Penny wise, pound foolish

August 22, 2011 8:57 AM

Why Amazon Can't Make A Kindle In the USA. Does It Really Matter That Amazon Can't Manufacture A Kindle In the USA? Amazon & Kindle Part 3: It's Not Just Manufacturing! A cogent look at why today's prevailing approach to cost and manufacturing is wrongheaded.
posted by Benny Andajetz (64 comments total)

People living in western cultures aren't willing to pay the required prices for manufacturing in the west. Eventually everything will be manufactured by robots in space and all humanity will be unemployed. Or rejoicing in a new golden age, not sure which.
posted by blue_beetle at 9:09 AM on August 22, 2011 [9 favorites]

This

The statistics about the role of workers are well documented and deeply shocking: only one in five workers is fully engaged in his or her work. It may well be true that some workers are inherently poorly motivated. But it is also true that decades of top-down command-and-control management in which the talents and the creativity of the workers are routinely ignored or crushed, management has to accept responsibility for creating work environments that inspire low motivation.

is key.
posted by dubitable at 9:12 AM on August 22, 2011 [60 favorites]

The funny thing is that based on my experience in 'management' probably 1 in 5 managers, from 'director' level all the way up to 'VP' or 'P' are actually engaged in their work as well. But since most of those people are special snowflakes with a degree, they feel justified in separating themselves from those lazy ass, degree-less scrubs who don't have a fancy title after their names.
posted by spicynuts at 9:20 AM on August 22, 2011 [10 favorites]

Was just on Hacker News a view days ago.

This might be interesting: the lights at the end of the tunnel
(You can download the book there for a donation)

Who knows, there might be something like peak employment.
posted by yoyo_nyc at 9:21 AM on August 22, 2011 [1 favorite]

People living in western cultures aren't willing to pay the required prices for manufacturing in the west. Eventually everything will be manufactured by robots in space and all humanity will be unemployed.

I realize that you are speaking lightly here, but this really is the core issue of the industrial era. The metric the world should be tracking is "How many hours of human labor does it take to keep food and goods flowing to the population?"

That number has dropped precipitously over the last 140 years and shows all signs of continuing to do so even as the population has risen. At some point as a society we're going to have to stop pretending that useful jobs will continue to be created at even close to the rate that they're being made obsolete, and figure out what to do with all of these people with time on their hands.

Anyway, derail.
posted by Tell Me No Lies at 9:24 AM on August 22, 2011 [62 favorites]

So let me get this straight: The leaders of our business culture have spent nearly a century trying to unwind the advances made by labor in the early 20th century, to create a workforce that is cheap, meek, compliant, and too scared of unemployment to protest abuse, and only now are they figuring out that such a workforce is unengaged, unmotivated, and not prone to innovate?

Brilliant.
posted by localroger at 9:25 AM on August 22, 2011 [75 favorites]

We should eat them. Particularly if they are rich.
posted by spicynuts at 9:25 AM on August 22, 2011 [7 favorites]

Most of us grew up in an era where "cheaper is better." Full stop. The driving factor in everyday purchases was more and more the price of the item. (Only in rare durable-goods purchases were we generally taught to avoid that rule.) Wal-Mart is the product of this movement. Until we shed the mentality that "price is cost" we'll continue pushing manufacturing to cheaper places. And the true costs will continue to rise.
posted by introp at 9:29 AM on August 22, 2011 [4 favorites]

From the first linked article:

An exception is Apple [AAPL], which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs."

Yes, Apple products are "Designed in California", but every single one I've ever purchased has been "Assembled/Manufactured/Made in [somewhere else]" So I'm having a hard time seeing how Apple is the exception here.

Kind of like IKEA: "Designed in Sweden; manufactured in [everywhere else but Sweden] (except for lingonberry products). Yum.
posted by webhund at 9:30 AM on August 22, 2011 [10 favorites]

This is just a borderline jingoistic anti-China piece. Its like the Forbes of the 1980s is back except they've replaced Japan with China. So what do we have here:

1. Idealization of the past is a fallacy. Who is to say any of his suggestions are helpful. From a right-wing "AMERICA RULEZ" perspective its scary to have so much done overseas, but from a practical perspective it either doesn't matter or has benefits we don't yet understand (less conflict because we depend on each other economicly).

2. Lamenting the new reality. Turns out we can't live in the 1950s forever.

3. Pointing out a problem that really isnt a problem.

4. Obligatory Obama criticism.

5. Obligartory cheesy Einstein quote.

Thanks Forbes, I haven't had my daily quota of nonsense pro-US fearmongering today.
posted by damn dirty ape at 9:35 AM on August 22, 2011 [14 favorites]

No idea where the Forbes guy pulled out that Dell vs. AsusTek anecdote, because it's hardly limited to Dell, and I'm not entirely sure that Dell ever manufactured its own motherboards.

Very very few PC manufacturers manufacture many of their own components for desktop PCs. It's one of those industries where complete vertical integration makes very little sense. It's far easier to hire a series of 3rd-party vendors to customize their products to meet your market. It's entirely possible for that 3rd party to steal your business, and always has been when you're dealing with a product that is essentially a commodity (which Dell deserves credit for realizing far sooner than the rest of the industry).

Dell didn't source parts from AsusTek without knowing that Asus maintains its own retail brand, and I'm still not entirely sure what the Forbes author would have recommended Dell have done, once it became apparent that they could externally source their components at a greatly reduced cost. Contracting with Asus was a good business decision, regardless of the long-term ramifications. Asus also don't sell their products direct-to-consumer, which means that Dell are generally still going to be able to take a reasonable profit margin, given that Asus's products will presumably be marked up once they're sold at Best Buy.

