Tim Cook
Today's news from Tim Cook that Apple is bringing some Mac manufacturing from China back to the United States is encouraging for the first reason you'll think of: it's a tentative move to disengage from appalling labor practices at the company's Chinese contractor, Foxconn, that tether anyone who owns an iPhone back to the developing world economy heart of darkness. But what does it mean for the American economy? For years, we've been told that the migration of manufacturing offshore is an economic inevitability, the result of ironclad laws of trade, labor and capital. Steve Jobs himself said of the China offshoring: "those jobs aren't coming back."
But what if those assumptions are wrong? For some valuable background, I recommend my friend Charles Fishman's excellent piece on the insourcing trend in the current issue of The Atlantic. It suggests that moves such as Apple's are more than just post-crash green shoots, replacing lost jobs with new ones, but a genuine shift back to U.S. manufacturing with concrete – and previously unrecognized – advantages.
Fishman focuses on another, equally surprising, insourcing story: over the past year, General Electric has revived its principal U.S. appliance manufacturing facility, a huge complex in Louisville, Kentucky. During its height in the 1970s, GE's Appliance Park employed 23,000. As of last year, that number had plummeted to 1,863. As recently as 2008 GE CEO Jeffrey Immelt was looking to sell the place. But then GE decided to start manufacturing appliances again, invested $800 million and started hiring. By the end of 2012, the number of employees will have rebounded to 3,600, with plans for more.
There are many reasons for this reversal: domestic energy costs are falling and Chinese labor costs are rising, for instance. But the crucial element may be that, in contracting manufacturing out to Chinese factories, GE lost control over, and input into, the foundation of the manufacturing process, the assembly line. The developing world factory became a distant "black box" where U.S.-based corporate designers and engineers sent their specs, without knowing or caring how the product was made, as long as it came out OK.
Turns out there are many hidden costs to this setup. Fishman describes how a GE team tore down the product they were planning to manufacture at Appliance Park, the high-tech GeoSpring water heater:
The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville.
In the end, says Nolan, not one part was the same.
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
This is interesting, as Fishman notes, because it suggests that the rush to offshore over the last decade may be more of a fad than the result of immutable laws of comparative advantage. Everybody was doing it, and on the surface it helped the bottom line. But it also introduced so many unknowns into the manufacturing process that, for some, supposed advantages may turn out to be fleeting. It's not clear yet what Apple's reasoning is for making Macs in the U.S., but its a good bet that, for a company obsessed with design and quality control, proximity and the ability to manage every aspect of the manufacturing process will yield economic benefits.
The U.S. is never going to be the manufacturing powerhouse it once was. (Or rather, manufacturing will never employ the numbers it once did.) But perhaps we're not doomed to a McDonald's-and-Starbucks economy either.
Update: Even Foxconn is now jumping on this bandwagon. Not sure how that's going to work.
Follow me on Twitter or Facebook. My Forbes blog page is here.
