Say hello to my little friend.

[Cessna Invesco Palin]

This post is an amalgamation of a couple of different things I've wanted to say here for a while, but I haven't had time recently to put pen to paper and actually create the post. The subject is Far East manufacturing - specifically the manufacturing of consumer electronics for American owned brands and companies, and the purpose is to give you an idea of the truly immense scale of this beast.

Since you are reading this post, on the internet, you probably have a product in your house that was manufactured by a Taiwanese corporation named "Hon Hai Precision Industry Company Ltd." You may even be using one of their products right now without even knowing it. You have almost certainly never heard of Hon Hai Precision Industry Company Ltd., but you may (if you are of the geeky persuasion) know them by their trade name - Foxconn. You might also remember them from a story some months back where a Foxconn employee supposedly committed suicide over a lost iPhone prototype. Here's the relevant Wikipedia entry for Foxconn:

http://en.wikipedia.org/wiki/Foxconn

One quote serves to demonstrate the immense scale of this company:

The company opened its first manufacturing plant in China in 1988, a factory in Shenzhen that is now the company's largest, with more than 270,000 employees.

To put this in perspective, this single Foxconn factory employs more people than any US auto manufacturing firm - even before things went to hell for the auto industry here. To make things even weirder, this is a Taiwanese company that does most of its manufacturing in mainland China.

This is a small sample of what they produce, again quoting the Wikipedia entry:

Foxconn produces the Mac mini, the iPod and the iPhone for Apple Inc.; Intel-branded motherboards for Intel Corp.; various orders for American computer manufacturers Dell and Hewlett-Packard; motherboards for UK computer maufacturer Zoostorm; the PlayStation 2 and PlayStation 3 for Sony; the Wii for Nintendo; the Xbox 360 for Microsoft, cell phones for Motorola, the Amazon Kindle, and Cisco equipment.

Remember, that's not a definitive list. I could easily name a dozen other American companies that have products produced by Foxconn at this one factory, which looks something like this, times eleventy squillion.



And it's just one of many similar factories in the Shenzhen area. Speaking of which, this... is Shenzhen:

?

And again, unless you're a geek or have an interest in China, you may have never heard of it. Shenzhen has fourteen million people. It's bigger than Chicago or LA. And it's growing. Fast.

Back to Wikipedia: Shenzhen's novel and modern cityscape is the result of the vibrant economy made possible by rapid foreign investment since the late 1970s, when it was a small fishing village. Since then, foreign nationals have invested more than US$30 billion for building factories and forming joint ventures. It is now reputedly one of the fastest growing cities in the world. Being southern China's major financial centre, Shenzhen is home to the Shenzhen Stock Exchange as well as the headquarters of numerous high-tech companies. Shenzhen is also the second busiest port in mainland China, ranking only after Shanghai.

Now you can complain all you want about China, but this isn't going away. If anything it's getting bigger. And stronger.

[Cursive]

1. Why can't we do that here?

:shrug:

[notesdev]

2. We DID do that here

and then "free trade" shipped it all over there

Chinese growth didn't happen spontaneously, it was turbo-charged by stripping production facilities from the US and other first-world countries and rebuilding them in China.

[Hannah Bell]

4. Exactly: "foreign nationals have invested more than US$30 billion" in this city alone.

This is the end product of Reaganomics & 30 years of tax cuts to the rich.

All that money at the top needs to make a profit. The way it does is:

1. Offshore production to cheaper locations & sell it back at not much reduced prices to the home market (= drains consumer pocketbooks while returning little in the way of income-producing jobs)
2. Attack wages & benefits at home
3. Privatize public services to produce profit-making "investments".
4. Speculative bubbles.

Textbook Marx. As was the last crash & continuing recession (despite what the cheerleaders say).

[Cessna Invesco Palin]

8. Actually, both cost and price are greatly reduced by doing this.

When one of my previous employers moved manufacturing from the US to Taiwan, FOB cost was reduced by approximately 50% and we were able to effect a 30% reduction in price, which made us competitive.

