, 2012 at 10:28 am

Lower wages and a more “business-friendly investment climate” (read: weaker or non-existent unions).

jpa January 23, 2012 at 4:24 pm

right to work states

byomtov January 22, 2012 at 10:16 am

Is Foxconn an example of how things would be in a libertarian utopia? No pesky safety rules or labor standards. Just do what the bosses say and shut up. Sounds lovely.

maguro January 22, 2012 at 10:25 am

Yes, let’s blame working conditions in China on libertarians, that makes sense. Everyone knows that China is ruled by libertarians. Duh.

byomtov January 22, 2012 at 12:26 pm

I’m not blaming working conditions in China on libertarians, just noting that they are consistent with libertarian thinking. Unless, that is, you think manufacturing complicated electronic devices can easily and efficiently be done by small shops, rather than in a large-scale factory.

The Original D January 22, 2012 at 4:28 pm

In some ways I think it is, at least with respect to labor and environmental laws. OTOH

China is terrible about protecting property rights except for the highest bidder.

Tyler Cowen January 22, 2012 at 10:25 am

C’mon people. Low wages are indeed one factor. But there are plenty of countries with wages lower than in China.

Blag the Ripper January 22, 2012 at 10:52 am

You think this is about low wages? You’re an even bigger tool than I thought (assuming you’re not simply lying).

Rahul January 22, 2012 at 11:25 am

Well, what do you think it is about?

Cliff January 22, 2012 at 3:27 pm

He just said it’s not about low wages. That is the comment you are responding to.

Ted Craig January 22, 2012 at 10:57 am

It’s not low wages, Tyler, but low compensation in a range of areas.

Cliff January 22, 2012 at 3:27 pm

Again, compare to other countries.

Ted Craig January 22, 2012 at 3:36 pm

Title of article and blog entry: Why isn’t the iPhone made in America?

kebko January 22, 2012 at 11:04 am

I wish it was the convention to frame this differently. Jobs aren’t going to where wages are low. Jobs are going to where wages are rising.

Andrew' January 22, 2012 at 11:19 am

Again, haven’t read the book, but I’ve seen fishy accounting to get over the initial hump of justifying a foreign investment. In my experience, it took the form of “we’ll turn things around in two months including shipping” which ended up being “we need 4 months, can’t handle the most difficult stuff, and require a staff of people in the US on the phone at all hours.” That doesn’t change anything to me, really, except are these companies going to be able to walk away from US pensions and that kind of thing?

kebko January 22, 2012 at 12:26 pm

Most US trade is with high wage nation; and nations with the worst conditions and protections tend to have very little trade. The only nations with low wages and poor conditions where production is moving are nations where wages are rising. Northern Europe has a larger trade surplus than China. Wage levels aren’t the motivating factor. It only seems that way because collectively we observe selectively.

the spam robots are getting better and better January 22, 2012 at 5:54 pm

Northern Europe has a larger trade surplus than China with the United States?

Millian January 22, 2012 at 12:13 pm

Low wages are one way to screw 99% of people, relative to the USA.

Another is pervasive invasive treatment of human beings, in violation of their rights.

Bad democratic India. Good efficient China.

And if this is part of your pro-engineer numbers campaign, I still don’t understand why you will not just acknowledge that engineers need more pay to increase their numbers in a free-market economy.

CBBB January 22, 2012 at 3:51 pm

+1

Daniel Dostal January 22, 2012 at 4:10 pm

I return to my previous post that the term “engineer” in china will often translate into “technician” in America. These “engineering” jobs in China would still be a relatively low hourly wage in America. However, it would beat working at Walmart.

But, that’s beside the point. Tyler is pointing out the differences in culture. A free market is suppose to mean an agile market. However, our labor force is not agile enough to make the iPhone in America. If TC is claiming this a bad thing, so be it. More importantly, understand why the iPhone is not made in America, with our free market being one of the roadblocks.

Also, why demean yourself by pretending Cowen is deconstructing this post into “Good efficient China”?

NAME REDACTED January 23, 2012 at 9:35 am

You can’t find many technicians in the US. The math skills required are too high due to the low quality of our highschools.

JWatts January 23, 2012 at 5:30 pm

“I return to my previous post that the term “engineer” in china will often translate into “technician” in America.”

