Apple, Supply Chains, and Industrial Policy

There’s been some really good commentary about the NY Times piece that discusses Apple and Chinese manufacturing, but something about the article didn’t quite wring true. There was a lot of talk about how the U.S. doesn’t have the manufacturing expertise, but then there would be the argument that a key component is a labor force that, at the drop of a hat, will put in 72 hour work weeks. Seems like there’s a little more going on than just supply chain issues.

Nonetheless, supply chains, which are a key component of manufacturing and are not the same as ‘innovation’, are important. As the Krugman notes, supply chains (all the component parts and technology that are often external to the company making the final product) can require some government intervention (boldface mine):

Manufacturing firms often stand or fall not just on their own merits, but because they do or don’t have a surrounding cluster of related firms that are suppliers or customers, provide a ready pool of suitable labor, and so on.

This, in turn, makes a case for policy to promote or preserve such clusters. Like all industrial policy arguments, this has to be applied carefully; something that could be a good idea in principle might be a very bad idea once you do the numbers, and these numbers are hard to do.

But can we think of a recent example in the United States where helping to preserve an industrial cluster was an important policy consideration? Indeed we can: the auto bailout. A key argument for the bailout was that if the major US firms were allowed to go bankrupt, a whole industrial ecology would be lost with them. And the auto bailout has been a huge success, not least because it did preserve that ecology.

This brings me to something Yves Smith, the proprietor of Naked Capitalism, discusses. It’s worth listening to her, since her non-blog expertise is in evaluating Asian manufacturing companies. Yves Smith (boldface mine):

Here Jobs has a more logical, if still daunting demand: he wants a phone with a glass screen that won’t scratch, since phones get shoved in pockets with keys and coins. But part of his ask was still unreasonable: “I want a glass screen, and I want it perfect in six weeks.”

Again, China delivered, but notice how:

For years, cellphone makers had avoided using glass because it required precision in cutting and grinding that was extremely difficult to achieve. Apple had already selected an American company, Corning Inc., to manufacture large panes of strengthened glass. But figuring out how to cut those panes into millions of iPhone screens required finding an empty cutting plant, hundreds of pieces of glass to use in experiments and an army of midlevel engineers. It would cost a fortune simply to prepare.

Then a bid for the work arrived from a Chinese factory.

When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day.

The Chinese plant got the job.

So basically, the Chinese funded a completely non-economical glass R&D facility IN ANTICIPATION of getting the Apple order. There is no way anyone would build a factory like that unless the money was close to free. It already had glass samples in stock! The “some subsidies trickled down” sounds way too innocent. It sounds more like someone recognized the importance of Apple as a marquee customer, and whether the push came from the officialdom or businessmen with the right connections in high places, it doesn’t really matter. This project smells of having serious government backing. How can private businesses anywhere compete with that?

It’s really odd that words like ‘competition’ are used when discussing trade with China. Not only, as the Times article describes, is the workforce kept in horrible conditions and can be worked literally to the point of suicide, but many companies have intricate ties to government (and the military). The U.S. has basically engaged in unilateral disarmament regarding trade policy, and the consequences, as shown by the rare counterexample of the auto industry, have been disastrous.

Somebody might want to do something about that.

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One Response to Apple, Supply Chains, and Industrial Policy

  1. Pingback: Trade Policy: Zakaria Bumps Into Reality, If Not His Assumptions | Mike the Mad Biologist

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