The imbalance of imports to exports within the United States can be measured through the near $39 billion trade deficit the United States currently has. This disproportion of exports to imports did not develop quickly, but rather was a culmination of many factors that led factories in America to become obsolete and put workers out of work.
Apple (NASDAQ:AAPL) is considered the pinnacle of an American company and a global icon. On the packaging and the back of every iPhone, iPod, iMac is printed "Designed By Apple in California." The products are manufactured and/or assembled in China. The case was not so in 2002. Ten years ago Apple did not manufacture all of its products abroad, but today Foxconn dominates the production of the Apple products, plus Amazon's (NASDAQ:AMZN) Kindle, Cisco's (NASDAQ:CSCO) routers, and countless other US-based companies' products.
This is not due to strictly the misconception of Americans that labor is cheaper abroad (though it is true); it also stems to America not having the "speed and flexibility" of Asian plants, says an executive from Apple. The disconnect between America and our nation's largest corporations is a systemic crisis that can only be fixed by the reversal of the terrible cycle that has caused America to be inept in manufacturing. In order for this to happen, companies and individuals alike will need to sacrifice short-term profit and high wages.
In 2009, Boeing (NYSE:BA) announced that it would be manufacturing its Dreamliner in South Carolina. This move was highly publicized, and the Obama administration took the offensive in the Boeing case and sided with the National Labor Relations Board, stating that Boeing opened the plant to get rid of unionized workers. In December 2011, the lawsuit was dropped by the NLRB, and Boeing was set to begin manufacturing in the new plant. The plant would bring roughly 5,000 workers to the Charleston area; they would be paid roughly $14 per hour. (This is in contrast to the unionized works in Washington making close to $28 per hour.) This marks a move in the right direction if America wants to have any chance of competing with China and India in manufacturing. The sad truth is that workers will have to sacrifice wages to begin any type of shift in manufacturing back to America.
How We Got Here
The question of how this decline in US manufacturing occurs is rooted in a multi-faceted and complex set of corporate decisions. The story roots all the way back to intangible cultural differences where America progressed toward a middle class-dominated society where wages and costs were heightened. In nations like China and Taiwan, the boom of the middle class never occurred, and in that sense, wages stayed very low. This put forth a dramatic difference between the costs of producing an item in America and in China.
While this was occurring, a divergence in education also ensued. In America, top-level universities teach mechanical, electrical, and other high-level engineering programs. In nations like China and Japan, the focus is on process-engineers or lower-level engineers. This created a landscape for lower-cost and more effective manufacturing of technology products in the developing world. Though the landscape may have been right for this transition to foreign means of production, it took one company to progress the cycle forward.
The First Step Toward Foxconn
When Dell (DELL) first began making hardware for computers in the late 1990s, it approached a Taiwanese manufacturing plant to make the simple circuit board that would be included in the new computer. After the Taiwanese company, ASUSTeK, had been making the simple boards for about a year, it approached Dell and said, "We've been doing a good job making these little boards. Why don't you let us make the motherboard for you? Circuit manufacturing isn't your core competence anyway, and we could do it for 20% less."
Dell's answer was yes, because of the lower costs and high profits for investors. In the book The Innovators Prescription, authors, Christensen, Grossman, and Hwang marked this as the point when major technology companies in America began "improv[ing] profitability by focus[ing] on those activities that are profitable and by getting out of activities that are less profitable."
This prompted a shift in focus from domestically manufactured goods to foreign goods. This cycle creates a chain effect of more and more factories being built in Asia and more and more process-engineers being educated. This set the stage for American companies to become obsolete, and our population to become unequipped to deliver on the demands of our nation's companies.
The Two Problems America Needs To Tackle:
The two main factors that have kept companies from bringing manufacturing back to the United States are personnel, cheap labor, and what that brings: efficiency. The main problem is that it is impossible to bring the jobs back to America, because in order for that to occur, all of the Asian factories would need to relocate.
Forbes recently posed the question of why the Amazon's Kindle cannot be made in the United States. The answer lies in the fact that flex circuits, electronic displays, injection moldings, wireless cards, control boards, etc. are all made in Asia. This provides the same landscape that America companies have where exporting manufacturing is difficult. The main obstacle in bringing jobs back to US is the sentiment that companies like Apple, Amazon, and Dell (DELL) have: "We shouldn't be criticized for using Chinese workers. ... The U.S. has stopped producing people with the skills we need" [Apple executive]
To begin the process of changing this mindset, it is imperative for the U.S. to emphasize the training of process-engineers and ultimately lowering the wages of U.S. workers. This is a shift that would have to be conscious and would not yield results for many years, if successful. It would only take one company (like Dell) to bring manufacturing back to America and begin a cycle of growth in the field.
How BA Is A Step In The Right Direction
BA is a definite step in the right direction for America to gain momentum in manufacturing again. The problem is that many other steps need to be taken so that the cycle of upward growth can commence. America needs to focus on educating mid-level engineers and change the American mindset from expecting a high-wage for a few to gaining mid-level jobs for many.
This is a slow process, but if America can slowly bring manufacturing wages down to a more competitive figure, educate process engineers, and make the nation economically appealing to business, the shift could slowly begin from Foxconn to America. The problem is that, with every day another Chinese engineer graduates and another worker begins at Foxconn for $168 a month, America's prospects of manufacturing become further from reality.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.