Also, Reaganomics has little to do with it. This trend started in the early 70s and has accelerated since then for exactly the reason I've noted above.

[Hannah Bell]

10. Reaganomics had plenty to do with it, & the "reason you noted above" = profits,

as I said.

The spread between cost & price got wider, not smaller. That's the profit share.

[Cessna Invesco Palin]

12. No it didn't. Certainly not for consumer electronics.

That's why you can buy a reasonable computer these days for $300. Time warp yourself back to 1997 and try doing that. Profit for companies like Foxconn is based on volume. As an American company searching for a CM they won't even give you the time of day unless you're willing to put in orders for hundreds of thousands, if not millions of units.

[Hannah Bell]

22. The spread between cost & price, not just price.

You may be a better shopper than I am; I looked for cheap computers last year & didn't find the $300 model.

I don't know what you're arguing about. It's obvious on its face that foreign corps wouldn't be offshoring if it didn't generate higher profit margins.

Case in point:

Apple's iPhone profit margin greater than 50%
For each 8GB model sold, Apple makes $333, according to iSuppli

http://www.computerworld.com/s/article/9026178/Apple_s_iPhone_profit_margin_greater_than_50_

http://www.allroadsleadtochina.com/2007/08/15/iphone-made-in-shenzhen/


50% PROFIT MARGIN = RAPE.

[madokie]

25. Is that true?

A 50% PROFIT MARGIN = RAPE. indeed

[Cessna Invesco Palin]

33. No, it's not true. See my post #30

This article is also three years out of date. I have no idea what BOM or mfg cost would be for the current iPhones, but they're also selling for a lot cheaper than the original ones. Part of the reason that brand new products retail for so much in the consumer electronics space is because companies know with absolute certainty that profit margin decreases with time. Competitors will come into the space and try to undercut your price. You will have to match them or face diminishing sales. Companies try to calculate profit over the lifetime of the product. There are formulae for this which are used routinely in the consumer electronics space.

[Cessna Invesco Palin]

30. Uh, that only calculates estimated BOM and manufacturing costs.

The article also clearly states that it doesn't take into account R&D or marketing costs. It doesn't appear to even try to estimate FOB or shipping costs. Or distribution costs. Or service costs. Basically, this is a useless number. I've never, ever heard of a company estimating profit as retail minus BOM. That's stupid.

[Hannah Bell]

35. whatever. r&d & marketing spread over the volume isn't much. that +

distribution etc. maybe 20% more = about 30% profit per unit. still rape.

my (rather obvious) point stands: the need to make profits on large quantities of capital explains offshoring & all the rest.

[Cessna Invesco Palin]

36. Where did you get those numbers?

Or did you just pull them out of your ass?

[Hannah Bell]

37. more:

http://venturebeat.com/2009/07/29/att-subsidy-of-375-boosts-apples-iphone-profit-margin-to-60-percent/

[Cessna Invesco Palin]

38. For God's sake stop pretending that gross margin equates to actual profit.

By your nonsensical standard gross margin on computer software is close to 90% and therefore all computer software is "RAPE!" since the production cost is the cost of a cardboard box and a CD.

[mrcheerful]

3. Because we don't live on less then $100 a week

Whats left out is the labor costs, these folks are not being paid $35 an hour, from the last thing I read about China's wages, they earn something like $115 a month. In China that's high wages in the US you couldn't live on that. Also a lot of these folks live in Dorm rooms on are near the factory in government housing.

[Cessna Invesco Palin]

11. Living quarters for these employees are typically very cramped.

Think freshman year of college dormitory, only dirtier, smellier, and with less privacy, and you're getting pretty close. The working hours aren't particularly odious. What IS odious in these factories is the treatment of employees. You are basically an interchangeable part. If you fail at getting your quota for one or two days you are probably going to get shitcanned, because there are ten people lined up behind you to take the same job. Do the factory managers take advantage of this? Of course they do. Hell, Foxconn is one of the better places to work, and they still treat their employees like they're robots.

[Cessna Invesco Palin]

6. Because Americans aren't willing to live in the conditions these workers endure every day.

Your $300 "entry-level" computer costs that little for a reason.

