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Tech Manufacturing Is a Disaster Waiting To Happen
Hugh Pickens writes "Peter Cochrane writes that since globalization took hold, geographic diversity has become distorted along with the resilience of supply so we now have a concentration of limited sourcing and manufacture in the supply chain in just one geographic region, south-east Asia, amounting to a major disaster just waiting to happen. 'Examples of a growing supply-chain brittleness include manufacturers temporarily denuded of LCD screens, memory chips and batteries by fires, a tsunami, and industrial problems,' writes Cochrane. 'With only a few plants located in south-east Asia, we are running the gauntlet of man-made and natural disasters.' Today, PCs, laptops, tablets and smartphones are produced by just 10 dominant contract manufacturers, spearheaded by Foxconn of Taiwan — which manufactures for Apple, Dell, HP, Acer, Sony, Nokia, Intel, Cisco, Nintendo and Amazon among others. The bad news is that many of the 10 big players in the IT field are not making good profits, so economic pressure could result in the 10 becoming seven."
You forgot to mention floods, like what happened in Thailand last year, and could possibly happen again this year.
#naabhaprzrag, #sverubfr-000, #agi-fcbafberq, negvpyr[pynff*=' negvpyr-ary-'] { qvfcynl: abar !vzcbegnag; }
Not just technology, this is more a phenomenon of globalisation if you ask me. The consumer is willing to save 3.2% on something at a macroeconomics level in spite of it's own industries because the apparent value on diversity in the supply chain and having local within-jurisdiction industry is practically zero. I'd love for someone to show me otherwise though as it's depressing.
It's almost an irrelevant question as the real reasoning behind it means that a CEO can put more money in his/her pocket. The entire decision process is about how much money they can get their fat greedy paws on RIGHT NOW. The fact that it could all fall down tomorrow doesn't come into the equation. This is yet another corporate culture problem.
The prices for the consumer could stay the same. It would cut Apple's profit margin from "obscene" to "above average" however.
People not being able to get the latest TV / MP3 / phone / iwhatever isn't a disaster. It would be bad for business and I can see how the resulting unemployment will be awful for those people; but they'll have lost more than that locally should this happen. So apart from the Disaster that causes the "disaster" I don't think I'll worry too much.
I recall something about putting all eggs in one basket being a bad thing.
When China's bubble bursts - and it's a 'when', not 'if', everybody in the world who shovelled their manufacturing there b'cos it is cheap are going to have a major meltdown in their hands.
That's not necessarily so. A recession would mean cheaper capital and labor which is an advantage for export oriented businesses. A meltdown due to the Chinese government going crazy and/or klepto could drop those businesses in their tracks.
This is precisely why my company does R&D and Manufacturing in the same location - right here in South Carolina. If we have a manufacturing problem, I can take a walk to the other side of the building from my office in R&D and help them fix it - right now.
No waiting for a convenient time for a world-wide conference call where nothing gets done and my instructions are misunderstood by someone who doesn't speak much English.
It's all coming back to this, now. My previous employer did the globalization experiment and realized it is a miserable failure. But, they couldn't abandon it because of the "religion" of globalization. Guys who graduated Harvard Business School with a Masters in Excel Spreadsheets infect the boards of large companies and insist that globalization results in higher profits, and it doesn't.
We make so much money it's almost disgusting. I have a pretty much unlimited budget for lab equipment and investigatory activities, and we engineer some pretty awesome stuff as a result of having the time and money. The 15 hours/week I _don't_ spend on frustrating conference calls with Asia is time well-spent inventing Cool Stuff(TM).
Redundancy costs money. So the real question is: "Are customers (consumers) willing to pay?"
Or perhaps a better idea is: You will pay either way. Chose: (1) Pay money now for redundancy and a guarantee of supply; or (2) "Pay" later through the unavailability of products.
The better question is how much more would they cost if we were paying the true cost of manufacturing, regardless of where it is being made...
Apple's profit margin: 29.66%
Exxon's profit margin: 7.62%
Oil and Pharmaceuticals might have larger profits in absolute terms, but that's because that have a much larger customer base. When it comes to profit per unit sold, Apple blows just about everyone else away.
China is ALREADY full-blown klepto. They have a major deep-seated cultural problems where their only morality is getting rich, no matter how much damage they cause or how many people they hurt.
See a recent article on the Bronte Capital blog, "The Macroeconomics of Chinese Kleptocracy".
http://brontecapital.blogspot.co.uk/2012/06/macroeconomics-of-chinese-kleptocracy.html
To be fair, it's no worse than our own feral and out-of-control overclass here in the West.
