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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; }
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.
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.
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!
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.