Does the U.S. need factories to be an economic power?

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I recently had a fascinating conversation with Hartmut Jenner, CEO of a German firm named Kärcher, which produces very high-quality cleaning equipment. Kärcher is a prime example of those mid-sized, extremely competitive manufacturers that are the backbone of Germany's export sector, the part of the economy that drives the nation's growth. Companies like Kärcher have done an excellent job of keeping their edge over rising competitors in low-wage, industrializing countries like China, and have managed to keep a good chunk of their factory production at home in high-cost Germany. Jenner has some strong feelings about the U.S. economy. Companies in America, he believes, have moved so much production offshore to China and other low-cost countries that the U.S. is losing its ability to manufacture. Here's what he told me:

I have some fear that (Americans) are losing their capability for mechanical manufacturing. I'm very scared. The physical skills are missing to manufacture. This is not a joke. That's not good for a country. The U.S. needs a mechanical base again.

Passionate stuff. His thoughts echo those of many in the U.S. who worry about the potential damage done to America's future by the loss of factories to a rising Asia. But is Jenner correct? Are factories a necessary requirement for national prosperity in an advanced economy like the U.S.? Or is that an old-fashioned concept, out of step in this age of global production networks, instant communications and competition from emerging economies? I'm going to offer up a counterpoint: A nation today doesn't need to have its own factories to be an economic power, even a manufacturing power. Here's what I mean:

The notion that the outsourcing and offshoring of American manufacturing would come to destroy the U.S. economy is not a new concern. Akio Morita, the co-founder of Sony, made this same point back in the 1980s, when the U.S. was scuffling with a rising Japan. Americans, he warned, “make money by ‘handling' money and shuffling it around instead of creating and producing goods with some actual value.” That problem may seem more true today than ever, as the meltdown on Wall Street raised serious questions about the viability of growth based on services, and especially financial innovation. (The collapse of Ireland offers even more evidence.) Perhaps Jenner and Morita are right. Americans have to get back on the assembly line, manufacturing cars and electronics and airplanes rather than financial instruments if the economy is going to thrive in the future.

Or perhaps not. The alternative argument is that the real value in manufacturing may not be in the production process anymore. Let's look at Apple, for instance. Here's a firm that is essentially a computer and consumer electronics maker – that doesn't make very many of its own products. Apple owns one factory (in, of all places, Ireland), but outsources “substantially all” its manufacturing to other companies, as an Apple spokesperson wrote me. And what impact has that had on Apple? Not much, it seems. Apple is one of the most influential companies in the world, with a stock price that is currently around an all-time high. That's because the real value in Apple's products can be found in the design, technology and branding, not in the process of physically screwing them together in a factory.

That becomes even clearer when we look at the companies that actually make Apple products. Take, for example, Hon Hai Precision Industry, a Taiwan-based giant that manufactures computers, mobile phones and other gadgets for a who's-who of international brands. Hon Hai runs a perfectly profitable, successful business, but it isn't benefiting quite as much from making the iPad as Apple has from designing and marketing it. Hon Hai's stock is well off its 52-week high, and its chairman recently said he had sliced the firm's annual revenue growth target to 15% from 30%.

The problem with being a firm like Hon Hai – which focuses more on the manufacturing process rather than the branding and innovative aspects of the business of making products – is that it lacks pricing power. The no-name manufacturers of Asia are constantly seeing their profits squeezed by their customers, who can outsource production to any number of eager factory owners. A company like Hon Hai likely has more leverage than many others, since it is so exceptional at what it does. But companies that primarily manufacture are always more vulnerable than those which control the brands, technology and designs.

That's why manufacturing companies across Asia are trying to follow the Apples, Sonys and H-Ps of the world, to expand out of making stuff into the more profitable realms of branding and design. South Korean electronics companies Samsung and LG have greatly enhanced their influence in the world economy since they developed powerful and well-known brands, and the well-designed products to match. Taiwan PC maker Acer used to manufacture computers for itself and other firms, but not anymore. Now Acer focuses on PC design and marketing. The company spun off its manufacturing over the years and now outsources 100% of its production. But that hasn't hurt its fortunes. Acer has gorged on market share in recent years, racing up to become the No.2 brand in the world, even though it doesn't produce one of its own computers.