If you absolutely HAD to spend billions in stimulus money, this situation would be perfect. Create a consortium with the major manufacturers and have the feds build a memory/hard drive/LCD plant(s) here in the states, absorbing all the capital costs (a pittance, compared to the over all stimulus bill).
The consortium would run the plant(s) and probably be competitive with overseas plants because they won't have the burden of the initial capital costs.
Of course, details, details, details but this approach would make sense in many industries.
When Fascism comes to America, it will call itself Anti-Fascism, and tell you to give up your guns.
It's almost an irrelevant question as the real reasoning behind it means that a CEO can put more money in his/her pocket. The entire decision process is about how much money they can get their fat greedy paws on RIGHT NOW. The fact that it could all fall down tomorrow doesn't come into the equation. This is yet another corporate culture problem.
Well said and accurate.
Further examples are becoming painfully obvious by observing--
- The term of many CEOs, and other executives, particularly hi-tech
- The so called "golden parachutes" that many receive
- The fixation with stock market values to the point that they have more to do with the weather than the financial health of a company
The incentive structure for executives is tied to stock prices today, the theory being that:
- A financially healthy and well run company has an appreciating stock price
- Stocks are longer term investments, so it creates an incentive to build a long term profitable company
But we've got the whole thing distorted now...
This idea that we can't "afford" to make anything here anymore is ludicrous. For decades we managed to do so just fine, during our boom years of 1945-1980, when most everyone that was willing to work could find a decent paying job that afforded them a living wage. My grandfather drove a truck for a large portion of that period and was able to make enough money to buy a modest house, get a new car every couple years, support himself, his wife, and their four children, pile said kids into the woodie every summer for a road trip/vacation, and put something away for both his retirement and his kid's college educations. He didn't even get a high school diploma until his later life, having dropped out to enlist and do his duty.
What I want to know is what happens when even China isn't cheap enough to prop up those hyper-inflated executive salaries. What is the next area we're going to be exploiting? Africa, probably. Hell, all they'd have to do is not be murderous blood diamond warlords and the African people will probable weep tears of joy at the opportunity to poison themselves and their environment for 3 cents a day, and the "job creators" will talk up how goddamned benevolent it all is. By that point the US economy should be thoroughly dead and they'll just bring the sweatshops back home, and we will weep our own tears of joy at the opportunity to be slave laborers...
I don't agree with everything that Michael Moore says, but on CNN one time he had a very important point.
When GM was doing well it was making something like $14 billion a year. Yet they were still laying off workers. What is so wrong with making $13 billion a year and keeping the workers, especially those that gave a significant part of their lives to that company.
There is no incentive for a corporation to treat its workers with respect. The unions gave that incentive but their own decadence has greatly ruined their own power. Couple that with the fact when you put in huge golden parachutes and pay millions of dollars to upper management a year there is no incentive for them to care if the enterprise is even there after they are gone. If a huge cluster-fsck.
In 2002, for example, the top 10 drug companies in the United States had a median profit margin of 17% ( http://www.cmaj.ca/content/171/12/1451.full ).
Just to give an idea. 'Obscene' seems appropriate.
CC.
TaijiQuan (Huang, 5 loosenings)
Not to mention the fact that, oh let's say there was a crash in every consumer-oriented supply chain next year...
The majority of end-users and consumers won't REALLY be on the hook for about 5 years, at which point in time, we'll all come to realize that we never actually even needed 64GB of RAM, 25TB hard drives, 96 core 233GHz CPUs, 10 exabit network cards, 65536px wide by 36864px high flat panel displays, and that we were able to "limp" along with our crappy, dumpy 16GB of RAM, 2TB hard drives, 4 core 3GHz CPUs, gigabit network cards, 1600px wide by 900px high flat panel displays, all of which are probably lasting well beyond the manufacturers warranties once we start actually caring for them as if we had to buy new ones for $1,000...
Oh boo-hoo!
In the "olden days" you never bought products that were only available from a single source. If the manufacturer did not license the technology to someone else, you did not buy it and in order to maintain this situation, you bought from both (all) suppliers in inverse proportion to their prices.
Sent from my ASR33 using ASCII
The Marianas Trench is just east of Shanghai along with Taiwan plus even Japan.
Pacific Rim countries are going to be continuously in the threat corridor of Tsunami risk area because of that trench and many others from Chile to the Aleutians at the northern edge near Alaska and Siberia.