The anecdote:

However the next time, ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost.

is entirely made up. That's just shitty journalism.

I don't want to hold Dell up as an example of a good company, but Steve Denning doesn't seem to understand the economics of how consumer-grade electronics must be produced in order to be sold at a competitive price. Dell did what it needed to do in order to remain competitive.

He also undermines his argument by pointing out that the Kindle is not "Made in China." It's made out of components that come from all over the place. It shouldn't at all be surprising that certain countries have specialized in certain niches -- this has happened as long as global trade has existed, and doesn't seem to be changing anytime soon. Also consider that most of the design and microcode comes from the US. Both of these things are non-negligible, and are vital to any electronic device. We've consistently excelled in these areas for quite some time (which is why it's vital that we invest in education to preserve this lead).

He also seems to fail to mention environmental regulation (or the lack thereof) as a cause for migration of electronics manufacturing to Asia. It's a heck of a lot cheaper to make a motherboard, when you can pour PCB etching chemicals into the river when you're done with them. (And let me say that I completely support these regulations, and would support a tariff levied against countries that do not adhere to good environmental practices).

Protectionism and nationalism are not sustainable in the long run. We need to find new things to specialize in, rather than racing to the bottom to compete with something that other countries have already perfected.

Right now, America is good at

• Music
• Movies
• Microcode
• High Speed Pizza Delivery

(With Apologies to Neil Stephenson)
posted by schmod at 9:36 AM on August 22, 2011 [24 favorites]

Apple is the exception in that they have yet to be out innovated by their manufacturing partners. As the author notes, it isn't clear that this is just a matter of time.

These articles are very salient from my point of view, and fit in well with questions of energy policy, the long term viability of growth driven economics and the retrenchment necessary for the Deep Economy proposed by Bill McKibben.

Underlying it all is the question of the role of the worker and purposefulness in work creating value. I reject that there is nothing of value for the unemployed to do. From abandoned or under-maintained properties to better management of our natural spaces, I see opportunities daily for things to happen that I would certainly value. What is missing is a commitment to compensate people if they undertake these things. Good stuff to think about.
posted by meinvt at 9:37 AM on August 22, 2011 [5 favorites]

Yes, Apple products are "Designed in California", but every single one I've ever purchased has been "Assembled/Manufactured/Made in [somewhere else]"

I seriously doubt right now that the plant capacity to build them exists in the US. Step one would be rebuilding that, if you wanted to change that, but if you want 25M LED panels, I seriously doubt you could find someone in the US able to make a fraction of them, never mind the whole order.

And let me say that I completely support these regulations, and would support a tariff levied against countries that do not adhere to good environmental practices

Make it so that offshore costs as much as onshore, and then we have a real competitive market. Allowing companies to dump external costs onto third world countries is may be the biggest sin the first world has committed. We don't let companies do that here, we shouldn't let them do that there.

Of course, the response of the poor that are the primary support of the GOP is that we should let them do that here. Maybe we deserve to lose. What's a little dioxin between friends? Carbon Tet isn't *that* bad, right?
posted by eriko at 9:43 AM on August 22, 2011 [1 favorite]

DERAIL

Music
Movies
Microcode
High Speed Pizza Delivery

The day I moved to LA was also the day I ordered my first pizza outside of NYC. "How long will it be?" "Forty five minutes."

High-speed my ass.
posted by griphus at 9:43 AM on August 22, 2011 [6 favorites]

With all due respect to schmod and damn dirty ape: I think you're willfully missing the positive points he was making. Notably, cost accounting is not a good measure of actual cost and may actually lead to bad decisions. And "adding value" is sometimes a better (and more workable , in the long run) decision than "cutting cost".

I don't see any Asian hate - he says they are doing what's good for them.
posted by Benny Andajetz at 9:44 AM on August 22, 2011 [3 favorites]

I like dealing with Indian software developers. I get roughly one question a day, usually around 3am. By time I get it and answer they are all asleep. Once they wake up, figure out they were asking the wrong thing, or they need more information it is now 3am again. Makes for a nice slow steady pace!
posted by Ad hominem at 9:46 AM on August 22, 2011 [9 favorites]

This is just a borderline jingoistic anti-China piece. Its like the Forbes of the 1980s is back except they've replaced Japan with China.

Dude, what piece did you read? His basic point is that too much cost savings today causes the withering of resources needed to be around tomorrow. This seems...fairly sensible. And I definitely missed the part where he went on a rant about how the Chinese are evil, much less a rant which implies that violent means ought to be used to defend against the threat they posed. Which is about the only definition of jingoism I know.
posted by Diablevert at 9:54 AM on August 22, 2011 [3 favorites]

People living in western cultures aren't willing to pay the required prices for manufacturing in the west.

No, this is incorrect. Instead, people always seek out the lowest price available to them. If you have a choice between two products that are otherwise equal, one $10 more than the other, then on the whole one will buy the cheaper one, regardless of other factors. This is because the way products are sold insulates consumers from the details of manufacturing.

Our economic system has gotten to be this way because there has been no pushback against it. We could charge companies who outsource manufacturing tariffs to even out the playing field, but we don't. That doesn't even seem to be up for discussion. Think about why this is.

Eventually everything will be manufactured by robots in space and all humanity will be unemployed. Or rejoicing in a new golden age, not sure which.