From this perspective, the real value of manufacturing in today's economy can't be found on the assembly lines. Manufacturing has become somewhat of a commodity – lots of factories around the world can make a perfectly good mobile phone or PC. But not everyone can design an iPad or develop the applications for it. That innovative process at the heart of manufacturing hasn't been commoditized, and can't be. That's where a high-cost but creative economy like the U.S. can maintain its advantage over the rising manufacturing powers of the emerging world.

That doesn't mean the U.S. should close all of its factories tomorrow. There is still a ton of room to compete in manufacturing industries that require a great degree of skill and technology. (Germany's manufacturing sector has excelled in that regard, but that's the subject of another post.) What I do believe, however, is that the advanced economies place far too much importance on the role of factories in their future competitiveness and growth.

There are some serious implications of this thinking. The loss of manufacturing does mean the loss of certain employment opportunities, especially for semi-skilled workers. It also means that the U.S. has to devote much greater resources to education, to produce the kind of creative, skilled employees who can design the next iPad rather than manufacture one. Perhaps the U.S. would have been better off using the billions to bailout General Motors to bailout the nation's struggling schools. Or instead of continuing tax breaks for the rich, who can afford to send their kids to elite boarding schools, we should divert more tax dollars to smart but needy children so they can excel and contribute to the national economy. The U.S. has to wake up to the reality that the classic industrial age is coming to an end for Americans, and they have to prepare better for the new age, in which creating stuff means a lot more than building it.

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The first thing, that came to my mind, when I reached the middle of the article, is why he equates a state to a company without drawing at least basic distinction. The problem I have with this idea, is that unlike a company, a state's primary responsibility is not just to maximize overall benefits, as shown in GDP/profits, but to ensure social stability, cohesion and survival of the society. And this is where the writer seems to be completely oblivious of the fact - so 'certain employment benefits' are lost, so what. Who cares about the 'semi-skilled', who make up the overwhelming majority in every nation? Let's invest more money into arts lessons at school and become a nation of creative iPod designers!

And that's where the second problem arises - the author seems to be completely oblivious of the fact, that there's such thing as 'market volume', which is also applicable to job market. You can't have 300 million designers, because there are simply not enough goods to offer enough opennings. Such supplementary creative jobs have always been miniscule in number, when you look at the whole production process and the amount of people involved and jobs created, especially when dealing with massive production of hi-tech equipment, involving thousands. Thus such an approach would open door to massive unemployment, which will make current employment levels look terrific in comparison. Evidently feeling, that something is wrong here and he's not quite on the right track, that author tries to save his argument by introducing a false dichotomy: its either jobs for the creative elite with everything else outsourced to China, or its billions pumped into General Motors in a bailout attempt simply to keep people working for the sake of keeping people working, regardless of the fact, whether their jobs actually make any real economic sense or not - just to keep unemployment numbers at acceptable levels by essentially.

It is evident, that the second option is ridiculous and unfair - a state, that thrives on robbing wealth of one social group to give it to the other group under the guise of 'work' (and that's what using taxes for bailouts essentially is), is inviting a social conflict, and when it involves millions, its a recipe for a social explosion. But the author's recipe is even worse - if it will take some time for the state to come tumbling down, under the weight of all those businesses, that need to be bailed out, without being productive or economically competitive, yet still employing millions, simply throwing millions of people to the dogs in favor of Chinese workers will give a social explosion much faster.

Funny enough, the author doesn't even try to ask the question: and why actually is there a need to outsource anything? Why can't we have both, the so-called 'creative' jobs, as well as manufacturing jobs at home, without having to resort to bailouts? This seems to be a no-go zone for the majority of western mainstream talking-heads, who don't even want to think, what can be done to solve the problem. And the most evident solution comes from asking the question - why do companies outsource at all? Because market competition is constantly on the rise, with expenses for marketing, market research, analysis increasing, due to necessity to stand out of the evergrowing list of the competition, while the costs of manufacture, are the ones to be the first to be slashed. But when it comes to more basic products, like canned food or furniture, or even more basic electronic products, manufacturing expenses make up a much more significant percentage, thus for many of companies decreasing labor costs is a matter of survival.

