Keeping manufacturing jobs at home
It’s no secret that manufacturing jobs are moving away from the US and other developed countries* to offshore locations. That’s been a boon to electronics-manufacturing-services providers like Foxconn, which is set to take more than half the global EMS revenue by 2011. It’s also been a boon for US-based companies like Apple, who take advantage of the low-cost production that offshore EMS providers offer.
It’s decidedly not good news for workforces in developed countries, as evidenced by persistent unemployment in the US despite rising corporate profits. Writing in Bloomberg Businessweek, Andy Grove notes that while Apple has about 25,000 employees in the US, Foxconn deploys some 250,000 workers making Apple products in southern China. As Grove puts it, “That means for every Apple worker in the US there are 10 people in China working on iMacs, iPods, and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other US tech companies.”
As I reported Monday, this is not good news. As Grove writes, “You could say, as many do, that shipping jobs overseas is no big deal because the high-value work—and much of the profits—remain in the US That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work—and masses of unemployed?”
Grove recommends strong, protectionist measures to prevent that scenario from happening—to the extent of engaging in a trade war that we fight to win.
Are there less drastic measures available? One company in the developed world that’s been remarkably consistent in keeping production near home is Rohde & Schwarz. It operates one plant in Vimperk in the Czech Republic, but most of its employees work in the Munich headquarters and in its Memmingen and Teisnach plants in Germany. Even the low-priced instruments from R&S’s Hameg subsidiary are manufactured in Germany—Hameg manufacturing will be transferring from Hameg’s Mainhausen headquarters to the R&S Memmingen plant, but won’t be leaving the country.
There are other examples. Writing in the Guardian, Ian Jack comments on manufacturing successes in the UK: “Rolls-Royce makes about a third of the world’s aircraft engines…. BAE Systems is the largest arms manufacturer in the world after Lockheed.”
It might not be too surprising that the developed world holds on to aerospace and military manufacturing, but Jack cites another more obscure example (in addition to Marmite and whisky): “Vacuum cleaners…surely the last British factory that made those went east when Hoover closed its operations and James Dyson moved production to Malaysia? But no: the last volume maker of vacuum cleaners in Britain prospers quietly in Chard, Somerset, where Numatic International turns out 4500 units a day.” The company, he says, employs more than 720 people, 500 of whom earn a basic shop-floor wage of £20,000. The anthropomorphic vacuum cleaners, sporting bowler hats and smiley faces, are decidedly low tech (although the company Website notes that “…the newest designs are developed and manufactured using the latest computerised technology [and] rigorous testing…) and would seem amenable to low-cost offshore production.
What accounts for the success of high-tech Rohde & Schwarz and low-tech Numatic in keeping jobs at home? For one thing, both companies are privately held, so neither operates at the whim of a perhaps less than heroic CEO who might be overly cautious in controlling costs that could affect next quarter’s stock-option-based compensation. It should be noted that both companies are competitive with public companies in their respective fields (with Rohde & Schwarz recently beginning to compete in an entirely new market), so they must be doing something right.
Update (7/29): Suzanne Deffree commented on Andy Grove’s Businessweek article earlier this month. I’m sorry that (being on vacation) I missed her post. It’s worth reading, as are the many comments.
*Original post had the incorrect word “companies” instead of “countries.” Thanks to commenter LB for the correction.
Sagar commented:
Heck of a job there, it absoluelty helps me out.
Lavinia commented:
Dude, right on there brhoetr.
Pas504 commented:
Economic theory shows that free trade results in lower costs for all, because production takes place at the most cost-efficient source. The problem for the US is that trade with countries like China, where the state controls the means of production, or Japan, where the state imposes regulatory barriers to imports, is not really "free." Today, Hiroshima is a clean, prosperous, attractive city, while many parts of Detroit look like a war zone. To keep from losing its employment base, the US government must act to maintain balanced trade. One way of ensuring balanced trade is to limit the aggregate value of imports from a country to the aggregate value of US exports to that country. (This is a value limit, not a tariff.) Another way is for the US Government to buy from US sources exclusively, whenever possible.
Dan514 commented:
We Canadians have also seen our manufacturing base disappear. Tariffs are not the answer. As long as we insist on $79.00 DVD players and a "replace rather than repair" mentality it will continue.
Next time you shop at a huge discount chain, think of the jobs not being created by your purchase. I am willing to pay a few $ more for Canadian or American goods knowing that it could be my brother, cousin or neighbor who will benefit from the work.
eric t. carlen commented:
In response to: Keeping mfg. jobs at home
Read the comment on Andy Grove. He did a great
job on bringing chip mfg.back to the U.S.A.
ChrisGar commented:
I generally agree with Andy Grove's comments. (although it is difficult to ignore his involvement in Intel's off-shoring efforts)
I've recently read a couple of good books about the history of tariffs in the US and was surprised that "free trade" was not common before the last 20-30 years. Before that, there were "reasonable" tariffs that encouraged US manufacturing. Can the US be a world economic leader without a manufacturing base ?