+1, this is almost certainly true. There are plenty of plant technicians that are referred to as engineers. Indeed, you can obtain a two year degree as an Engineering Technician. Which amounts to good marketing on the party of the college.

“These “engineering” jobs in China would still be a relatively low hourly wage in America.”

Most technicians are going to make between $15-25 per hour. Do you consider that low wage?

john January 23, 2012 at 4:22 am

People overemphasize the low wage meme. Where I am currently they bring in foreign workers to do the assembly work, as far as I know they all hold degrees and are extremely pleased to be here. Conditions aren’t always optimal but much of this can be attributed to weak supervision or culture. They are paid considerably more than they would be in any other occupation.

Another point, everyone, and I mean everyone wants to be an engineer. It’s seen as a path to security. I have a wealthy friend whose daughter was a promising artist, he still insisted that she study engineering and be the top of her class. Studying the liberal arts is either for the brilliant or the ‘not-so-brilliant’. Competition is so fierce that you see people grossly over-qualified for the positions they hold.

Lastly, it’s not just the assembly line work that has left the US. Most of my colleagues are in fact highly educated and quite well off. Like you might expect them to be in the US. They work in research, design and management. Many were educated abroad, some worked (if the work exists – often it doesn’t because as the article states this is where the work is) but most want to return to where they can expect to make comparable packages to what they make in the US but with a much lower cost of living.

One last point. I often here negative comments about the living conditions in the dorms. Every company I have worked for has had some kind on campus or arranged housing. It’s particularly attractive to recent graduates who are in a different city to where they were born. It’s often just a continuation of the camaraderie of student life. My family and I chose to live in company housing and while certainly far more luxurious options exist there is a long waiting list to get space. Primarily this is do to convenience, beautiful and safe environment, and access to one of the best schools in the city. The facilities are as well cared for as any apartment we have rented in the west.

Lupus Yonderboy January 27, 2012 at 9:58 pm

Everyone got it wrong here. It is very simple…

I put all of my savings into a houses, trading up a few times, always thinking equity credit lines would bail me out if i lost a job etc. Thanks to the bubble, we are trapped. China can scale 8700 industrial engineers b/c they do not have the shackles of being prisoners in their own homes. I am interviewing with Redmond right now, they like most, are hesitant on relocation support. I live in one of the best zip codes in the country for demand, forbes #1 city, a scant 1 mile from forbes #1 company. What is moving houses is the very bottom of the market and corporate relocations.

So this post could very well be titled “How capital gaines policies in the US Housing market in the late 90s means Apple makes iPhones in China.”

I wish I had a yurt instead.

FYI January 22, 2012 at 10:37 am

I think it’s funny how people love to think of this as a moral issue. Companies are either ‘bad’ because they are not building factories in the US or they are ‘bad’ because they explore conditions in China.

But consumers are never bad for buying iPods made in China right? Pfff.

Daniel Dostal January 22, 2012 at 4:14 pm

It’s a moral issue only because of cognitive dissonance. You must understand why people make this a moral argument, right? At our basest instincts, we are protectors, unless protecting the herd prevents our own success. So when an American company uses “slave labor”, it is in the wrong. However, this iPhone makes me a better person, so buying it doesn’t make me bad. Reconciling the 2 is not something that comes naturely to humans. Even reconciling them with relative takes effort, since neither is particularly true.

thedude January 22, 2012 at 10:43 am

This is a great article and explains why most policy makers in the US have no clue how to improve our manufacturing capacity in the US. Very few, if any, have worked for a private sector manufacturing company at a management level. They’ve never had to compete with overseas based firms. Policy makers and academics don’t see and understand how the well intentioned and individually appropriate barriers placed on manufacturing companies in the US combine to form an impenetrable web that reduces competitiveness, profit margins, and therefore investment.

You can argue over “appropriate” profits, but investment dollars flow to high profit margins. Investment dollars fuel innovation. You DO NOT have innovation without significant profit margins. If the ROI isn’t there, the investment isn’t made. If an ROI is higher overseas, that is where investment will be made and where innovation will occur. This is reality.

anonymous... January 22, 2012 at 2:05 pm

It is said that eight out of nine members of the Chinese politburo have engineering degrees, while only six out of 535 members of Congress do…

Rahul January 22, 2012 at 2:23 pm

Great point.