Before that golden age thing can happen, our economic systems must fundamentally realign themselves, and that will be exceptionally painful. The United States is so divided right now that we had a serious crisis of confidence that Congress would pull itself together in time that the nation would pay its basic economic obligations; expecting it to behave with the foresight and vision to change its whole economic system seems foolish.

Under that system, people slave away their whole lives in order to meet basic economic needs so a small number of people can grow fat skimming off excess value; one should expect those privileged people to kick up a fuss about it. Miracles do, occasionally, happen, but not if Rupert Murdock, Roger Ailes and the Koch brothers have anything to say about it.
posted by JHarris at 9:55 AM on August 22, 2011 [4 favorites]

Also consider that most of the design and microcode comes from the US.

Don't Intel (and possibly AMD) design their CPUs in Israel (presumably something to do with there being a lot of Russian physics PhDs there) and ARM design theirs in the UK?
posted by acb at 9:56 AM on August 22, 2011

So I'm having a hard time seeing how Apple is the exception here.

As the article indicates, Apple maintains a very deep, hands-on relationship with its suppliers, covering key aspects of design and manufacturing. They aren't relying on their suppliers to come to them with new techniques or designs. Apple drives the innovation to the suppliers, then oversees the implementation of the innovation. That's the key difference. Apple's competitors largely rely on the suppliers to bring new ideas and processes to them.
posted by Thorzdad at 9:58 AM on August 22, 2011 [1 favorite]

The day I moved to LA was also the day I ordered my first pizza outside of NYC. "How long will it be?" "Forty five minutes."

High-speed my ass.

Shoulda ordered from Uncle Enzo. He's a man of his word. Just don't cross him.
posted by chimaera at 10:00 AM on August 22, 2011 [8 favorites]

From yoyo_nyc's linked article: Today, the world's largest bookseller, Amazon, is a software company—its core capability is its amazing software engine for selling virtually everything online, no retail stores necessary.

Having a good (or good enough) web app is obviously central to what they do, but isn't it even more important to have really good fulfillment? "The page you made" is almost never helpful to me, but getting things reliably in two days definitely is.
posted by en forme de poire at 10:02 AM on August 22, 2011 [2 favorites]

I seriously doubt right now that the plant capacity to build them exists in the US. Step one would be rebuilding that, if you wanted to change that, but if you want 25M LED panels, I seriously doubt you could find someone in the US able to make a fraction of them, never mind the whole order.

Who would pay for those plants? Wouldn't we just be asking them to take an economic hit for the good of the nation?

As the article indicates, Apple maintains a very deep, hands-on relationship with its suppliers, covering key aspects of design and manufacturing.

But presumably not their worker suicide prevention policies.

They aren't relying on their suppliers to come to them with new techniques or designs. Apple drives the innovation to the suppliers, then oversees the implementation of the innovation.

Are they leveraging something too? Like synergies? I love it when companies leverage shit. I could watch that all day long.

That's the key difference. Apple's competitors largely rely on the suppliers to bring new ideas and processes to them.

The key difference is that Apple is just superficially different enough that its marketing can convince some people that they are substantially different.
posted by JHarris at 10:04 AM on August 22, 2011 [9 favorites]

Okay, that was snarkier than necessary. I'm taking a timeout.
posted by JHarris at 10:05 AM on August 22, 2011 [4 favorites]

Though in many respects a fluff-filled volume, Rise of the Creative Class by Richard Florida did make a -- to me -- persuasive argument that the future was very much about innovation and design coming out of America while manufacturing was done elsewhere.

And I think about a recent episode of 'Back to Work' with Merlin Mann in which he ponders what kind of long-term future in the workforce the unionized cashiers picketing a CVS honestly think they have.

If you put all your money on a horse, you have to accept that the horse has a limited lifespan. What will you do then?
posted by gsh at 10:06 AM on August 22, 2011

Don't Intel (and possibly AMD) design their CPUs in Israel (presumably something to do with there being a lot of Russian physics PhDs there) and ARM design theirs in the UK?

I actually asked one of design team leads about this (design work outside) and apparently its still Intel corp but regional teams (as in the one they're setting up now in south east asia) - so its geographically dispersed but they don't outsource design or manufacturing. They're building their first China plant now.
posted by infini at 10:06 AM on August 22, 2011

I wonder what the difference in profits is for Dell vs. AsusTek?
posted by ennui.bz at 10:09 AM on August 22, 2011

Old news. Of course it's news when Capital decides it so.
posted by larry_darrell at 10:10 AM on August 22, 2011

Who would pay for those plants? Wouldn't we just be asking them to take an economic hit for the good of the nation?

Just as important to understand: Who gave them away? And Why? Was it a bad move? And if it was, how do we keep from doing it again?

Everybody just blithely says it's stupid to consider doing anything other than buying electronics components from Asia. We invented it, but now have no control over it. And worse, once you lose control over manufacturing and manufacturing improvements, you are severely hamstrung in your ability to leverage those improvements to make new discoveries and take new directions.
posted by Benny Andajetz at 10:13 AM on August 22, 2011 [4 favorites]

Is the author simply pushing his books? Ain't saying his favored management style doesn't rock. Yet, I'm simply dubious that it'll solve the underlying "If no westerners work then no westerners buy" problem.

