You don’t WANT to be making iPhones, really

Last week’s hairshirt NYT piece got a lot of attention — it was AR’s lead link on Sunday and pointed at by Josh, Reformed Broker,  — bemoaning “America’s inability” to manufacture or assemble iPhones and other electronic gizmos. However, it entirely missed the point, thinks Baruch. It is always en vogue to bemoan one’s own nation’s manufacturing competitiveness, in the case of Southern Europe, possibly fairly. But most of the time it ignores the great dynamic of economic development, that as economies increase in wealth, intellectual property and sophistication, pure manufacturing becomes less and less attractive an activity. America has the most sophisticated economy on the planet; the idea that it is bad that people who participate in it no longer fit bits of plastic together is a wrong one.

The other point that the article makes rings truer, that making iPhones isn’t much fun:

. . . 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.

Assembling iPhones is a repetitive and gruelling manual job. It is hard on the eyes, on the stamina and probably on the spirit. The majority of the workers at the Foxconn (also known as Hon Hai) plant are young, resilient recent immigrants to the city, for whom the alternative to doing this is working on the family smallholding or some other menial job in the Chinese boondocks. They don’t need engineering degrees, though do need skills and motivations I and probably a lot of Americans don’t have, e.g. being able to put small parts together in exactly the same way, again and again for hours and hours all the while standing up, Don Rumsfeld like. Being in a position where you can be woken up at 12.30 am to do a 12 hour shift fortified only with a biscuit and a cup of tea is not something I would wish on my fellow countrymen — at least not all of them.

I don’t think the NYT seriously wants their fellow Americans to work like this either (and by the way, since when was a foreman’s job on an assembly line “middle class”?). It’s the sort of thing workers in developed countries stopped doing since the 1970s and 1980s, and trades unions have been fighting against for decades before. We shouldn’t go back.

Don’t get me wrong — I don’t disparage the necessity of mind-numbing manual work, I certainly don’t look down on those who do it, nor hate the bosses who oversee them. It is a fact of life. However, it has to be for something worthwhile, however, and in large part I think it is in the case of Foxconn and Apple. For the Turkish and Greek Gastarbeiter in Europe in the 1950s and 1960s factory manual labour was a stepping stone to better things, and similarly, one hopes the Chinese building iPhones will be able to save some money to take back home or stay in the city to start a business, get married and educate some (well, typically only one) kids, or, at worst, buy an xBox. You have to look at the alternatives open to the people doing the work; for a Chinese late teen or 20-something the more realistic alternative to the Foxconn plant is a life of rural toil, tedium and poverty. For the average US teen it would be college (and some debt) and/or relatively bearable job in a service industry, possibly cutting hair. The American shouldn’t have to compete with his Chinese counterpart — the menu of his or her life choices is so much richer.

The other idea implicit in the article I have a problem with is that iPhones and the physical location of the plants that supply them have disproportionally favoured the Chinese economy over the US. Well, when it comes to assembly, the amount that stays in China is an infinitesimal fraction of the total added value of an iPhone. Foxconn earns something like a 5% gross margin and a 2-3% EBIT margin on its assembly business and for business from Apple it might even be less. Indeed, some analysts think Foxconn only earns a positive margin because it can throw in a few components of its own into the deal. Its notable that no-one else has ever been able to take any of Apple’s assembly business from Foxconn. Many have tried and lost money, such are the competitive razor thin margin this business operates at.

Compare that to the 30% to 50% gross margins (and 20-30% EBIT) a semiconductor supplier earns selling a chip into the iPhone — almost all the semi content in the iPhone is from US companies, and by no means not all the chips are fabbed in China, although I agree with the article that many are. I’m not even talking about the great margins that a software company selling code into the iPhone foodchain makes, nor the insanely great margins Apple operates at, just the hardware foodchain. Which part of that foodchain does the NYT really want American companies to be at?

My final comment is that the article ignores the flipside of the equation, the dual nature of employees like Eric Saragoza, the mid-level Apple engineer who  got laid off in 2002. Scant comfort for him of course, but he is also a consumer. The huge benefit of the constant price down in technology is that consumers get to be able to buy amazing, life changing products at increasingly affordable prices, while incentivising the companies who make them with great margins. iPhones and iPads have changed my life moderately, but have transformed the lives of millions of people in a more profound way. This is what technology does, and I don’t know another way of ensuring that it happens. Very often the ability to make something new and useful for significantly less is just as impactful as the ability to make that new and useful thing in the first place — it opens the door to new business models, to new uses, to things the inventors may not have dreamed of. Look at Tim Berners-Lee and the internet*. Benefits like these are immeasurable and general to all, and you only notice what happened later on, while Eric Saragoza’s job loss was immediate, specific, and personal. It makes a good, heart rending story. “Everything is slowly getting better for most everyone” should make a good story too, but in practice will be less affecting, and get fewer links.