Walmart actually though is the first company that such a Tsunami hit reaches the stock price. More than high technology, the trade curtailment from the one port most likely to sustain or protected is Hong Kong. But that port alone cannot handle the volume of China. Nor can we assume that it will be totally protected by such an event despite the natural level or protection being higher than most world ports.
The port of New York is also another one of concern with La Palma off the west African coast potentially creating a 30 meter wave that would inundate the United States east coast is a geologically proven.
http://www.aisnota.com/slashdot/ Welcome to Logic and the Future
It isn't a single-source, it is multiple sources in a single geographic area.
These technologies are licensed, but manufacturing facilities are incredibly expensive to set up. Consequently, they are in areas where the shipping costs of individual components is cheapest at an aggregate.
A manufacturing facility for something like an iPad in the U.S. would still be shipping all the parts from SE Asia because the vast bulk of the supply chain just doesn't exist here anymore.
Learning HOW to think is more important than learning WHAT to think.
It's almost an irrelevant question as the real reasoning behind it means that a CEO can put more money in his/her pocket. The entire decision process is about how much money they can get their fat greedy paws on RIGHT NOW. The fact that it could all fall down tomorrow doesn't come into the equation. This is yet another corporate culture problem.
I won't dispute that. But it's not the only factor involved, and it's as much a symptom as it is a disease.
Throughout the 20th Century the emphasis was on efficiency. First we replaced individual start-to-finish craftsmen with stations on an assembly line. Then we focussed on Economies of Scale, amagamating and merging. Then we added automation. Then went back and replaced people on the assembly line with robots. Finally, we wrapped up the century by developing an ever-expanding suite of business analytics tools. It wasn't quite as tidy and sequential as this, of course, but that was the general trend.
The end results were very efficient indeed. Instead of many factories and offices clanking and banging along, you end up with a few hyper-efficient factories and offices, all running at high speed and in precise tune. Leaving lots of profits for the executives and shareholders and Lower Prices Everyday for customers.
Until they don't.
The downside of efficiency is that it has no "wiggle room". The only direction you can go is down, and the more finely-tuned your processes are, the bigger the chance that a relatively small kink in the tracks can derail the whole high-speed train.
Floods are bad enough, but they're only one possibility. If you concentrate your resources enough, even a really low-probability limited-scope event like a chunk of space debris coming through the roof can have a major impact. No pun intended.
Sometimes being too efficient isn't so good.
It is pointless to just look at those decades. Between the Great Depression and WWII, there were 15 years where nobody bought anything. By the end of WWII there was a huge pent-up demand for things. Add in all of the people now wanting to start a family, and you have even more demand for housing, cars, furnishings, clothing, appliances, etc. Now add in the fact that people were coming back from the war with money, and people were willing to give cheap credit, and you have a huge manufacturing boom.
However, a lot of the seeds of a future downturn were sowed during that time. For instance, steelworkers, angry that their wages were frozen by the government during WWII, even though the company made a ton of money, staged a lengthy strike to force the companies to give them their due. While in the short term they were successful, in the long term they failed miserably. The long strike forced customers of the steel companies to get steel from elsewhere (like Asia), and they found that while the quality was not very good, it was incredibly cheap. As time went on, the price of steel manufactured in the US kept going up (due to the contracts that ended the strike), and the Asians got better at making steel. As a result, all of the customers switched to Asian steel, and the US steel companies either ceased to exist altogether, or are only a small fraction of what they used to be.
Lastly, things like environmental laws (which did not exist until the 1970s) have a huge impact. In the US, when an electronics manufacturer pollutes the groundwater, they are made to clean it up, and a huge cost. No so everywhere else in the world.
Like sugar, steel and automotive manufacturing for instance? The "start" happened a while ago, and each of those industries I've mentioned have suffered or caused problems that are directly due to them being protected. Uncompetitive steel prices moved manufacturing offshore, a protected car industry produced almost unsellable crap even when overseas branches of the same companies were making quality designs and local sugar priced itself out of the market so the USA got twice as fat on corn syrup as it would have on sugar.
It's not just about getting others upset. It's about shooting yourself in the foot.
Lastly, things like environmental laws (which did not exist until the 1970s) have a huge impact. In the US, when an electronics manufacturer pollutes the groundwater, they are made to clean it up, and a huge cost. No so everywhere else in the world.
I'm hoping that I'm not picking up criticism of our environmental laws. There are numerous examples of what happens when there are no regulations concerning pollution. The only reason why these consumer goods are so cheap in China and elsewhere is because we've externalized all of these costs to societies where the average citizen has no power whatsoever to do anything about it.
