Industrial Policy? Right After the Lunar Colony.

We have had a Presidential campaign going on for quite some time now but very little of substance has been brought forward by anyone. The two parties seem content, for now, to campaign by sound bite, while what little is left of our industrial base is further eviscerated. Last week’s story in the New York Times, detailing the flight of Apple’s manufacturing to China, should be read by everyone who thinks that manufacturing jobs are coming back to the U.S. any time soon.

The story gives us an idea of what we are facing as a country, and what having a strong commitment to an industrial policy has brought to China. While I still believe that cheaper labor brought industrial potential to China it certainly is not the only thing that has sucked manufacturing out of the United States. How about one of the first examples in the story:

Apple executives say that going overseas, at this point, is their only option. 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.”

So not only is the labor less expensive but “scaling up” is significantly easier and faster. The story talked about scale-ability and the supply chain.

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.

Are there other examples of the Chinese doing things that we no longer seem willing to do in the United States? Yup!

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

Hmmm. Chinese Government subsidies? I would be willing to bet that one or two of those government programs probably failed, or did not live up to expectations. But the Chinese government does not have anybody hurling stones at them for trying to attract manufacturing with governmental subsidies. Nor do they have imbeciles utilizing the failure of a subsidy program to call for an end to all such programs. But maybe the Chinese don’t know what they are doing. They only have just short of $3 trillion in currency holdings in their central bank. Better to be ideologically pure and broke and without jobs than to do things that make common sense.

The story talks about the supply chain, and its importance in the manufacturing process.

“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.”

My own thought is that the supply chain is indeed critical, but it will eventually follow the manufacturing. The issue is ease of ability to open facilities QUICKLY, and to be able to scale production QUICKLY. On top of all of our other problems you can do NOTHING quickly in the United States. How long has Cape Wind been trying to get permits? How much money has the developer spent trying to get those permits? Quickly? It is laughable.

Qualified workers? Governor Patrick talked about the need to better match job skills with available work, pointing to about 120,000 jobs that remain open for lack of qualified applicants. This article homes in on that issue.

Another critical advantage for Apple was that 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.

Is it just engineers? Hardly.

…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.

And the story also deals with the contrast in styles between the work forces. And I am not talking about working for $17 a week, or living in dormitories. The story points to American engineer Eric Saragoza, who worked at an Apple manufacturing plant in California back in 1995.

It was 1995, and the facility near Sacramento employed more than 1,500 workers. It was a kaleidoscope of robotic arms, conveyor belts ferrying circuit boards and, eventually, candy-colored iMacs in various stages of assembly. Mr. Saragoza, an engineer, quickly moved up the plant’s ranks and joined an elite diagnostic team. His salary climbed to $50,000. He and his wife had three children. They bought a home with a pool.

“It felt like, finally, school was paying off,” he said. “I knew the world needed people who can build things.”

At the same time, however, the electronics industry was changing, and Apple — with products that were declining in popularity — was struggling to remake itself. One focus was improving manufacturing. A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85. Wages weren’t the major reason for the disparities. Rather it was costs like inventory and how long it took workers to finish a task.

“We were told we would have to do 12-hour days, and come in on Saturdays,” Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

Mr. Saragoza wanted Saturdays off. He has been unemployed, or underemployed, since then.

“What they really want are 30-year-olds without children,” said Mr. Saragoza, who today is 48, and whose family now includes five of his own.

So what about the Saragoza story? Was he wrong to not want to work Saturdays? As he defined it you certainly cannot call it slave labor. Typical of the American work force, or atypical?

Bottom line is that you likely need a substantive change in many things, and a real desire and willingness to stop the pettiness in Washington, and move towards a real industrial policy. Solyndra? Chicken feed in comparison to the subsidies deployed by the Chinese government. And what have the Chinese subsidies brought to Chinese solar manufacturing? From the New York Times:

China, whose government has been a big promoter of green-energy companies, already accounts for three-fifths of the world’s solar panel production, giving it enormous economies of scale.

And it exports 95 percent of its production, much of it to the United States, rather than using it within China. That has helped push wholesale solar panel prices down sharply — to $1 to $1.20 a watt of capacity today, from $1.80 in January, from $3.30 in 2008.

So the American producers file anti-dumping actions against the Chinese, ultimately a losing war, even if a few battles are won. We need to compete, and to win the competition. But in order to do that the silliness and outright stupidity that passes for federal governance has got to change. We need to drive an industrial policy that promotes jobs here in America, and not in a half-assed way either. The American work force will need to adapt and change as well, deploying a new willingness to drive productivity gains. But we don’t talk industrial policy on the campaign trail. We are too busy talking about kosher meals and moon colonies. Under our current system it would likely take 7 years to get a permit for the construction necessary to put up a moon colony, so we don’t have to worry about it. I hope folks start to realize the severity of the problem, but we honestly can’t seem to get out of our own way. Read the second story from the Times on Chinese manufacturing here.

Read a David Brooks column on worker skills in America here.

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