Willitts January 22, 2012 at 5:27 pm

Nine out of nine members of the Chinese politburo are selected by the Chinese Communist Party.

In the US, fewer than 192 out of 435 members are selected by the American Communist Party.

Ted Craig January 22, 2012 at 6:30 pm

About 20 percent of CEOs of Fortune 500 companies have engineering degrees. And those politburo engineering degrees are fairly weak.

Urso January 23, 2012 at 12:39 pm

Story has a twist – their degrees are in *social* engineering

Yancey Ward January 22, 2012 at 10:43 am

We don’t know what we are missing by not paying $5000 for an i-Phone.

Ted Craig January 22, 2012 at 11:00 am

You’re assuming the cost would be higher for consumers. You are not considering that the profit would be lower for Apple.

Yancey Ward January 22, 2012 at 11:15 am

It is probably safe to assume both would happen. It is also safe to assume Chinese workers would have to take their next best employment offer.

Robert January 22, 2012 at 3:28 pm

If we can’t afford 5000 for a morally made iPhone, then maybe we don’t really *need* an iPhone.

Daniel Dostal January 22, 2012 at 4:17 pm

Which is exactly why Apple would sell them for $1500 and would not be the most sought after stock of this recession. Of course, your morality and mine clearly don’t match. I believe in allowing other people to better themselves.

Robert January 22, 2012 at 11:11 pm

I believe people better themselves by getting closer to God. Economic indicators should be at the service of morality, not the other way around.

Daniel Dostal January 23, 2012 at 1:06 am

Yep, our moral systems will never align. Mine is based purely on the development of advanced civilizations. And I find nothing morally wrong in Apple’s business practices. Quite the contrary, I find them to generally be of a higher moral quality, as defined by the fact that they respond to their customers desires and do intelligent business (re: usage of comparative advantage).

Robert January 23, 2012 at 9:59 am

This is the difference between a “Culture of Life” and all other systems. The Life moral system values all human life above all else, where as your system values “advanced civilization”.

FYI January 22, 2012 at 3:07 pm

Ah, you got to love how naive some people are…

The Original D January 22, 2012 at 4:32 pm

Or they might not sell any at all. After all, they have to compete with Android phones made in China.

Millian January 22, 2012 at 12:16 pm

People may decide that iPhones available at human-rights-respecting prices would not be worthwhile.

I do not see how this is noticeably worse for human welfare.

Such a policy would cause China to care more about human rights. Their policy priority is access to Western markets.

maguro January 22, 2012 at 12:22 pm

In that case, the oppressed iPhone assemblers would be out of a job and would have to either take an even less appealing factory job or maybe trudge back to the countyside and take up substinence farming. Not seeing how anyone is better off in that scenario.

byomtov January 23, 2012 at 3:34 pm

In that case, the oppressed iPhone assemblers would be out of a job and would have to either take an even less appealing factory job or maybe trudge back to the countyside and take up substinence farming. Not seeing how anyone is better off in that scenario.

All of them? You know this how?

How much of the cost of an iPhone does Chinese labor represent?

According to the NYT article,

For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

Minimal. So you could raise wages a bit, maybe solve he N-hexane problem, improve conditions, without driving the price to $5000.

I suppose that would violate the “maximize profits regardless” notion. I mean, who cares if you ruin a worker’s hands, as long as it puts a dollar in your pocket. Right?

Daniel Dostal January 22, 2012 at 4:22 pm

That’s a very bold statement. If China had to give up it’s comparative advantage and only continue as a manufacturing force because of it’s manufacturing labor force, it would take minutes for Indonesia and Malaysia to become the new China. China is what it is today because of external demands on their manufacturing sector. Removing the price advantage would cripple their competitiveness, forcing millions to return to their backwards, overpopulated farms to live poorly and die young.

In all actuality, I’m not even sure you’ll understand my post. Not a single line in your post had much truth in it.

The Original D January 22, 2012 at 4:34 pm

Why would China care about something that didn’t happen? If Apple never did their manufacturing there in the first place, I’m sure they’d find other things to worry about.

Bill January 22, 2012 at 10:46 am

I think you need to address this in a broader context, and not just from the Apple example. Some of my clients were and still are in the electronics/computer industry, and I’ve watched this change over time, even doing subcontracting out some work to these countries

Electronic assembly moved to Japan in the late ’60’s and from there to Thailand, Taiwan and Korea in the mid 70’s, and now to China.

