Globalization and the iPhone

January 23rd, 2012 at 9:29 am

In terms of a comprehensive piece—micro, macro, from the policy to the personal—on how economic globalization is playing out in the today’s world, you can’t do better than this NYT article on Apple and its iPhone.  Rather than try to summarize a nuanced look at the many issues here, let me pull out what for me were some key points.

Living Standards and Globalization

“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.”

This is a key line—a quote from a college-educated engineer displaced from Apple by its move to global supply chains.  At the heart of that chain is Foxconn, the Chinese industrial complex that assembles much of the world’s electronics.

…nothing like Foxconn City exists in the United States.

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. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.

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,” said [a former Apple employee]. “What U.S. plant can find 3,000 people overnight and convince them to live in dorms?”

For many Americans, and specifically for those in the middle class, this is one reality of globalization.  To compete at this level would mean to sacrifice living standard gains made over the decades of the 20th century, gains that have come to define the American middle class, such as the ability to take advantage of our technological advances and productivity gains to enjoy more leisure than is yet available to the working classes in emerging economies.

Globalists never seem to grasp the magnitude of that tradeoff and it’s why the Tom Friedmans of the world always seem perplexed as to why broad swaths don’t embrace globalization the way they do.  It’s absolutely the case—I don’t want to downplay this—that the flipside of this deal is cheap, amazing, and transformative consumer electronics.

But at the end of the day, there is simply no app that replaces watching your kids play soccer on Saturday.

Economics of Supply Chains and Industrial Policy

Too often, when we think of manufacturing, we think of the big factory and the end of the line, the one making the cars or computers, and not the chain of suppliers.  But, in fact, as the descriptions in the Times piece underscore, the key to a successful manufacturing sector is a robust, flexible supply chain.  And keep in mind there are multiples of jobs in the supply chain versus the assembly factory, especially since end-use factories have shed many of their previous functions, e.g., auto assemblers used to make transmissions in the plant—now they outsource.

(When I was with the Obama administration, this was a central concern around preserving GM and Chrysler, not to mention Ford, which also would have been screwed if the supply chains went down.)

As the Asian case shows, there’s a role for industrial policy here in offsetting a classical market failure: coordination externalities.  Individual firms simply can’t see the forest for the trees in this space and market signals are not forthcoming. That means they’ll fail to coordinate around aspects that provide the greatest efficiencies and the flexible production that innovators like Apple need: things like agglomeration, or clustering, externalities (critical links in the chain locate near each other and coordinate production at the most granular level—as in “make sure this glass plate made in one chain link fits seamlessly into this casing made in another chain link”).

But try to raise these issues in US policy circles and you’re accused of–horrors!–”picking winners.”  Meanwhile, we randomly shower tax credits on businesses based more on the skill of their lobbyists than on a global strategy reflecting market failures.

There are also important issues re the supply side of human capital here.  I was once again struck by the point made a number of times in the piece that relative to our competitors, we lack enough workers with a few years of post-college training—not BAs—who can fill skilled production worker positions.

The Role of Inequality

This was one issue the piece did not stress enough, IMHO.  To read the piece, with its emphasis on ways in which we’ve fallen behind in this global production process, you might come away thinking America must be considerably less well off.  And, of course, the middle class has lost a lot of ground, both in real terms and relative to past gains.

But GDP per capita—the value of the economy divided by population—has grown a lot more quickly than middle-class incomes and productivity growth has accelerated since the early 1990s.

The problem, in this context, harking back to my first point, is that the gains of globalization have bypassed many in the middle class, enriching those Americans who design the architecture of products like the iPhone, hurting those Americans who would staff its production chain.

More to come on this…

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10 comments in reply to "Globalization and the iPhone"

  1. foosion says:

    >> The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory>>

    To me, this is a key line. Add in the Chinese governments efforts to depress the value of its currency and you have massive government intervention on behalf of export industries.

    Meanwhile, the US is pushing for a “strong” dollar (hurting US manufacturing workers), while intervening on behalf of the best off in ways which hurt the middle (e.g., IP protection, which helps the CEOs and shareholders of the pharmaceutical industry, media, etc. at the cost of higher consumer prices; licensing restrictions, which restrict competition on doctors and lawyers at the cost of higher consumer prices; monetary policy favoring lenders [generally the wealthiest] against borrowers; direct bailouts of the financial sector which benefit the 1%; etc.).

