Out(In!)sourcing and the Plastic Law of Wages

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by Lindy Davies

The December issue of Atlantic magazine offered two long articles on how and why manufacturing jobs are — amazingly — starting to come back to the United States. Perhaps they aren’t coming — yet! — in sufficient numbers to solve the domestic jobs crisis. But, James Fallows and Charles Fishman report that the trend is growing, and there are some pretty strong indications that it will continue to do so.

In his article “Mr. China Comes to America,” Fallows reports on his visit to one of China’s hugest factories, the Foxconn complex, “where some 230,000 Chinese workers, mainly between the ages of 18 and 25, turn out products sold under international brand names, from Apple and Dell to Nintendo and Sony.” Though his access to the plant was closely managed by his Chinese hosts, Fallows’s impression was that these “Dark Satanic Mills” are less reminiscent of William Blake’s, or even Upton Sinclair’s — than the conditions in Henry Ford’s plants, ca. 1914. (To see truly hellish working conditions, he says, one must go outside of major cities.) Nevertheless, every building over five stories high at the Foxconn complex is ringed with netting, about 20 feet above the ground, to catch suicides, which had been a serious-enough problem to make the nets a good investment. Employee turnover at this state-of-the-art electronics manufacturing facility stands at a staggering 60%. Henry Ford faced similar levels of turnover in 1914, and that was a major factor in his decision to raise wages to about twice the current market rate — thus starting a trend toward large numbers of workers who could afford to buy the products they produced.

Suicide nets at Foxconn.

If working at the Foxconn plant is such a bummer, why do thousands and thousands of Chinese worker line up for job openings there? One strong reason, Fallows discovered, is that unlike many other employers, Foxconn is known for paying wages on time. At many Chinese factories, workers may well get IOUs.

Wages are rising at Foxconn and other similar Chinese manufacturers. But, obviously, this isn’t because of any shortage of available workers. It’s simply because better-paid workers tend to quit less often, and waste less time trying to leap out of windows; increased efficiency benefits the bottom line more than lowest-priced labor.

Back on this side of the Pacific, Fallows visited some innovative California start-ups that literally didn’t have time to outsource their manufacturing. One was a company that makes Ipad accessories. For them, it was absolutely essential that they get their hip new products to market within a very short time-window. Using 3-D printing technology and local manufacturing allowed them to exploit their time advantage, and build a brand name. This new technology enables a drastic reduction in the time between idea and finished product — so much so that the time needed to set up production overseas, and ship goods back home, becomes a liability.

Other powerful trends are encouraging manufacturers to take new looks at making things here in the US. Fishman’s article reported on the reversal of fortune experienced at General Electric’s huge, nearly-defunct “Appliance Park” in Louisville, Kentucky. The facility employed as many as 23,000 workers in the early 1970s, but by 2011 its number of hourly workers dwindled to 1,863.

Since then, however, the plant has been growing again, and the reasons why are fascinating. GE had been making its GeoSpring energy-saving water heater in China, but in 2009 it decided to try bringing it home, to an abandoned assembly line at Appliance Park. When engineers examined the GeoSpring heaters with an eye toward designing the line that would build it, they found that it had been designed — by engineers based in the US — in ways that made it quite laborious to actually build. According to Fishman, this was like “writing a cookbook without ever cooking.” Chinese workers had been given the design, and, at a very inexpensive per-hour rate, had built the thing. But the American engineers, when faced with the challenge of creating a line to build it here, went back to the drawing boards and redesigned the product, from the inside out. They set up an efficient line and built a GeoSpring water heater that retailed for $300 less than the Chinese-made unit, and had higher energy efficiency.

Flush with this success, GE looked at a dishwasher assembly line that was exceedingly long and cumbersome. The workers themselves were told to devise and suggest ways to increase the line’s efficiency — and they were promised that no one would lose their jobs because of it. The outcome was that GE could now produce the same dishwashers with 30% fewer workers than before. Because these workers were promised they could keep their jobs, they were assigned to choose an outsourced component of the dishwasher to build at home. They chose the user-interface panel on the door — and devised a way to produce that in Kentucky, at substantial savings.

Fishman lists these reasons why it is probable that manufacturing will increasingly turn back toward the United States:

  • Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
  • The natural-gas boom in the US has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the US)
  • In dollars, wages in China are some five times what they were in 2000 — and they are expected to keep rising 18 percent a year.
  • American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005 — and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
  • US labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing [low] wages anymore.

Without question, these are welcome developments — and it’s tempting to look at this as if it were an ineluctable trend that needs no help from anyone. Perhaps this is the real 21st-century capitalism? Before we break out the champagne, though, we should remember some other relevant factors:

  • The US unemployment rate still hovers around 8%, and even if the economy were to fully recover it would scarcely dip below five per cent, which surely has much to do with the changing priorities of labor unions.
  • To date, the trends and innovations discussed in these articles have created relatively few jobs in the US (though if they represent a viable trend, numbers will go up). Foxconn still employs 230,000, and applicants are still queueing.
  • Many low-tech goods, such as clothes and low-cost furniture, simply will never be made in the United States under current international conditions, no matter how efficient production becomes. Producing in extremely low-wage countries will just be too attractive.
  • The United States still operates a tax system that raises the cost of hiring labor and producing goods, and rewards sprawl, and unproductive holding of resources.

In fact, highly-developed areas, with literate, skilled labor forces, have always been friendly to highly innovative manufacturing; this is just the latest iteration of an ages-old dynamic. Why are we suddenly surprised to see manufacturing jobs returning to America? Could it be because this country’s economic policies, for a very long time, have seemed designed to drive them away?

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