If the U.S. enforced labor and environmental standards with its imports in the same way it regulated domestic production, we wouldn't be in this mess right now. The only reason any of that offshoring bullshit is possible is because we allow it to occur. The race to the bottom is completely unsustainable. Like I said, what happens when even China isn't cheap enough to manufacture our consumer crap? What happens when oil finally gets so scarce that the cost of bringing the shit here is prohibitive in itself? I refuse to believe that the only answer is "Well, we'll just have to get over this whole "clean air, land, and water thing, and be willing to work like a slave laborer" and that's precisely what I keep hearing needs to happen, especially by people that are financial secure enough that their own existence won't be tainted by that bullshit.
Oddly enough in a post above (about protectionism) I pointed to protectionism as being the reason US steel companies were so complacent and failed to compete - it's the textbook case for that - but here I see you using it to blame those greasy working class people or something!
I suggest you look into the barriers to importation of steel into the United States so that you can learn that your above anecdote is nothing but partisan bullshit. Call me whatever names you like in return - I'm one of those nasty foreign people that was making steel that the company I worked for wanted to export to the USA in the early 1990s but couldn't.
why is today any different?
Because decades ago, the need for computers was limited to a few large companies. Today, it is very hard to live well as an individual in a western democracy without a computer.
The difference between filing my taxes online and having to do them on paper is about GBP600 per year. Renewing my tax disc on my car and my bike takes 10 minutes on the internet vs 1 hour in the local post office at lunch time. Being able to buy goods online increases where and how I can spend the extra disposable income that the savings give me, thus stimulating the local economy. Maps, communications, the list goes on.
Wait, when did we start talking about MBAs and C-level executives?!
- chrish
While we certainly could refuse to trade with places that don't follow our ideas of what is important, the problem is that other countries are also free to expect us to meet their idea of what is important.
The free market at work. If we do not meet their expectations, we do not need to have a business relationship with them. I see no issue there.
I know that is a simplistic view on the matter, but when you get right down to it, it's an ethical choice, and we're becoming, as a culture, pretty damned unethical when it comes to acknowledging these ancillary costs to externalization. It seems like a sizable number of people in this country couldn't give a shit less if Chinese people are flinging themselves off of buildings due to their dreary work conditions, so long as they're able to save another $20 on their fucking iPad. If those conditions were present here the public would be in an uproar...but it's out-of-sight, out-of-mind. Add in a helping of "as long as I'm not the one forced to work in those conditions I could give a shit less" that's so pervasive nowadays and I really don't see how we're going to pull ourselves out of this feedback loop. It's like everyone can see the writing on the wall, but they just keep on shopping at Walmart, buying foreign-made goods anyway.
It almost reminds me of the behavior of an abuse victim, to be honest. We know rationally that we're being abused, but don't know any other way to live so we just come up with excuses to justify it. "We have to relax our labor regulations, because if we don't they'll just send the jobs to China!" "We have to relax our environmental standards, because if we don't they'll just send the jobs to China!" It's like a fucking afterschool special about abusive relationships: "I have to have sex with my boyfriend, because if I don't he'll just leave me for some other girl who will!" When does it all end?
There are thing we can afford making, and there are others that we cannot (unless we change the nation's ethos with its hunger for the cheapest deals.)
But those 'cheapest deals' are artificially cheap, that's the problem. They're not based on actual cost because they ignore things like pollution and societal problems in 3rd world nations that result from externalizing these costs.
It's pretty much nothing but dumping on a global scale. We've addressed these issues before in the U.S., and have taken steps to combat it in the past, but it seems like once labor became the commodity being dumped, and not its resultant products, everyone become either blind or ignorant to it. At least, the people that actually have the power to change things (consumers).
If we taxed goods at a rate to reach parity with their actual cost of production, to include cost of future environmental clean-up, the human rights violations, etc, would it really be that much cheaper to produce it in China than to make it right here, at home, even with U.S. labor and environmental regulations? I seriously doubt it. As a country we really need to get our heads out of our asses on this point, because like it or not these costs are going to eventually effect us. If China is dumping toxins into their environment at record levels to ensure they're able to maintain their grip on our business contracts, those toxins are eventually going to migrate into our own environment. We can't escape it...all we can do is kick the can down the road for another generation and leave it for our kids to deal with. I mean, Jesus Christ, we have to be more enlightened then that, it's the 21st century for fuck's sake.
