The Weekly Sift

In the State of the Union, President Obama emphasized manufacturing, committing his administration to “bring jobs back home”. Perhaps coincidentally, the last two weeks have given us an amazing run of revealing articles about manufacturing: what gets made where and why, who gets a job making it, and how they are treated.

The New York Times focused two articles (Wednesday and January 21) on Apple’s manufacturing in China. This American Life centered an episode on Mike Daisey, whose recently-opened one-man show “The Agony and the Ecstasy of Steve Jobs” includes much material from his interviews with the iPhone assembly workers in Shenzhen. The current issue of Atlantic includes “Making it in America“, an article that starts with two South Carolina factory workers and goes all the way up the chain to the global pressures on their CEO.

These articles became the raw material for insightful comment from Paul Krugman, the New Yorker’s Nicholas Thompson, Slate’s Matt Yglesias, MSNBC’s Chris Hayes, Alternet’s Robert Cruickshank, Foreign Policy’s Clyde Prestowitz,  and many others.

Background. Instead of trying to reproduce all those ideas, I’m going to assume that you’ve either picked up the buzz or are willing to chase some of the links I’ve provided. Doubtlessly you know the general picture: While America continues to create market-dominating companies like Apple or Google, the number of American jobs they provide doesn’t compare with market-dominating American companies of the past like General Electric or Ford.

The reason why is simple: While much of the design and management happens in America, most of the physical products are manufactured in low-wage economies like China. Those factories that remain in America are highly automated, so that our manufacturing employment plummets even as our manufacturing output continues to rise. America still makes a lot of stuff, it’s just not made by people.

The following graphs come by way of the bonddad blog:

Why? The most interesting fact to glean from the articles is that it’s not just the wages. Yes, workers in Shenzhen are cheap, but two other factors are also important.

First, what the NYT article calls “flexibility”. That’s a euphemism for domination. Chinese workers are completely under the thumb of employers like Foxconn, which assembles products for Apple and most of Apple’s competitors.

Almost every commenting article repeated the story of Foxconn workers being rousted out of their dorms in the middle of the night to make a last-minute change to the iPhone. Try to imagine doing that in an American factory.

“Flexibility” also isn’t inhibited by worker safety. If the factory managers come up with a new process, nobody has to analyze it or approve it. They just do it. If it later turns out that workers have been inhaling disabling neurotoxins — one of Mike Daisey’s examples — that’s a shame.

Second,

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “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.”

The overall result is that Apple gets exactly the product it wants faster — not just cheaper — than if it manufactured in America.

Everything we’ve been told is wrong. Again and again, I’ve read about “the death of distance”. It’s not supposed to matter where things are done now. But in fact it does. Once industries get clustered in a particular place, it’s not easy to move them.

And once they’ve moved away, it’s not easy to move them back. It’s not just the supply chain. Worker skill is a chicken-and-egg problem. No company is going to open a factory someplace where they can’t find the skilled workers they need, but no worker is going to get training on the off-chance that a factory will open someplace that doesn’t have any working factories now.

Free-market economists have encouraged us to look at every job in every factory as an individual issue. If Mexicans or Indonesians can do a job cheaper, move it there. We weren’t supposed to ask what all those individual decisions added up to. That would be “industrial policy“, which was supposed to be bad, because government shouldn’t pick winners and losers.

But the Chinese did worry about the big picture, and now they have all the manufacturing jobs. Prestowitz says:

Asia didn’t always have these supply chains. They were initially all in the United States. Asia got them because its governments and corporations worked hand in glove to get them. There is no reason why the United States government can’t work hand in glove with corporations to get at least some of them back. It’s not rocket science.

Ignorance is Bliss. Bliss has market value. The NYT and Mike Daisey have done a great job cataloging worker abuses in the Foxconn plants in Shenzhen. It’s obvious how to fix this: Consumers put pressure on Apple (and its rivals, who are no better); Apple puts pressure on Foxconn; and Foxconn changes how it treats its workers.

Why doesn’t that happen? Again, it’s not because there’s not enough money. The NYT says:

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.

Cruickshank (a self-confessed Apple fan) comments, “I would personally pay $65 more per iPhone if I knew it was going to American workers.”

Lots of people would, I imagine. But picture how that would work: Apple offers an alternative all-American iPhone or even a no-workers-abused Chinese iPhone, and sells it right next to the current iPhone for a bit more money.

Now everyone who buys the original feels like a scumbag. Worse, as you stand there dithering about whether workers’ rights or American jobs are worth $65 to you, you’re not having the retail experience the Apple Store is trying to create. The whole joy of Apple products is that they are magic. Picturing the real process that creates them breaks the spell.