Another key question is "can the US continue to innovate in processes related to production -- even though the production is done in a far away country?"
I think the answer is mostly no. Companies that outsource production will not drive innovation in the production processes nearly as much as they did before. The business model for outsource test/packaging facilities is mostly pay / time model -- which also does not encourage innovation.
The long-term business model will evolve and there will be incentive to do some innovation -- but I'm still not sure it will ever be to the level that is was when companies had internal manufacturing and were pushed to innovate to reduce costs.
MEinAZ commented:
As an engineer with over 40 years of experience and much of that heavily involved in automation including material handling, robotics and all the other motion control apps, I have seen a changing world in mfg. From automating sawmills in the US to compete with Canada, over 17 years in semiconductor (wafer) including solar apps and so many in between that it has been a lesson in industry. I was heavily involved in the negative aspects of helping to ship our hi-tech over seas at my employers bequest. Didn't like it much. We gave much of our industry away by looking at short-term profits from Wall St. oriented management. We lost in so many ways that we are now paying with broken industry that was totally unneccessary. Private industry has the strength and foresight to deal with this while "Educated" individuals in management look to hit and run techniques to make them look good today while killing the business for tomorrow. Automation saved the automotive industry and brought quality back into the equation. Repeatable quality. Controlled costs as long as the raw materials don't haunt the budget. When those raw materials are controlled by Wall St. and overseas entities, we are, again, at the mercy of short-term thinkers. Using our experience from the last 40 years is critical. If we don't learn from our mistakes, we are doomed to continue the death of our real heritage, the industrial arts. Back to the basics with the help of technology. Stay the course. Believe in our people to be the innovators they are and support them. Leave Wall St to the people that wouldn't know industrial art if they drove down the street in it or went 240mph turning left =)
andy commented:
Some of the most successful manufacturing companies in the UK are in private hands e.g JCB. I live in Cambridge, 4000 people are employed in a multi faceted company called Marshalls. It is a private family owned company. If the company was floated, then one of the first actions a new CEO would do is split it up and sell bits off, until eventually it would be a shadow of its former self.
We can manufacture in the West, if we are prepared to look at the markets we sell into, to invest in the skills and the manufacturing techniques required to keep competitive. Most of all I think that we also need the 'will' to do manufacturing. Far too many financial management types just want to take the easy route of closing down and subcontracting out.
Get Competitive commented:
Double Standard....Yes I agree we should eliminate the Govt. subsidies, I'm sorry I didn't make that more apparent. We need to get the Govt. out of the welfare business altogether, and that means corporate welfare. Dave, you definitely need a history lesson, Google Smoot–Hawley Tariff and read about its contribution to creating and extending the Depression, and you will see why trade wars are counterproductive at best and devastating at worst. Dave you are right about the speculative build up, just like we have now.
LB commented:
Rick:
"It’s no secret that manufacturing jobs are moving away from the US and other developed companies to offshore locations." Did you mean "other developed countries to offshore locations?"
Dave commented:
Trade wars did not cause the 'Great Depression' it was caused by the collapse of the Austrian Bank that rippled through Europe and into the US. The buildup to failure was gross speculation in the markets just as our government allowed and encouraged over the past 15 years.
Double Standard commented:
Interesting comment from “Get Competitive - What is needed is genuine Govt. support of manufacturing Companies. Govt. need to eliminate many impediments like unions excessive environmental rules, minimum wage laws, corporate taxes, high Govt. deficits and other anti competitive laws. ”
You put the blame for everything on Government while also demanding corporate welfare. I would happily support you if you were to state that there should be no subsidies the corporations, businesses and farmers everybody pays their own way. If you stop the corporate welfare the Government deficit would disappear.
Sim69 commented:
I don't think trying to compete with China's low wages system is a good idea. it is going to end anyway (people there want higher wages and unionize, not to go the other way).
US Govt need to invest in automation to create jobs (robots work 24/7 and are cheaper than foreign labor in the medium term). Lower minimum wages and no environmental rules would boost ignorance and degradation all across the country.
Get Competitive commented:
Andy Grove was totally wrong with his "trade War" statement, nobody wins when trade wars occur, in fact Anti free trade helped create the great depression. What is needed is genuine Govt. support of manufacturing Companies. Govt. need to eliminate many impediments like unions excessive environmental rules, minimum wage laws, corporate taxes, high Govt. deficits and other anti competitive laws. America can compete, but only when our own house is in order, and unfortunately we continue to move in the wrong direction.
Sim69 commented:
I read Andy Grove's article some time ago and I agree with his view. It's time to understand that money-driven decision are not always good in the long term. But for most CEOs the only goal is to do well at the quarterly meeting.