This goes to show one thing - whether we like it or not, labor market has already become global, regardless of state borders. And there seem to be two options: oppose this fact, tax to death those companies, that outsource manufacturing, and completely loose business in certain areas of production, while at the same time creating a risk of more bailout-junkes, non-competititve on the global market in the long run. Or embrace the fact of a unified labor market and allow salaries to drop to world medium levels in each branch, drop excessive social securities. Yes, that might lead to a shock for current blue collars and low-skilled workers, but that's an argument of no jobs vs. low-paid, semi-skilled jobs. One thing I agree with the author on, is that the times are indeed changing.

Dr. Heywood R. Floyd

Industrial production is of no relevance. There's a dry cleaning place on every corner; we will all work there.

National Martinizing

Yes, they would find that a shock, when their wages only covered the first 30 percent of their monthly rent on a 1 BR apartment, and absolutely nothing else. I suppose rents and such would have to decline with the new market status the meantime, all these workers would be evicted from where they are presently living. Not really seeing how that's workable. A revolution might be easier. The first option seems more sensible, from the perspective of the regime. There's still enough of a whiff of democracy around this place that if the second option were tried, it would very likely lead to the election of a new set of political frontmen sworn to undertake the first option.
Err... nobody's saying, that they should be thrown out in the street. A net of social pensons, will provide sufficient coverage. And will be less expensive, than multibillion bailouts. But that would certainly require a certain social consesus, and first of all openness on the side of government - government will need to stop lying and tell people the truth: we are going bankrupt, we don't know when, but we are sure, that the system will collapse under its own weight, we are following the path of comfortable stagnation, Brezhnev era-style. But that would require a certain new level of trust, new level of closeness between the government and the people, like what ex-Soviet countries, especially the baltic states, Poland, Czechs, Hungarians had after the collapse of the Soviet regime, when they saw the ruins of the empire, and knew, that they'll need to start everything from scratch.

The only good thing about first option, is that you don't know, when it fails, though you do know that it is doomed to fail eventually, its just a matter of time, like juggling with grenades. Russian philosopher Alexandr Zinovjev described such political approach, as 'politics of postponed catastrophe'.

As for the revolution - what's the point of a revolution would be? You can revolt against the government, but not against world economic trends (well, unless you are North Korean government, that is). A new government would be faced with the same dilemma.

Your greedy jew employer has hired gooks to do your job for a bowl of rice and a bunkbed, middle-class, middle-aged american, but if your kid can debt slave himself to the same jew bank that locked you in your home and won't give you a loan to save their lives, maybe he can go to college for six years while working part time flipping burgers and stocking shelves... so he can graduate just in time for his job to go to said gook's kid for two bowls of rice and he can tell the bank that he can't pay his bills and his debt from his mothers basement working two part timers. And your daughter is banging mulattos in her dorm because she spent her teens watching MTV and Disney, and will soon bring you a bundle of absolute joy to raise while she studies Native American philosophy from a socialist jew professor.

Exactly why the US military lobbed 400,000 gentile lives at the jew burners.

Dr. Heywood R. Floyd
If German workers aren't working for a global median wage, it stands to reason American workers can yet avoid such a fate, ergo the point of a revolution would be to institute the sort of regime that would initiate the variety of policies likely to lead to such an outcome. I suppose there may be some disagreement on what those policies may be, however.

Why are you so sure, that they don't? Do you have any data to back that up? To my knowledge, there are very few manufacturing companies in the west, that don't outsource manufacturing at least partially. That they don't outsource so much in the sphere of IT, is due to the fact, that they are also nowhere near to US levels in the area: see Dell, Google, Intel, Microsoft. I believe, German workers have pretty much the same issues.
Dr. Heywood R. Floyd
I didn't realize it was controversial to suggest a global median of industrial wages would be a very low figure. I was just kinda guessing it would be around three dollars per hour.

Do you have any data to back up the assertion that Germany even exists?

Why are you so sure, that they don't' - was directed at your comment about Germany.

Well, you must base your opinion on something, some numbers, anything. You can't deduct it logically, since its a statement of an empirical fact, so it needs some grounds at least. Not saying it is not so, I'm just not sure, that Germany or any other Western country for that matter is that much different.

Dr. Heywood R. Floyd

I wasn't so sure that they don't, as it were. You seemed to be expressing relative optimism about Germany's future. It would seem I did not interpret your remarks correctly.