I'll propose a solution : China launches a large scale program of modifying various parts to spy on their American consumers. American discovers that a Goldman-Sacks executive's phone reports all his internet usage to China, an hard drive installed at Oracle imposes a specific security hole upon their database software, a CPU installed at Los Alamos has been sending nuclear secrets, etc. American companies freak the fuck out, congress bans imported electronics, and allocates half the military budget to rebuilding electronic manufacturing capacity. Yeah, I realize this clever plan requires that China start the ball rolling. Ain't likely, but hey.

In all seriousness, we could require that all components used in sensitive government work be 100% Made-in-the-USA at plants employing only U.S. citizens and cleared foreign nationals, although not requiring clearances for U.S. citizens. We could gradually ratchet up sensitive to include all federal regulators and even state level regulators and law enforcement. And obviously the financial industry might jump onboard voluntarily. You'd create an awful lot of fairly high level manufacturing jobs. And you'd massively expand the R&D efforts into automation that'll ultimately make production more labor cost neutral.
posted by jeffburdges at 10:14 AM on August 22, 2011

Intel has processor design teams in the US in California, Colorado, Texas, Oregon and Arizona as well as Israel.

ARM has design teams in the US in Texas.

ARM processors are also designed by Qualcomm in the US and Marvell in the US.

Processor design isn't done in very many places but many of those are in the US in California, Arizona, North Carolina, Texas, Colorado and other places. Other SOC design is also done all over the US. Design isn't manufacturing and doesn't have exactly the same cost issues.

As far as manufacturing goes, Intel has Fabs in several places in the US. These factories are highly automated and only do the most tricky of the chip manufacturing steps. The more routine steps are typically done in other factories that I think are mostly outside the US. Intel does have Fabs outside the US as well.
posted by jclarkin at 10:16 AM on August 22, 2011

Though in many respects a fluff-filled volume, Rise of the Creative Class by Richard Florida did make a -- to me -- persuasive argument that the future was very much about innovation and design coming out of America while manufacturing was done elsewhere.

I believe this has also been/is being refuted now as in design/innovation needs manufacturing and industry in order to continue being relevant, as well as to transfer the skillsets and knowledge that industrial design and new product/service innovation practitioners require viz.,

The prevailing view of the past 25 years has been that the U.S. can thrive as a center of innovation and leave the manufacturing of the products it invents and designs to others. Nothing could be further from the truth.

This logic is predicated on utterly false assumptions about the divisibility of R&D and manufacturing and basic competitive dynamics.

In many cases, R&D and manufacturing are tightly intertwined. Unless you know how to manufacture a product, you often cannot design it. And, to understand how to manufacture it, you have to have manufacturing competencies and experience. The notion that you can design a product in the serene world of the R&D laboratory without any knowledge of the rough and tumble world of production is ridiculous.

To innovate, you need great two-way feedback. You need to transfer knowledge from R&D into production, but you also need to move knowledge from production back to R&D. The act of production creates knowledge about the process and the product design.
posted by infini at 10:23 AM on August 22, 2011 [5 favorites]

I enjoyed reading Mr. Denning's 3 part series. My favorite was this:
There is an automatic assumption that when faced with a market challenge the way to be more competitive is to cut costs.

Thank you for the links.
posted by BuffaloChickenWing at 10:40 AM on August 22, 2011

People living in western cultures aren't willing to pay the required prices for manufacturing in the west.

And people in eastern cultures are? Because if so, we have a solution. We can manufacture stuff and charge them what it costs us and they can manufacture the same stuff and charge us a whole lot less.

As mentioned, people pay what they can get away with. Just ask the creators of:

Music
Movies
Microcode
posted by IndigoJones at 11:04 AM on August 22, 2011

(Interesting he didn't mention aligning US corporate taxes to world standards as a means to encourage repatriating money and manufacturing. I suppose Forbes takes that stance as a given)
posted by IndigoJones at 11:05 AM on August 22, 2011

Diablevert: "And I definitely missed the part where he went on a rant about how the Chinese are evil, much less a rant which implies that violent means ought to be used to defend against the threat they posed. Which is about the only definition of jingoism I know."

No, you're absolutely right.

He avoids most of that nationalistic sentiment, but there seems to be a whole lot of "Wink, wink, AMERICAN jobs" in the article, and I can't help but think that the article was targeted toward the anti-China jingoist crowd (being printed in Forbes and all).

He also seems to stop short of proposing government regulation as an answer to these problems. These days, companies don't have the luxury of making huge investments and taking a loss up-front for possible gains in the long-term. I can only think of a small handful of companies who are in a financial position to do that, and none of them are in "commodity" businesses (which is what the consumer tech industry is quickly becoming).

Of course, the government regulation debate has even gotten sticky here, with purported "Pro business" policies being anything but that. (Hint: if the policy only serves to make the CEO and top shareholders wealthier, it's not actually pro-business).
posted by schmod at 11:10 AM on August 22, 2011 [1 favorite]

I am too tired to deal with this post at any length but note one simple reality:

Nike makes shoes in places where labor is so cheap that the cost of a pair of shoes is around 20 bucks. Does this huge labor savings get paaed on to American consumers? Not at 90 bucks a pair of running shoes. In short: labor cost much cheaper; profits for company much greater and little passed on to American consumer.
posted by Postroad at 11:17 AM on August 22, 2011 [4 favorites]

Postroad has something there, I think. For some industries, companies use underpaid foreign labor to compete against each other, and it quickly becomes necessary to preserve what quickly become razor-thin profit margins.

