Tuesday, January 24, 2012

What drives globalized manufacturing to emerging Asia?

Conventional wisdom would have it that the low labour cost in emerging Asia is the driving force behind outsourced manufacturing. The Times has an excellent article (see also this interactive video) that questions this belief with the example of iPhone. It argues that abundance of mid-level manufacturing skills and the advantages with the dynamics of production in massive scale are the reasons for the rapid growth of outsourced manufacturing to Asia.

Various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.

But such calculations are, in many respects, meaningless because building the iPhone in the United States would demand much more than hiring Americans — it would require transforming the national and global economies. Apple executives believe there simply aren’t enough American workers with the skills the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also say they must go abroad.

Apple's iconic iPhone is the exemplar of modern day globalized production,

Though components differ between versions, all iPhones contain hundreds of parts, an estimated 90 percent of which are manufactured abroad. Advanced semiconductors have come from Germany and Taiwan, memory from Korea and Japan, display panels and circuitry from Korea and Taiwan, chipsets from Europe and rare metals from Africa and Asia. And all of it is put together in China.

Among the emerging economies, China has an unparalleled comparative advantage as the electronic products assemly line of the world. Its advantages as the assembler are numerous...

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

... and in leveraging its massive labour force with mid-level manufacturing skills...

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.

... finally, China has companies like Foxconn, which can mobilize massive numbers of diligent workers in quick time to deliver on any electronic assembling activity. It writes about the Foxconn City,

The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day... 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.

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.

The article highlights the critical importance of a large base of mid-level manufacturing skills and the presence of a broad-range of manufacturing supply-chain in the success of any economy. They are essential ingredients to the development of a large manufacturing base. The United States which had these capabilities for many decades has seen them get eroded and has now ceded way to China.

Countries like India, which are waiting in line to emulate the Chinese growth miracle, would do well to appreciate the vital role played by these factors. India has nothing comparable to Foxconn and suffers from acute shortage of mid-level skilled technicians. Attempts to build up supply-chain capacities through growth clusters and special economic zones have borne limited success and that too only in a few sectors. Unless these deficiencies are bridged, India's growth potential will remain just that, potential.

Update 1 (26/1/2012)

NYT investigation reveals serious problems with working conditions in Chinese factories supplying components to consumer electronics firms like Apple. Here is the list of Apple's suppliers.

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