Up and down the supply chain, everyone is happier not knowing the extent to which they benefit from the mistreatment of Chinese workers. The market — which just wants to make consumers happy — has been very efficient at providing that ignorance.

“Until now,” you might be thinking. Yes, the recent publicity has brought attention back to the responsibility we shoulder when we buy things: Everyone in the supply chain justifies their actions by claiming that they just want to please the consumer. So when you plunk down your Visa, you’re signing your name to the whole process. If enough of us now decide we want to deal with that responsibility, surely the market will provide some way for us to do it. Won’t it?

Here’s the problem: The market responds to consumers’ true desires, the ones that motivate our purchases, not the desires we claim to have or wish we had. And in our heart-of-hearts, don’t we really just want this responsibility to go away? Don’t we want the Apple Store to go back to being a high-tech Eden, where everything appears by magic?

If that’s what we really want, that’s what the market will provide. Some tiny improvements will happen in the factories, and each link of the chain will exaggerate that change, until the nerd at the Genius Bar can swear up-and-down that it’s all fine now. The workers in Shenzhen are all happy little Oompa-Loompas.

The mechanisms are already in place. Apple already has a shiny code of conduct for its suppliers. Foxconn already has a statement of workers’ rights that satisfies Apple. Supervisors on the factory floor already claim they adhere to that statement. And still workers are maimed or die or commit suicide. The NYT covers it:

“We’ve spent years telling Apple there are serious problems and recommending changes,” said a consultant at BSR — also known as Business for Social Responsibility — which has been twice retained by Apple to provide advice on labor issues. “They don’t want to pre-empt problems, they just want to avoid embarrassments.”

And like all global manufacturers, Apple is constantly squeezing its suppliers’ profit margins.

“You can set all the rules you want, but they’re meaningless if you don’t give suppliers enough profit to treat workers well,” said one former Apple executive with firsthand knowledge of the supplier responsibility group. “If you squeeze margins, you’re forcing them to cut safety.”

How exactly is that going to stop?

Degrees of moral separation. Atlantic’s Making It In America by Adam Davidson starts by comparing Maddy and Luke, two workers making fuel injectors in a Standard Motor Parts factory in South Carolina. Both are dedicated and hard-working, but Luke is skilled and Maddy is not.

Luke’s job, the article claims, is relatively secure, but Maddy will be let go as soon as machinery costs drop far enough to make replacing her worthwhile. In the meantime, machine costs put a lid on her wages, and she has nowhere to go.

A decade ago, a smart, hard-working Level 1 might have persuaded management to provide on-the-job training in Level-2 skills. But these days, the gap between a Level 1 and a 2 is so wide that it doesn’t make financial sense for Standard to spend years training someone who might not be able to pick up the skills or might take that training to a competing factory.

But Standard is profitable, so Davidson raises the same question Apple faces: Why couldn’t the company charge a little more or make a little less money and show some loyalty to its people and to America?

(NYT quotes an Apple executive saying: “We don’t have an obligation to solve America’s problems.” To which Foreign Policy’s Clyde Prestowitz replies: “Apple’s products still have a large U.S. government R&D content and I’ll bet that the guy who says Apple has no obligation to help Uncle Sam does strongly believe that Uncle Sam has an obligation to stop foreign pirating of Apple’s intellectual property and to maintain the deployments of the U.S. Seventh Fleet and of the 100,000 U.S. troops in the Asia-Pacific region that make it safe for Apple to use supply chains that stretch through a number of countries such as China and Japan between which there are long standing and bitter animosities.”)

So Davidson talks to the guy he thinks could make that decision: Standard’s CEO Larry Sills, grandson of the founder.

It turns out that Sills doesn’t believe he has the power to do Maddy any favors. Sills sees himself as the slave of two masters: the consumer, who looks for price and quality, but doesn’t seem to know or care how the auto parts are made; and the stockholder, who likewise just wants earnings to rise and doesn’t seem to care how it happens.

Once again, we’re seeing one of the major structural problems of the modern economy: We all live many degrees of separation away from the moral consequences of our decisions.

If you had to go down to a Shenzhen-style sweatshop to buy your iPhone, or if owning mutual fund shares meant that you occasionally had to fire somebody like Maddy face-to-face, you might think twice about it. But instead you are wowed at the Apple Store and every month you get a nice clean IRA statement in the mail.

You’re happier that way, and the Powers That Be are happier. And that’s why nothing changes.