For some other industries, brand strength becomes great enough that consumers seek out that company's products to a greater extent, which allows them to somewhat negate the effects of competition. Thus, Apple's iPad and Google's Android don't complete against each other as strongly as Dell and Acer would, because the products have differences beyond mere utility. In those cases there is less excuse for using foreign labor; it comes down to corporate greed (or the so-called moral imperative of getting the greatest value for stockholders).

For running shoes, this boils down mostly to brand loyalty and fashion preference. There are things you can do with an iPad that you can't do with Android and vice versa, but this isn't the case with sneakers.
posted by JHarris at 11:32 AM on August 22, 2011

Postroad: "Nike makes shoes in places where labor is so cheap that the cost of a pair of shoes is around 20 bucks. Does this huge labor savings get paaed on to American consumers? Not at 90 bucks a pair of running shoes. In short: labor cost much cheaper; profits for company much greater and little passed on to American consumer."

Why does everyone pick on Nike in these discussions? They're a publicly-traded company, and as such, their financials are publicly available.

In FY2010, Nike took in $19.014 billion in revenue, and had a net income of $1.907 billion, almost a perfect 10% profit margin.

10% is a nice, healthy profit margin, but they're not robbing the bank. (So, I guess they're not getting a very good value from their sweatshops, considering the massive amount of bad PR that it's generated for them over the past 20+ years)

It's also well-known that they spend another ~10% on marketing, yikes! I'll guess that distribution and retail expenses (which are never inconsiderable) account for a sizeable portion of the remaining $70, if the shoes really only did cost "$20" to make.

_{And, seriously. Can we stop with these component teardown price estimates? You cannot pull all of the electronic components out of an iPad, add up their individual values, and claim that the sum is equal to Apple's per-unit cost. That's like saying that I can melt an iPad into 16 ounces of plastic and silicon, which is worth roughly $0.25, and therefore must be what Apple pays per unit. Nike and Apple's manufacturing costs are a trade secret, and justifiably so.}

Might be time to pick a new scapegoat for this particular strawman.
posted by schmod at 11:56 AM on August 22, 2011 [7 favorites]

Knowing people who work in the market in competition against Nike, Adidas, etc... and knowing how much they pay for their shoes from the same fabricators and their markup on products, yeah most of the bigger name brands are marking up their products quite a bit more than others with less brand recognition for what is effectively the same product.
posted by MrBobaFett at 12:07 PM on August 22, 2011 [1 favorite]

What is needed is radically different management that has continuous innovation built into its DNA, with a different goal (delighting the customer), a different role for managers (enabling teams), a different of coordinating work (dynamic linking) and different values (continuous improvement and radical transparency) and different communications (horizontal conversations). A single fix is not enough: we need systemic change.

Ugh. What is it with people hawking their latest management book? Leverage our synergies, indeed.
posted by bumpkin at 12:59 PM on August 22, 2011 [3 favorites]

mrbobafett, tell me where to get some shoes that are as comfortable and durable as nike sb dunks so I can buy them.
posted by meows at 1:10 PM on August 22, 2011

In FY2010, Nike took in $19.014 billion in revenue, and had a net income of $1.907 billion, almost a perfect 10% profit margin.

10% is a nice, healthy profit margin, but they're not robbing the bank.

Nike got singled out mostly because it it was mentioned upthread. Nike does have labor problems, according to Oxfam Australia.

What's perfect about 10%? Who is to say Nike is allowed any more or less profit than another company? If they could get it they certainly would go for more; if they can't get it then they'll do without, and if they can't get enough to keep running they'll go out of business. There are plenty of other shoe companies that would immediately fill that market niche. That is how it works, and they know it, so it doesn't make sense to talk about how much profit they should have; they would always say it's more than what they're making now. The question to ask is, is a point or two of Nike's profit margin worth the exploitation of its disadvantaged workforce?

It's also well-known that they spend another ~10% on marketing, yikes!

"[...]it will commit to paying already high earning sport stars millions of dollars to endorse their products." - Linked to Oxfam Austrailia page.

And, seriously. Can we stop with these component teardown price estimates? You cannot pull all of the electronic components out of an iPad, add up their individual values, and claim that the sum is equal to Apple's per-unit cost.

I didn't do a tear-down and am not sure how you jumped to that conclusion, but I did read yesterday that the parts in an iPad are estimated to cost $326.60. There are certainly costs beyond that, but those costs are not per-unit; the more they sell, the closer the relative costs to Apple for producing each unit will approach $326.60. At least that's how I think the math irons out.

Nike and Apple's manufacturing costs are a trade secret, and justifiably so.

That may be, but if they keep it a secret then they forfeit their right to use their costs as a defense against their pricing strategy. "We pay a lot to make our shoes. How much we won't say, but it's quite expensive. Trust us."

Might be time to pick a new scapegoat for this particular strawman.

Am I also begging the appeal to ad hominem?
posted by JHarris at 1:12 PM on August 22, 2011

Maddening to see the articles decline from the intriguing first installment to the pathetic 'Please buy my "Radical Management" book!' appeals in every goddamn paragraph of the third installment.

By the third one he's just handwaving, unable to talk about American Culture because he understands it as nothing more than background noise for Business Culture.

1/3 of the series is excellent, though.
posted by waxbanks at 1:23 PM on August 22, 2011

Most of us grew up in an era where "cheaper is better." Full stop. The driving factor in everyday purchases was more and more the price of the item. (Only in rare durable-goods purchases were we generally taught to avoid that rule.) Wal-Mart is the product of this movement.