Baruch is not an American and the decline of the middle class there is not his uppermost concern; in fact he cares as much about the Chinese factory workers toiling away at Foxconn. He thinks the dynamics of what the NYT is writing about is actually fantastic for almost everyone, and actually strengthens the global middle class by adding more people to it, in China. This is wholly a Good Thing, for all the problems we actually should be concerned about, like war, poverty, the environment, healthcare, education and the personal outcomes of ourselves and our fellow humans, all these things are mitigated by expanding the middle class, because only people with some disposable wealth of time and income are able to think about them.

* You think he ever thought he would end up using his invention for finding Angry Birds cheats like the rest of us? Of course not.



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12 responses to “You don’t WANT to be making iPhones, really

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  2. Call me cynical but when an article poking silicon valley comes out, in a mainstream media publication, the same week that SOPA gets the go by is just sour grapes. Its not like the NYT and its cohort are great and growing employers after all.

  3. Hear, hear. Well said.

    P.S. — Write more stuff. Slacker.

    • Dude, I don’t know how you do it. I think you secretly blog at work with all your scurrying associates thinking you are writing important letters to CFOs and stuff.

  4. This is sad stuff, Baruch. I frankly don’t think it’s worth my making arguments based on basic ethics or even enlightened self-interest. Karl Denninger makes the points well enough:

    Your post does much to support the conclusion that the approaching global chaos that Soros is predicting is in fact to be welcomed. Just as the heedless and obdurate owning classes in France and Russia couldn’t be bothered even to save their lives, the 1%ers and their lackeys will continue with their let-them-eat-cake position until a bad day on Wall St means being killed by an angry mob. An avoidable but apparently inevitable period of chaos and violence will be followed by something unpredictable but at least different, and I think eventually the global popular vote will be that chaotic change is preferable to allowing concentration of wealth and power to continue to a neo-feudal outcome.

  5. AHopefulSkeptic

    Good points all, Baruch, and in general I agree with you about the positive aspects of manufacturing outsourcing, but recently I’ve had a lot to make my doubts grow.

    There’s no doubt that standing at an assembly line for hours at a time is something of a crappy job, but it was a job that *did* in fact lift many Americans into the middle class (just as it’s doing the same for many Chinese). It wasn’t great, but as you said it put people into a position to improve their futures and the futures of their children.

    The problem isn’t that manufacturing jobs are going away, but that the replacement jobs don’t seem to offer the same upward social mobility. In the fifties and sixties if you didn’t finish school or have any family background you could buy a house, raise a family, and even send your kids to college working in a factory. Try doing that cutting hair today and you’re in for a world of pain. The replacement jobs in the service sector are disproportionately lower-paying, and even if education improves there’s the simple fact that not everyone can be doctors and lawyers or engineers; there’s only so many high-paying jobs a society can support.

    The whole inequality of jobs touches on another similar point: namely that although most of the value in Apple’s products stays in the US, those profits accrue to only a relatively small number of Apple shareholders and employees. Even the ecosystem around Apple products is limited in its ability to provide for a large number of people. One of the very reasons investors love these kinds of start-ups is because they can scale enormously without needing to hire massive numbers of people.

    The lower cost of manufacturing has very definitely increased the quality of life for millions of people, both on the production end and the consumption end. Lower wages isn’t as dangerous when prices also fall. But the final and biggest problem is that while prices of consumer goods, the nice-to-haves, have fallen as median income has stagnated, the price of must-haves has actually risen massively. Namely, the cost of education, health care, and housing have all increased in real terms even as income has not. In material terms (kitchen appliances, TVs, etc) today’s “poor” are actually quite well off compared to their historical counterparts. But in terms of opportunity and relative status they are worse off. That’s why people feel pinched, and that’s why the middle class seems to be shrinking. Not because people are afraid they can’t afford iPads, but because they can’t afford houses or to send their kids off to college.

    So in the end, the issue again isn’t that the loss of manufacturing is itself bad, it’s just the lack of good replacements for manufacturing jobs as a way provide for a broad base of people with good living standards. There are certainly many examples in the world of many countries where the citizens enjoy high living standards and don’t depend on manufacturing. It’s just not clear to me how we get there from here without an engine for social mobility to replace manufacturing jobs, or at least some more enlightened social policies.