We are not, nor will we ever be, able to hire workers at these wages in the US.

But, that does not mean that the US should have lost control of electronic assembly: If you notice, it is Taiwanese and Korean companies which put in place the infrastructure, place their engineers on site, set up the systems, etc, and retain ownership of these plants in China. The US lost this expertise in the 80’s, except for such things as disk drive assembly, and were happy to give up TV assembly, small electronics (radios) etc.,

What this really tells you is that if you subcontract out, and do not retain the expertise of managing foreign workers, setting up plants, having engineers who can speak the language, you lose out on future assembly of more advanced electronics in the future–because you lost that expertise.

Alex January 22, 2012 at 10:58 am
charlie January 22, 2012 at 11:46 am

best comment so far.

I’ve love to see where you could hire Americans who could manage 300K+ chinese workers.

Isaac Crawford January 22, 2012 at 10:51 am

For all of the folks that keep claiming “slave labor” I have one question. Will those workers be better off without the jobs? They are about to find out, Foxconn is going to start rolling out a million+ robots to replace a lot of the workers. I’m sure all of those “slaves” will be much better off once that happens. Next we’ll hear about how Foxconn doesn’t hire enough people, doesn’t hire enough low skill labor and how they are “hollowing out” the growing middle class in China.

Eric January 22, 2012 at 11:40 am

Good point, but a total red herring. People are criticizing those who praise the economic success of China while conveniently ignoring the pesky details of Communism.

Blag the Ripper January 22, 2012 at 1:34 pm

+1

Millian January 22, 2012 at 12:17 pm

Workers as a whole may very well be better-off in a more pro-human rights labour market. Democratic governments, one after another, made that very judgement around 1900, give or take forty years.

Rahul January 22, 2012 at 3:14 pm

So a starving farmer in India is better than a Foxxcom worker?

Henry January 22, 2012 at 3:49 pm

The bigger point in this libertarian site is how much freedom do you really have if your options are being human robot in Foxxcon or starve in your village? I guess they could still go radical and become a bandit.

The Original D January 22, 2012 at 4:35 pm

Who would they steal from?

Matt Waters January 22, 2012 at 4:42 pm

It’s far better than the choice between being a starving farmer and being a starving farmer, which is what they had up until the 80’s.

Of course it would be preferable for China to have a liberal, Western democracy with well-functioning institutions, true property rights and all that. But to say that somehow it’s wrong to use Chinese labor because they don’t have the ideal solution is wrong. Unless they are literal slaves working against their will, their employment is the best option for their situation. Otherwise they wouldn’t take the job.

Cliff January 22, 2012 at 3:31 pm

Democratic governments followed well behind markets, and often “pro-human-rights” labor rules were actually protection.

Daniel Dostal January 22, 2012 at 4:27 pm

Around 1900 was how many decades of industrialization for the USA, UK, and France? Why do you think China can move from an agrarian society to an industrialized society much quicker? And then how do you expect them to transform again into a creative society when their industrial advantage wanes with the retirement of the current generation?

The Original D January 22, 2012 at 4:36 pm

+1

CBBB January 22, 2012 at 5:12 pm

It can move much much quicker. South Korea made the move in the span of 30 years

The Original D January 22, 2012 at 5:15 pm

And now S. Korea does a lot of production in China.

That said, I agree that China can improve, and I believe it will. Development is a process, not an end state.

mishka January 22, 2012 at 11:26 am

communism… blah blah blah… totalitarism… blah blah blah.. central planning… blah blah blah…
— wins global competition.
amazing.

Daniel Dostal January 22, 2012 at 4:28 pm

Going short, right now, maybe. I’ve got a good 60 years before I have to worry much about dying, so I think I’ll take the long on this. And China does not look so healthy there.

John January 22, 2012 at 11:32 am

The Chinese government has little to do with the operations at Foxconn, contrary to the ranting claims of commenters above. The loans they get are little different than the loansand tax breaks given to US factories.

CBBB January 22, 2012 at 6:07 pm

No, but the Chinese government has a lot to do with the fact that the workers at Foxconn would never be able to organize and their mobility around the country is limited thus limiting their options.