Thinking about it more, this is far from just a 20th or 21st century phenomena. Economic historians have pointed out the greatest beneficiaries of slavery in the 19th century were not Southern plantation class, but the consumers who purchased cotton shirts. But we're not really talking about merely shirts anymore.

Cheaper IS better, at least for technology. Consumers get most of benefit of cost cutting. It's a GOOD thing that the poorest of the world can have access to technology. It's good that farmers can coordinate crop prices on their cell phones. It's good that young people can use Facebook as a "digital public square". It's good that migrant laborers can send money to family back home. It's good that people in North Korea get bootleg DVDs of South Korean soaps.

If Westerners are so eager to pay more for jobs, then someone could set up the American Apparel equivalent for a tech company (and some of already pointed to Big A already). But please leave the rest of the world out of it.
posted by FJT at 1:28 PM on August 22, 2011

JHarris: "What's perfect about 10%? "

The math. $1.907 billion is almost exactly 10% of $19.014 billion. Just a coincidence that jumped out on paper.

I was more pointing out that I've seen many different formulations of your argument, all of which seem to hinge around the fact that cheap labor makes sneakers ridiculously inexpensive to produce.

My point was that, when all was said and done, Nike aren't taking massive profits as a result of sweatshop labor, which suggests that their business is incredibly inefficient elsewhere, or that sweatshop labor isn't actually saving them all that much money, given that they have US-based competitors who manage to price their products competitively with Nike, and stay in business, despite adhering to good labor practices (which, I guess supports Steve Denning's argument in the articles).

Basically, Nike should stop using sweatshop labor, because it's absolutely killed their reputation, and doesn't seem to be saving them very much money.
posted by schmod at 2:18 PM on August 22, 2011

Don't Intel (and possibly AMD) design their CPUs in Israel (presumably something to do with there being a lot of Russian physics PhDs there) and ARM design theirs in the UK?

Uh, incase you didn't get the joke 'microcode' in Snowcrash Just refers to software, not actual microcode inside microprocessors.

Though in many respects a fluff-filled volume, Rise of the Creative Class by Richard Florida did make a -- to me -- persuasive argument that the future was very much about innovation and design coming out of America while manufacturing was done elsewhere.

*Sigh* This is such an annoying conceit. Not everyone can do those kind of jobs, and computers will be able to do more and more of those jobs too. And of course you don't need the same number of designers as you do line workers to bring a product to marker. One or a handful of designers can put something together that will require hundreds of manufacturing wokers to actually build.

And on top of that, China wants to design jobs, and is providing incentives for companies doing manufacturing in China to move design jobs to China as well. It's not like they can't do it for some reason. And a lack of language barrier and geographic distance helps as well.

Actually I think Amazon outsourced the design of the kindles and their upcoming tablets as well.

---

THe other thing is that the reason you can't manufacture this stuff in the U.S isn't at all due to the employee costs. It's because China has spent years and years building up it's manufacturing infrastructure. We certainly could build those things here if we wanted too.

But at the same time, you're going to have more and more automation as well. At the turn of the 20th century, something like 30% of the population worked in agriculture. Now it's like 2.5% (if I'm remembering correctly). That was for what we need to live. But at a certain point we're going to have a society where it doesn't require much labor either for the stuff we need or the stuff we want.

We need to get over this obsession with 'work' and become a leisure society where most people just sit around and play video games or whatever.
posted by delmoi at 2:43 PM on August 22, 2011 [1 favorite]

> The key difference is that Apple is just superficially different enough that its marketing can convince some people that they are substantially different.

I'll ignore the snarkiness but there's a seed of truth to it. Apple's frequently inventing the manufacturing processes and bankrolling the equipment necessary to build its products. That's a lot of sunk cost that Apple will reasonably also want to see a profit on. With their billions in pocket, Apple can reasonably afford to do things like this without having to shoulder the considerably greater costs and responsibilities of becoming their own OEM.

The raw material cost of an iPad might be three hundred bucks, but that's ignoring what it cost to re-engineer the factories used to make it, buy the equipment used to build the products (or design the equipment and fund their manufacture as well).

It's fairly interesting because while the electronics inside Macs are not distinct - you can usually buy PC laptops with nearly identical components - the hardware itself is distinct, and of course the OS is different. On a desktop computer, nice hardware is mostly eye candy, but the physical characteristics of a well-built laptop counts for a lot more than raw performance benchmarks. By its design ethos, Apple will never be in a position of having to compete directly against its own suppliers.

I don't know to what extent other computer companies engage in this kind of hardware differentiation. HP, to the surprise of many, is making noises about leaving the hardware business entirely. Lenovo and Toshiba still make well-regarded purpose-built portables.

But it is looking increasingly like the remaining name-brand PC companies will have to either begin emulating Apple, in investing more intensive work into the design and manufacture side of their products in order to promote themselves upmarket and provide their customers more meaningful reasons to continue using their products, or give up and declare that PC hardware has become a commodity.
posted by ardgedee at 2:59 PM on August 22, 2011

delmoi: We need to get over this obsession with 'work' and become a leisure society where most people just sit around and play video games or whatever.

I sense that the road from where we are to the Iain M. Banks Culture universe is paved with Soylent Green.
posted by localroger at 5:09 PM on August 22, 2011

Working at a company that uses a Scrum/Agile variant for our development processes, I was looking forward to reading a coherent explanation/argument as to why Scrum is cost effective when compared with other processes. Unfortunately, all I saw in the 3rd article was that one company who didn't use Scrum failed and one that did succeeded and that clearly the difference was Scrum vs. hierarchical development. Post hoc ergo propter hoc, y'all.

