News From the Dismal Science . . .

by wjw on August 24, 2011

So Moody’s has downgraded Japan’s debt.  Zero Hedge, my favorite site for economic paranoia of all stripes and dimensions, offered a suitable comment: “What was that word Freud used when you are a weak, pathetic, corrupt, powerless, piece of anachronistic filth and instead of doing the right thing (for fear of losing your job or worse), you lash out at a weaker and irrelevant substitute? Oh yes, projection.

And over at Forbes, Steve Denning offers a detailed and fascinating explanation of Why Amazon Can’t Make a Kindle in the USA. Here’s the short answer:

  • The flex circuit connectors are made in China because the US supplier base migrated to Asia.

  • The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing.

  • The highly polished injection-molded case is made in China because the U.S. supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China.

  • The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets.

  • The controller board is made in China because U.S. companies long ago transferred manufacture of printed circuit boards to Asia.

  • The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers.

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.” (Hmm.  My impression was that Apple manufactures everything overseas, too.)

It’s all the result of a long, sad process:

“So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

It’s a long and depressing article, well worth reading.  And while most of it isn’t a surprise, exactly, it’s very much news to the political class in Washington, as well as our lords and masters at the Federal Reserve.

But there’s at least a little hope here and there.  From Deena Stryker, the story of the remarkable revolution in Iceland, possibly one at least as interesting as that in Libya.

“What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered, transforming the relationship between citizens and their political institutions and eventually driving Iceland’s leaders to the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would have made Iceland’s citizens responsible for its bankers’ debts, and accepted calls for a referendum.”

A stiff middle finger for the IMF!  You’ve got to hope that the Icelanders are resilient enough to rebuilt their economy on their own, once the entire economic structure of the world is dedicated to impoverishing them and sending the entire population back to peonage.  (Hmm.  Would you rather live in Cuba or Haiti?  An interesting question.)

Ken Houghton August 24, 2011 at 10:06 am

“My impression was that Apple manufactures everything overseas, too.”

Your impression is correct, although some of the assembly of those components is done in the U.S. (Just as my Subaru was “team crafted in Indiana.”)

The article is bollocks–except, of course, the part about how the Far East took the lead in the development of screens and mobile electronic devices because they manufacture such items and therefore have an easier time of “asking the next question” and “taking the next step.” (Recall that one of the side events of the last G-20 meeting in Korea was the G-7/8 leaders all having to rent mobile phones because theirs weren’t capable of taking full advantage of the Korean network.)

DensityDuck August 24, 2011 at 9:22 pm

I guess we could have kept the manufacturing base here in the USA, if we didn’t care about dumping industrial solvent and heavy-metal waste into the ditch behind the factory, and letting the effluent from the degreasing and lithography processes vent directly out the roof without so much as a HEPA filter.

The area around the factory that makes batteries for the Prius looks like the surface of the moon…

Bruce Cohen (Speaker to Managers) August 25, 2011 at 11:44 pm

My impression was that Apple manufactures everything overseas, too.

It does. But the difference between Apple and most other American “manufacturers” explains the whole situation. It’s not just manufacturing that the other companies have given away, it’s also product design, and along with that, product specification. In fact, most American companies have turned themselves into middlemen, with no control at all over the kinds of products they produce or the ability of those products to capture a useful share of the market. Apple has retained control of the design of its products, in part by very closely monitoring and controlling the design and manufacturing of the components of its products. See for example the way that Apple interacts with (and chooses or rejects) the manufacturers of its processor chips, or its displays.

Another counter-example to the trend is Intel, which has chosen to stay at the leading edge of integrated circuit technology by dropping product lines which become commodities (like RAM chips, low-end microcontrollers, etc.) and trying to maintain product share by constantly improving their process technology. Their business is predicated on constantly developing new and more powerful chips, and selling them at the highest profit margins they can manage, then plowing the profits back into new generations of process technology. They use that strategy to stay constantly ahead of all their competitors, at the cost of (quite literally) exponentially-increasing fabrication plant startup costs. The current generation of fab plant in development will have cost US $10 billion when it comes online in a year or two; the next generation will most likely cost $20 billion. But Intel is the only semiconductor company which keeps so much of its design, development, process, and research technology here in the US; that they do so is an explicit recognition on their part that if they try to push the innovation of their products offshore they will lose control of it.

Tom Womack August 30, 2011 at 8:13 am

Intel is quite close to being actually multinational: it has extremely good development teams in Israel, it has fabs in Ireland and Israel, and it does assembly in Costa Rica, Malaysia, Vietnam and Chengdu.

The research fab is in Oregon, but the core of microprocessor development probably is now in Israel.

It’s the fact that the company is vertically integrated (rather than sending its chip designs to a separate company in Taiwan to be manufactured) that makes the big difference. AMD followed the same models but, running spectacularly out of money a couple of years ago, sold its fab facilities to an Abu Dhabi investment fund; this hasn’t killed it yet.

Comments on this entry are closed.

Previous post:

Next post:

Contact Us | Terms of User | Trademarks | Privacy Statement

Copyright © 2010 WJW. All Rights Reserved.