Roy January 22, 2012 at 9:05 pm

+1

Becky Hargrove January 22, 2012 at 11:36 am

Tyler I get why you believe this is a great article….and then the part where a former engineer makes ten dollars an hour wiping glass helped me understand the gripes here. However I hope I can explain my reaction in a simple way. None of this is either good or bad, but simply a logical conclusion of what we expect money to be able to do in the present day. The single production efficiency standard means that the whole world has to compete for best place and what’s more, we base our lives on what the definition of that ‘best’ place is. Most of the time, for tradable goods, that definition makes sense. Formerly we used multiple production efficiency points in piecemeal production but once everyone adapted to the factory, it was not really possible to pay based on variable time – everyone was forced to conform. That conformity gave us the modern world.

There is a way to overcome that problem. Non-tradable goods, in order to create local wealth, are best approached in non-conformist ways. In other words, the previous variable productivity option that once made local communities wealthy, can be recreated in knowledge-based service economies which utilize multiple production efficiency points. (along with their incredible flexibility) That way, we still have the monetary gain of the single (conforming) production track, along with the (non-conforming) wealth production of variable production rates in knowledge based services. By doing so, every community can realize great wealth and need not envy the single track wealth of tradable goods that is currently forced to certain parts of the world.

derek January 22, 2012 at 1:05 pm

Ok. That employs 10%. What about the other 90%?

The Original D January 22, 2012 at 4:38 pm

tl;dr

Do you have actual practical suggestions instead of abstract concepts?

charlie January 22, 2012 at 11:37 am

Interesting take-away they didn’t mention:

1) The iphone is assembled by hand. That is amazing. Have you taken one apart? They are really small inside.

2) Apple’s dead end customer service jobs pay something like 10x daily what the Chinese slaves make

3) Nothing about why Foxconn has a plant in Brazil.

The Original D January 22, 2012 at 4:39 pm

What makes a job dead end? Are people who do customer service at other companies doomed?

Sbard January 23, 2012 at 11:40 am

Foxconn likely has a plant in Brazil because Brazil imposes extremely high duties on imported electronics.

Bill Stepp January 22, 2012 at 11:45 am

You don’t need a rethink about scope and scale, etc. Just get out of your ivory tower and learn how business actually works. Someone tell it to Krugman, DeLong et al.

msi January 22, 2012 at 12:10 pm

Fmr Intel CEO Andrew Grove’s article on scaling from a couple of years back seems to cover the same issues as the NYT piece:

http://www.businessweek.com/magazine/content/10_28/b4186048358596.htm

Andy January 22, 2012 at 12:16 pm

A biggest difference between the US and China here is union. Union eventually will kill the job market. Companies shall outsource what ever they can

NAME REDACTED January 22, 2012 at 3:23 pm

+1
Exactly.
They have flexibility because they have no manufacturing unions.

Daniel Dostal January 22, 2012 at 4:31 pm

They have flexibility because they have workers who can fill manufacturing jobs quickly. Unions may be part of the problem, but here in America, few people grow up hoping to working in a factory. That is the case in China.

The Original D January 22, 2012 at 4:40 pm

Labor flexibility is certainly part of the picture, but if you bring that up you have to be prepared to explain Germany.

Claudia January 22, 2012 at 12:27 pm

I can see why this article generated arguments against the low wages/long work weeks, heavy-handed industrial policy, and non-democratic government in China, but those seem like a sides issue for the middle-wage earners struggling in the U.S.

China is at a different stage in their economic development. So the Apple production workers choose to work six days a week at 12 hours a day and many Americans (but not all i-bankers, farmers, etc.) would turn down those conditions? Making them work typical US hours (if you could) would be like telling everyone that they have to pay the premium for organic food, because it’s “good” for them. It’s an option, but not a requirement.

Of course, the article scratches the surface. It looks breifly at one firm’s experience to understand why middle-wage earners are having such a rough time in the U.S. This is an important issue. The section that most caught my eye (and I didn’t see much of this in the comments) is this:

“I’m not worried about the country’s long-term future,” Mr. Jobs told Mr. Obama, according to one observer. “This country is insanely great. What I’m worried about is that we don’t talk enough about solutions.”