I think that one of the main reasons that Scrum succeeds for us is that we hired talented software engineers who are invested in and passionate about what they do. I think we would succeed using other processes too and for exactly the same reason. However, for us Scrum hits a sweet spot in that we are actively tracking what we're doing, avoiding long meetings, actively using feedback to improve process and with teams of our size, that works out well.
posted by plinth at 6:27 PM on August 22, 2011

The day I moved to LA was also the day I ordered my first pizza outside of NYC. "How long will it be?" "Forty five minutes."

Okay. Fine. Pick on the one thing that Stephenson failed to predict correctly.
posted by schmod at 6:44 PM on August 22, 2011

Taxes. It's all about taxes.

Google only gets taxed 2.4%, mainly by shifting their profits overseas. The only way to do this if you manufacture, is to move that manufacturing overseas.
posted by eye of newt at 9:15 PM on August 22, 2011 [1 favorite]

Whatever happens in a free market economy is going to be criticised. If prices are too high it's exploitation of the consumer, if they're too low it's exploitation of the workers. If there's shortages of something (hardly ever happens, but still) it's because capitalism is inherently inefficient, if there's too much stuff we're squandering the world's resources. Capitalism is at the same time a rapacious, all powerful monster eating everything in its path and a helpless shell about to collapse entirely. Somehow the point that people worked much harder with much less chance of individual fulfilment for much less reward in command economies is entirely ignored.

Free markets and free trade benefit everyone and we're living in a time of untold plenty because of it. Other places in the world are poor not because of free trade and free markets, but because they've lacked free trade and free markets. Poor countries will get wealthier by embracing the same things which have enabled the west to thrive. To take the example at hand, computers are cheaper, faster, bigger and better than they were even five or ten years ago by orders of magnitude thanks to "today's prevailing approach to cost and manufacturing" and mobile phones and computing, in particular, are revolutionising communications in the 3rd world like nothing else has ever done.

People have advocated mercantilism and protectionism for centuries and though they've always been wrong this argument is endless because people seldom bother to examine the historical record of what succeeds and what fails. Much of the venom endlessly spewed against free markets is not because people are outraged because they fail (which they don't), they're outraged because they succeed. Adam Smith and David Ricardo were right and it doesn't matter whether the subject is computers or kumquats.
posted by joannemullen at 10:24 PM on August 22, 2011

Free markets and free trade benefit everyone.

Nonsense. Free trade has no soul. The highest form of capitalism is legalized organized crime.

Just the other day this college radio station played this radio add from the 60s. It went something like this "Corporations have no morals, but their employees do. Don't forget that when you are running a company, you are still a human being with a soul. Brought to you by the US Council of Churches." Can you imagine an ad like this today? The Bush Jr administration co-opted many of the US churches, and they eagerly took the bait, leaving their moral judgement behind. This had led to people making unqualified statements like this.

Yes, as long as we don't forget that we are moral human beings, free trade can definitely benefit everyone. But if we do forget, then unbridled capitalism ends up benefiting almost no one.
posted by eye of newt at 10:51 PM on August 22, 2011 [1 favorite]

ennui.bz: I wonder what the difference in profits is for Dell vs. AsusTek?

For the record, based on the most recent annual financial reports for Asus and Dell (figures in parentheses are percentage of revenue):

                   Asus (TWD)       Dell (USD)
         Revenue    429.8B            61.5B
    Gross profit     56.5B (13.1%)    11.4B (18.5%)
Operating income     18.6B (4.3%)      3.4B (5.6%)
      Net income     18.0B (4.2%)      2.6B (4.3%)

Make of that what you will.
posted by mhum at 11:27 PM on August 22, 2011

>Though in many respects a fluff-filled volume, Rise of the Creative Class by Richard Florida did make a -- to me -- persuasive argument that the future was very much about innovation and design coming out of America while manufacturing was done elsewhere.

This argument's a common one (Tom Friedman has no doubt just finished a remarkably self-satisfying conversation with a pizzeria owner in Bangladesh, and is reflecting on the America-Home-of-Ingenuity idea's eternal truth), but it's pretty much crazy.

Yes, talent clusters, and yes, creatively-conducive locales foster creativity... but presupposing that creative and design talent can't begin to develop in hitherto rigid environments is akin to believing that Factory Worker Dad can't have Oddball Poet Son, even when OPS has doesn't have the extremely demanding work or educational schedule that FWD did as a kid.

In the aggregate, creativity, and the self-consciously creative approach, are functions of leisure and purchasing power.

As an economy grows richer, it usually spends more money and time on aesthetics, which in turn, for some subset of the population, means creativity and innovation.

The "they'll never learn to design like we can" bit is an elitist's dream and a fool's bet: An ever-growing percentage of decent commercial website design, to take one example, seems to come from third-world countries.

Given the opportunity, it seems that, yes, people in places with thatch for roofs and goats for pets can become perfectly good at Photoshop.

In any case, it should be remembered: During the 18th and 19th Centuries, the US wasn't the North Star of technological innovation.

That was England.

Instead, the US was notorious as a place whose people ripped off others' patents.

But time moved on, and as the US grew wealthier, its citizens started having the time and resources to start doing new things... such as pursuing innovation itself.
posted by darth_tedious at 12:34 AM on August 23, 2011 [2 favorites]

In the aggregate, creativity, and the self-consciously creative approach, are functions of leisure and purchasing power.