    >> the gains of globalization have bypassed many in the middle class>>

    It’s just not some neutral hand-of-the-marketplace phenomenon, it’s part of deliberate governmental policy


  2. Fred Donaldson says:

    “…enriching those Americans who design the architecture of products like the iPhone, hurting those Americans who would staff its production chain.”

    Actually, the enrichment is going to $150,000+ MBAs and lawyers, not to $80,000 MSEs. And recent cuts to the estate tax only mean more to the elite, who can go to college and study when they like, work when they like, vacation when they like, and talk about “those poor, lazy, factory people.”

    The effort by Great Britain and the U.S. in recent decades has paid off for the elite – unions are gasping, middle class human beings (not worker units) are begging for jobs of any kind, and the major rewards of production are not going to the manufacturing system creators or labor workers, but instead to the financial manipulators.


  3. the buckaroo says:

    …seems Lush loves the Plantation style of labor pools…slavery is the new work credo of free market capitalism operating in a communist society.

    Too much pretzel logic going on…if Jobs liked it, it must be good, phooey. Bring on the tariffs to equalize the corporate greed of off shoring.


  4. perplexed says:

    Ah, laissez-faire capitalism at its finest. A corporation operating with limited liability provided by a government intervention in the “market” is given a monopoly through patent protection (another government intervention in the “market”) provided by the same government, combines with totalitarian regime that “invests” the savings of its citizens in the “capitalist marketplace” to increase exports to the “international free marketplace” by maintaining an artificially low exchange rate. So the real competition now becomes which country will allow the greatest exploitation of its workers, all in the name of entertaining those in the world that can afford it at the lowest possible cost to them. Thus we have raised the bar for our “job creators”: who can beat the $400,000 profit per employee record? If those employees living in company dorms are only working 12 hour days, 6 days a week, they still have a lot of free time so there’s plenty of room for “improvement.”

    It seems to me I’ve read most of this story many years in a book by Upton Sinclair called “The Jungle.” Back to the future.


  5. Jarrett says:

    Why is this issue never mentioned by politicians of either party in America?

    Why do we let “globalization” reduce “standards of living”?

    How can I ever buy another Apple product when I hear that nets have been installed at their factory to cut-down on suicide jumps from the roof?


    • perplexed says:

      They are both funded by the monopoly profits they legislated into existence and protect with a vengeance. 100% public funding of campaigns is a must. We must restore and protect the relationship between our representatives and the voters. If representatives lose their jobs by voting in the interests of their constituents instead of voting in the interests of their campaign funders, we have a democratic republic in name only. We put our legislators in this conflicted position by allowing this to continue. There’s really not much question about who is ultimately responsible in a democracy.


  6. Michael says:

    Conservatives like it when Americans can’t afford to raise their kids. That’s the issue we need to take on — it’s not just that globalization makes the destruction of the middle class an option. It’s that the US conservative movement has been so united and relentless in its pursuit of that option.


  7. George Jones says:

    Jared,

    I live in Kendall County, Illinois. I am going to give you some facts … then ask a few questions about what you suggest for our Local Economic Development.

    * Kendall County is about 45 miles southwest of Chicago and 1 of the counties in the 7 county Chicagoland Metro Region.
    * We experienced a population growth rate of 110% between 2000 and 2010 and now have a current population of about 114,000.
    * There are about 25,000 Jobs in Kendall County: 20% Goods Producing Sector; 60% Service Providing Sector; 20% Public Employee Sector.
    * Our largest employer is Caterpillar with 2500 jobs … 10% of jobs within the county.
    * Overall Kendall County has a workforce of about 60,000 persons … 6,000 / 10% are unemployed. 60% of our workforce work outside of Kendall County.
    * In Oswego, IL where I live this is how the Property Valuations breakdown: 84% Residential; 15% Commercial; 1% Industrial. Our property taxes are in the top 3% of all US Counties.

    ? What Industries do you suggest our Economic Development people target?

    Please kindly also reply jonesge (at) yahoo.com


  8. greg hargis says:

    “But at the end of the day, there is simply no app that replaces watching your kids play soccer on Saturday.”

    Great line Jared.


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