My solution (and I don’t know much about this) would be to bolster community colleges and vocational education in the U.S.

gregor January 22, 2012 at 1:44 pm

As someone said at the beginning all these advantages derive from the lower standard of living of the Chinese workers and the authoritarian regime. U. S. has nothing to learn from this. If it does, it will no longer be the U. S.

Henry January 22, 2012 at 3:51 pm

+1

tomrus January 22, 2012 at 3:06 pm

“Convince them to live in dorms”? What hilarity.

Have you been to North Dakota recently?

Becky Hargrove January 22, 2012 at 3:30 pm

gregor,
The U.S. has everything to learn from China about this, just as they learned from us. We are in an extremely advantageous position now because of that.
derek,
The only reason you go to a small town and see a non-tradable sector that only employs ten percent of the population, is that government still sees such services in the same terms as every other sector. That forces government to take whatever money remains from wealth creation and spend it on education and healthcare for the people who don’t have the money to do so. A big part of the problem is that knowledge has not been allowed to trickle down (person to person participation) in the same manner as physical resources and products. Plus, even though aggregate supply has to constantly monitor production optimization, many individual players scarcely even need to consider how a single optimal production level defines the workplace. That is why it would be extremely difficult to define knowledge-based lateral skills now in monetary terms. We could know how two players match their skills and how their production would compare to the industry standard, but putting those skills into money now would only confuse things further. It is better to build a commuity base that relies on money and technology, and integrate knowledge work in terms of lateral skills share. The better the knowledge specialization a community reaches, the more production based monetary economies they could eventually attract.

jorod January 22, 2012 at 4:19 pm

Maybe if we stopped subsidizing law schools…

Matt Waters January 22, 2012 at 4:48 pm

The only real issue I see on the US side is the lack of halfway-engineering grads and other skilled trades such as welding. My own experience is that kids do not want to get their hands dirty and instead hold out for some sort of desk or service jobs.

That’s not necessarily a bad thing though. If somebody wants to earn less in order to not get their hands dirty, then why is that a problem? It lowers GDP, but their utility is higher.

Willitts January 22, 2012 at 5:29 pm

“Daddy, I want to grow up to be a people herder too. Maybe I will make $15 per day instead of $10 like you.”

Doubtful January 22, 2012 at 5:50 pm

But also see, for example:

iPhone, iPad Study Shows Trade Stats
Dramatically Overstate the Value of U.S. Imports from China
http://mjperry.blogspot.com/2011/12/trade-statistics-are-misleading-and.html

It refers to work done by Ken Kraemer at the University of California:

This study also confirms our earlier finding that trade statistics
can mislead as much as inform. Earlier we found that for every $299
iPod sold in the U.S., the U.S. trade deficit with China increased
by about $150. For the iPhone and the iPad, the increase is about $229
and $275 respectively. Yet the value captured from these products
through assembly in China is around $10.

Jay January 22, 2012 at 7:50 pm

This is an excellent article in that it shows the complete economic ignorance of our current President.

joemomma January 22, 2012 at 7:59 pm

Occupy Wallstreeters need to occupy China.

Tom January 23, 2012 at 10:31 am

We’d be outsourcing our rabble-rouser enforcement. Another job Americans won’t do.

Steve Sailer January 22, 2012 at 11:49 pm

Just as some Americans pay more for shade grown coffee, some Americans would pay more for American-made Apple products. An obvious place to start is the wildly overpriced $2499 17-inch MacBook Pro. If Apple announced that all its 17″ laptops would be assembled in America (which would cut down on the huge profit margins on this item by only a modest amount), it could start a trend where consumers can show off their patriotism by using this big beast.

jpa January 23, 2012 at 4:53 pm

people get fired for missing profits by just a ‘modest’ amount. good luck with that proposal…

Dave January 23, 2012 at 12:43 am

The kind of stuff you guys are talking about are just components of wage. Working conditions are one of many things people include in their total compensation. This is still a wage thing.

At the end of the day, you either feel affinity to your fellow nationals (or race) or you don’t. If you don’t, support free trade. If you do, support protectionism. That simple.

Kirk Hartley January 23, 2012 at 9:14 am

The “advantages” in China are speed achieved through subsidies and working conditions we long ago rejected (e.g. workers living in dorms and working constant 12 hour shifts.) There is no real “need” for that much speed except that it generates great profits, at a long-term price not born by or accounted for by Apple or its shareholders.