As an economy grows richer, it usually spends more money and time on aesthetics, which in turn, for some subset of the population, means creativity and innovation.

Lets separate 'art' and 'visual aesthetics by a certain set of cultural rules' from design and innovation shall we?

Creativity (and its sister, ingenuity) are human traits that emerge, often under the harshest conditions of scarcity to find solutions to everyday problems - a common definition of industrial design btw.

[insert bunch of links and a couple of FPPs here]
posted by infini at 1:15 AM on August 23, 2011

meows - the guys I know are in the Baseball/Softball market, so they don't make basketball shoes. But they do make from my understanding pretty nice shoes.
posted by MrBobaFett at 8:06 AM on August 23, 2011

I think for manufacturing to come back to the U.S., U.S. manufacturing has to stand for something and has to be known for adding value to the product that they make, so that people are willing to pay extra for U.S.-made products. For example, many people will pay more for a watch made in Switzerland, or other gadgets made in Germany, because to those people having a Made in Switzerland or Made in Germany label denotes high quality or prestige. When people see that, people think of highly-respected craftsmen painstakingly ensuring that the products they make are of the highest quality, even if that might not be the case in reality.
posted by gyc at 5:48 PM on August 23, 2011

People have advocated mercantilism and protectionism for centuries and though they've always been wrong this argument is endless because people seldom bother to examine the historical record of what succeeds and what fails. Much of the venom endlessly spewed against free markets is not because people are outraged because they fail (which they don't), they're outraged because they succeed.

Many industrializing countries from the mid 1800s to the early 1900s used tariff systems to protect their industries from British imports. Two such countries—the United States and Germany—succeeded in industrializing rapidly and catching up with the United Kingdom. Perhaps the world market would have grown quicker without such tariffs, but that was hardly the point then and certainly is not now. The market is great in many respects, but when you are in a weak market position it is best to recognize the existence of non-market action as a potential strategy.
posted by Jehan at 7:15 PM on August 23, 2011

Make of that what you will.

Uh... is there a reason you didn't convert TWD into USD? Here are the figures in USD:

                   Asus ($)                     Dell ($)
         Revenue     $14.77 billion            $61.5 billion
    Gross profit     $1.941 billion (13.1%)    $11.4 billion (18.5%)
Operating income     $0.6391 billion (4.3%)    $3.4 billion (5.6%)
      Net income     $0.6185 billion (4.2%)    $2.6 billion (4.3%)

I really like Asus stuff, though. Too bad E*Trade doesn't let you buy stock on the taiwan exchange
posted by delmoi at 10:46 PM on August 23, 2011

How about using the same units for an honest comparison?

                   Asus (USD)       Dell (USD)
         Revenue    14.6B            61.5B
    Gross profit     1.9B (13.1%)    11.4B (18.5%)
Operating income     0.6B (4.3%)      3.4B (5.6%)
      Net income     0.6B (4.2%)      2.6B (4.3%)

Dell's still (by far) the larger company.

They're also a glorified beige-box vendor, which people always seem to forget. They always have been too -- they just happened to have a pretty decent professional services division that allowed them to compete with the big guys. This is how they always managed to consistently undercut their competitors for well over a decade. Beige-box parts; big-iron service (sort of). Many people attribute Dell's decline to the fact that they strayed from that formula, and started making more and more proprietary equipment without really having the technical expertise or inventory/support systems to do so competently.

I had a drive fail on a Dell server in our office recently. Their support guys were actually pretty fantastic, although they wouldn't give us any of the answers that my bosses wanted to hear (we're normally a HP shop).

Dell told us "Just buy any drive off of the shelf with the same spindle speed -- we'll sell you one if you want -- install it in the old drive's caddy, and the RAID controller will be smart enough to figure out the rest. We don't stock old drives, because our controllers can do this. If you're still under warranty, we'll send someone out to install a free replacement part within 4 hours."

My bosses wanted to hear "We'll overnight you HP Part 42-2727, which is identical/compatible with your failed part and comes preinstalled in a HP 3.5" caddy. We can sell you an additional unit as a spare. Unit cost is $800/ea. for a 72GB Drive." No, really. Enterprise vendors can charge prices like that, and get away with it.

I certainly see why HP's strategy makes my supervisors more comfortable (they remember the days where compatibility issues were a much bigger deal), although Dell's model seemed technically sound, and made more sense to me personally. Also, Dell systems are cheap enough to simply replace entirely after a few years. We buy HP servers with the intention of them having survive a 15-20 year lifespan. For whatever reason, virtualization is a technical pariah in my industry.

Personally, I side with Dell here, although it's easy to see the pitfall of being mistaken for a "big iron" company, when Dell have almost always built their solutions out of readily-available parts. They don't keep a warehouse full of every part for every system that they've ever sold.
posted by schmod at 8:44 AM on August 24, 2011

Does America Need Manufacturing? Amid the working-class ruins of Michigan, the Obama administration is pursuing what amounts to a stealth industrial policy.
posted by homunculus at 6:46 PM on August 26, 2011

demoi: Uh... is there a reason you didn't convert TWD into USD?
schmod: How about using the same units for an honest comparison?

Sorry about that. Partly I was too lazy to do the conversion but mostly I was only thinking about the question in terms of margins (e.g.: as a percentage of revenue) rather than as absolute numbers to get a sense of how and where their cost structures different.
posted by mhum at 6:41 AM on September 1, 2011