This is a bit outside the normal scope of the blog, but I’ve been shocked to see the point not be made elsewhere. You may have seen the excellent NYT article from a couple weeks back “How the U.S. Lost Out on iPhone Work.” It’s a terrific piece of journalism but with one major error.
The big revelation, supposedly, is that labor costs aren’t the major reason why Apple does its manufacturing in China rather than the U.S.:
In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. 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.
For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.
The point about supply chains is a good one, and rooted in a rich literature around economic geography and “clusters.” But the point about scaling up and down faster – flexiblity, as it’s referred to in the article – is misleading.
I have no doubt that manufacturing flexibility is hugely valuable. The error is in treating this as separate from labor costs. From the article:
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.
“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”
The better way to think about this is that no American plant can match this kind of flexibility at a competitive price as compared to Chinese factories. Ask yourself: how much would you have to pay American workers to be available 24 hours a day, to live in a dorm next to the factory, and to do surprise 12 hour shifts in the middle of the night? Getting this kind of “flexibility” in the U.S. is hard for a lot of reasons, but one of them is labor costs! You’d have to pay Americans a fairly high salary for them to agree to those terms.
I’m fine with emphasizing that this kind of flexibility is increasingly important in global manufacturing. But it’s a mistake to think of it as divorced from labor costs.