Actually, we're seeing the first stage of Replicator Technology, aka digital copying, and look at the absolutely thundering effect of the affected industries. In a way, Star Trek was sweet, because I actually recall very few lawyers were ever parts of the plots. Today, it would be more dystopian, with a Copyright Infringement SWAT teams. "Someone copied a Justin Bieber song. Alpha Force, Move Out! Go Go Go! GET the Terrorist Sonofabitch!"
My first Journal Entry ever, in 8 years! http://slashdot.org/journal/365947/aphelion-scifi-fantasy-horror-poetry-webzine
The beauty of capitalism is that we don't have to come up with the jobs that these newly unemployed will have to do, they will figure that out for themselves. The only way that automation can replace people is if it is cheaper than people. There will come a balance from wage reductions in which automation is no longer profitable, people will still find work. With the reduction of costs from automation the price of commodities go down, that means people will still be able to buy what they need to live even with the reduced wages. These people might not be living the high life but they will still live better than you and me. I say that because the advancement of technology has historically improved the lives of even the poorest of people. The so called "poor" of this country have refrigerators and microwave ovens. That's because such items are so cheap that I was able to get two of each for free recently only because the prior owners wanted something "better", not because they were broken.
Barring some technological quantum leap in which we create robots as capable as any human we will still need people to perform certain tasks. People will be reluctant to have a robot watch after their children for example. We'd still need police officers, lawyers, medical technicians, truck drivers, and all sorts of tasks where lives could be put at risk because of a malfunctioning machine. We'll need people to watch over the machines, build the machines, care for the machines, and install the machines.
If we come to a time where nearly all physical labor is unnecessary then I don't see people starving because they cannot find a job. I foresee a near utopia where items of all kinds are plentiful and cheap. People will buy this stuff through acts requiring certain skills or talents, engineers, physicians, lawyers, entertainers, and religious ministers. People could also buy stuff by just selling the excess from their personally owned machines to others. Someone with extra solar panels could probably sell enough electricity to live a comfortable life. These people might not go on extravagant vacations, but by spending wisely and doing their own home repairs they would have food, shelter, clothing, and entertainment.
Assuming everyone has their own "makerbot" that can make anything they need then all one needs to survive is one makerbot, energy, and raw materials. Energy could be from the sun, wind, pedal bike, running water, petroleum, nuclear reactor, or whatever. The raw materials could be just the air. The "job" of these people would be to keep the makerbot running so they can live. They'd search out the energy and raw materials to keep the bot running. If they can do that then they can live a life approximating permanent retirement.
This would be the futuristic equivalent of the subsistence farmer. Instead of a garden, cow, and coop of chickens the person would have a makerbot, solar panels, a windmill, a garden, and maybe even a coop of chickens. I see the future as very bright. We will always have the poor, nothing we do will eliminate all want in the world. People will find work if allowed the freedom to do so. If there is mass homelessness, widespread starvation, and extreme unemployment then what we have is a lack of freedom. Compare North Korea to South Korea, very similar cultures, people, climate, etc. and yet one has all the problems you describe and the other does not. That's because one nation is free and the other is not.
I am armed because I am free. I am free because I am armed.
The difference is quite simple, Americans and Britons think it is "all about money". At least they did in the auto industry. In Germany, there is more than money involved in the car business. Boys become engineers because there is a long tradition of craftsmanship, because their fathers show them all sorts of ancient and current locomotives, aircraft and so on. VW's long-term CEO Ferdinand Piech has an aeronautical engineering degree, which is much harder than mechanical engineering. So he has the best education you can get on earth for making cars (and many other machines). Compare that to the GM CEOs, who are all Master-Beancounters. Their cars are consequentially crap and rational buyers go for German or Japanese cars, even if their purchase cost is higher. TCO will certainly be better, as VW cars normally just don't break (except for regular wear and tear).
A marginally more realistic, but just as paranoid scenario: If everything's made in one region, there's essentially one gateway and therefore anyone interested in rigging the market value need turn but a single tap.
Alternative: If everything's made in one place, with few-to-no fab plants elsewhere, then one region has ALL the expertise and experience. The lack of alternatives mean that the manufacturers can dictate R&D and the future direction of the markets. Once skills elsewhere have rusted sufficiently, no rivalry will be possible.
Alternative: By concentrating development of a critical component of modern systems, the region has the power to "selectively" distribute produce according to who is friendly and who isn't. They get to play kingmaker as the various economic powers work out what they're wanting to do.
It's a small world and it smells funny; I'd buy another if it wasn't for the money; Take back what I paid (SoM)