On the argument that we lack scientists and engineers, that’s nonsense. Proof? The best readily accessible resource I know of is a book previously touted on this blog – “HOW ECONOMICS SHAPES SCIENCE”: By PAULA STEPHAN, a professor in Georgia. The book is a data-filled short version of a treatise (literally) she previously compiled on the economics of science, including engineering. Consider especially chapters 6 and 7 on the economics of Phd degrees (today, the ROI is lousy, for most individuals) and the economics of the “foreign born” worker (many are here, and more could and want to be here). Bottom line ? The supply of scientists and engineers is tied to a range of factors, and they go far beyond (the insanity of) the debacle known as “homeland security.” And, in fact we have a vast pool of PhDs and other well trained people. What we do NOT have is a vast pool of such people willing to work insane hours and live in “company towns” that should remind all of history one would like to think we’ve moved past. But, as was proved by Koehler, Rockefeller and others, the company town is a great economic engine and that model will be used again and again until there are import laws to block the import of products built under conditions we long ago rejected.

athEIst January 23, 2012 at 10:25 am

mishka January 22, 2012 at 1:12 pm
yup. it’s called “fiduciary duties to shareholders.

When Jane Addams(Hull House) went to talk to the factory managers who would not install simple safety devices(screens, grills, bars) on machines that were killing many workers, she(who by then was well-known and respected) was told they couldn’t do it because of:
fiduciary duties to shareholders.

byomtov January 24, 2012 at 12:30 pm

I sometimes wonder if we have an accurate notion of “fiduciary duty to shareholders.”

Imagine an electronics with only one owner. That owner might well be willing to accept the reduction in profit caused by some improvement in working conditions in the factory. In fact I’d guess that, if they were owners, many of the commenters here would at least want to have reasonable health and safety conditions for workers, even if somewhat costly and not required by law.

If so, why is Apple’s obligation to assume that its shareholders don’t want that – that its shareholders are eager to squeeze every nickel out of Chinese workers and to the devil with their health and wellbeing?

Does fiduciary duty mean simply maximizing profits, or does it mean acting in the interests of the shareholders? Go back to the single-owner case. The plant manager, as an employee, has an obligation to act inth eowner’s interest. And if th owner wants better working conditions then it’s ceratinly the plant manager’s “fiduciary duty” to provide them. Now, in the case of a large corporation, we don’t know what the shareholders want (though we could try to find out), so we have to make an assumption. But let’s recognize that the “fiduciary responsibility” argument is just an excuse for one particular assumption.

enave January 23, 2012 at 10:54 am

Does anyone know what it is about assembly of an iPad that can’t be done faster and cheaper by a robot?

jpa January 23, 2012 at 4:54 pm

Robots don’t have fine motor control… yet.

Also, computer vision is not as good as humans for finding defects… yet.

dana January 23, 2012 at 11:46 am

bit concerning if “better aspects” of Chinese industrial society refers to factory towns. Eventually there will be protest in china against the servitude of such a system, just as there was in the United States. If it is supressed by the totalitarian goverment (which is an applicable description) then there will ultimately be revolution, at which point, hopefully some of the factory jobs will come back to the US…

Cash wages are only part of employee compensation (of course, firms like Foxconn have admited that they occassionaly dont pay their employees), labor standards need to be factored into the cost of an employee

Craig Richardson January 23, 2012 at 12:43 pm

Note: The Iphone costs $8 to manufacture in China, for phones that sell for $199, $299 and $399. That means the lion’s share of the income from the sale of the phone goes to parts companies (largely from South Korea, Switzerland Japan), as well as plenty of revenue to U.S. advertising, profits, product design, retail and everything else that Apple does in the U.S.

Just because China is a genius at manufacturing doesn’t mean it’s a genius at capturing revenue streams.

See: http://www.isuppli.com/Teardowns/News/Pages/iPhone-4S-Carries-BOM-of-$188,-IHS-iSuppli-Teardown-Analysis-Reveals.aspx

PacRim Jim January 23, 2012 at 1:15 pm

Has nobody thought of automating the assembly process?
Robots are programmable and don’t even need a cup of tea.

Dan Weber January 23, 2012 at 2:52 pm

But then you are taking jobs away from the Chinese workers.

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