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  7. I think you are missing the underlying point of the original story, that the enabling and support industries are no longer here either. The supply chain has moved offshore as well. And as Andy Grove pointed out, once you lose manufacturing, the higher margin engineering, research and design work naturally follow. Apple has been one of the few able to stay ahead(so far) due to extreme secrecy and by continuing to innovate at a pace unmatched. The long game for China is to get all the jobs they can, including the high value design work and IP. They are very patient and don’t have to worry about next quarter results or an election every few years. The massive amount of capital flowing their way is funding their universities and defense R&D. Meanwhile our short term thinking and lack of industrial policy is damaging our economy and leading to a bifurcated society. The resulting social unrest and civil disorder will not be pleasant. Depending on China to supply technology for our defense needs and to fund our debt is not a long term viable plan. We are eating our seed corn while burning our furniture to stay warm.

  8. Richard Burnsed

    Good points, A Hopeful Skeptic. It seems that our economy is favoring the “apex predator” and the majority in this country have few options. Going into debt to pay for school can move you up the food chain a couple of notches (maybe) but as more people see this as one of the few opportunities to have the american dream a degree will become devalued. Actually cutting hair might do okay for you, if you can stay busy you can make fair money. About 30K/ year according to I honestly believe that as a culture we have lost respect for all the tradespeople that actually keep the economy moving by producing physical products with real value while rewarding people who move money around far too much. If I had to pay a bit more for goods and there were less homeless people I think that would be a worthwhile deal.

  9. Strange, Baruch, I was about to chastise you for making obvious, mainstream points, but now your post has gone all viral, so I’ll just add two substantive remarks:

    1. The problems of the US economy outlined in the NYT article are not some inevitable result of the rise of the Chinese manufacturing behemoth. Look at Sweden, Finland, Switzerland — they’re doing fine, even with a global economic crisis, and this has everything to do with the enlightened fiscal policy choices these countries have made: High taxes, but with investment in education and in social welfare amid a liberal (in the proper non-US meaning) business climate that nevertheless enjoys some state direction. There is no reason why Americans couldn’t go down the same path, except of course for the visceral reaction around half seem to have towards this idea.

    2. The rise of the global information economy tends to favor rising income inequality because the winners in this economy (successful software producers, movie moguls, patent holders, rock stars, designers) can conquer all markets without being bound to physical manufacturing resources. A society can benefit overall if its citizens are heavily invested in these kinds of industries, but needs to redistribute the spoils within society if it wants to maintain social equality. Sorry to trot out Sweden again, but that’s what it does. Swedes in the service industries (the hairdressers, the police, the taxi drivers, the barristas) are paid high wages, and their services are expensive, but that is the price of a remarkable social cohesion. I pay $5.50 for my latte in Stockholm, but I don’t mind, because it is for a good cause (and comes with some truly innovative and creative swirly patterns on top).

    • Yes Bento, but don’t the high-earning Swedish taxi drivers ALSO have to pay $5.50 for a latte? So I bet they don’t drink that many. If I had to choose between a high salary and a high cost of living or a low salary and a low cost of living I would reckon it’s a wash, in the end. Although I think I would be able to afford better holidays if I went for the high salary/cost of living option. Meanwhile I bet that hairdressers in the US drink more lattes than their Swedish counterparts. Although I also think the Swedish latte may taste better — most things taste better outside the US, sad but true, with the exception of hamburgers.

      The thing about the countries you mention is that they are all smaller and relatively simpler economies; government policy is better able to be effective where things are simpler. In a bigger, highly complex economy, your dirigisme-lite won’t work as well. I would argue that the US couldn’t take the route you are talking about, even if they wanted to. Also, there’s arguably a lot less desire for social cohesion in the US than there is in SweFinSwitz. Try and persuade an East Coast librul to pay twice the price for his lemongrass and hibiscus smoothie so a West Virginian can afford to buy another assault rifle.

      The arguments made by other commenters are good in their way, but tend too far to the nostalgic and apocalyptic. The same arguments, by the way, were made by the British when it came to the rise of Germany after WW2, by Europe and the US about Japan in the 1950s and 1960s, Taiwan and Korea in the 1980s, and probably much further back in time as well. It simply is not true that moving things around and designing things adds less value than making things — designing and deciding what thing to make is as important as making it as is financing it. All of these things add value. Very often, the actual making of it is the easy part.

      Finally, people don’t always rise up in revolt (though may complain) when they have a problem with their relative wealth, but tend to when their basic needs are not being met. And Cash, anyone who thinks Foxconn workers are literally made to work by having guns pointed at them is, frankly, a loonie, or doesn’t understand the meaning of the word “literally”.

  10. Go into any Chinese grocery store here in NJ – the immigrant cashiers (mainland Chinese) are twice as fast as any one else; just amazing manual dexterity. Same way in the factories.

    Having been on the fringes of “where do we make this?” decisions for electronic assemblies, the question was always “what’s the best place?”, not where’s the cheapest or how do we screw American workers. When the suppliers are in Asia, and the customers are in Asia, why assemble anywhere else?