[reggie the dog]

18. Not all of us buy the cheapest things we can get our hands on.

[Cessna Invesco Palin]

21. I'd hardly rank iPhones as cheap.

Fact is, Foxconn produces everything from two cent plastic doohickeywidgets to three thousand dollar supercomputers. Actually, if you want to do this shit on the cheap there are a lot better companies you could go to than Foxconn. They at least exercise control over their subcontractors. A lot of Chinese CMs don't. You get what you pay for.

[Jamastiene]

7. NAFTA

If you owned a corporation and you could pay workers in one country several dollars less per hour to manufacture something than in another country, wouldn't you?

That's what is happening. They don't have to pay them as much as they would have to pay Americans.

If an American company tried to compete...it would lose money due to NAFTA.

[Cessna Invesco Palin]

9. Why do people continue to insist that NAFTA has something to do with outsourcing to China?

China isn't part of NAFTA. Unless China moved to North America since last I checked.

[moondust]

15. NAFTA opened the door.

It provided the government's official sanction/blessing on the idea of offshoring. Before NAFTA it wasn't entirely clear what the government's position would be on moving large numbers of jobs offshore and thus weakening the U.S. economy. I don't know it for a fact but my guess is that some companies may have been reluctant to sink a lot of investment capital into offshore operations until they knew for sure that the government would not at some point cut them off and cost them their offshore investments. NAFTA was the government's stamp of approval.

[Cessna Invesco Palin]

20. The door was open before NAFTA. You're talking complete nonsense.

It provided the government's official sanction/blessing on the idea of offshoring.

So wait - you mean MFN status for China was meaningless until NAFTA? That makes no sense. At all. And it especially makes no sense since CE companies have been offshoring to the far east for at least fifteen years before NAFTA was implemented.

Before NAFTA it wasn't entirely clear what the government's position would be on moving large numbers of jobs offshore and thus weakening the U.S. economy.

Having grown up in the rust belt, I can assure you that the US government's position on offshoring was perfectly clear far, far before NAFTA.

I don't know it for a fact but my guess is that some companies may have been reluctant to sink a lot of investment capital into offshore operations until they knew for sure that the government would not at some point cut them off

This may come as a surprise to you, but the national government generally doesn't have the capability of controlling what American corporate entities do overseas. They can control import tariffs, and that's about it.

[moondust]

23. It's simple.

Once the government officially approved of offshoring jobs to Mexico and Canada under NAFTA then the legal precedent was established for shipping jobs anywhere including China. Equal protection, you know. It was all kind of murky until codified by NAFTA.

[Cessna Invesco Palin]

29. Why would you need to establish legal precedent for something that is completely legal?

If you can cite any specific law that companies might have been worried about violating, you might have a point. Can you cite such a law that existed before NAFTA? I'm going to bet that you can't, since if you could you would have done so already.

[piratefish08]

26. We used to..........

[Maghetti]

5. uh

Hello friend.

[Kalun D]

13. GATT

Jamastiene, I think you mean GATT

Listen to Thom Hartmann. The reason China is cheaper is only a small part labor. Mostly it's lack of government regs, pollution etc. Another major reason is tarrifs, China has a 20% tarrif on US goods, US has no tariff on Chinese goods.

The international bankers want a one world government, in order to do that they have to drag the US down into the ditch.

[Cessna Invesco Palin]

17. No, it's a big part labor.

Chinese workers in these factories make about as much in a day as an equivalent American worker makes in an hour. As a general rule, American electronics manufacturing companies estimate Chinese labor to cost 1/5 of American labor. That is a *very conservative* estimate. My real-world estimate would be something like 1/8th. Some of this gets offset by shipping costs. Some of it gets offset by having to send people over to China constantly to police the CMs so that they don't fuck you over or fuck up your product (This is inevitable and happens constantly.) But there's still a massive reduction in cost associated with moving production to the far east. That's why every American electronics manufacturer does it, even though it's a gigantic horrible pain in the ass that everyone hates.

[Kalun D]

39. As a percentage of total cost

As a percentage of total cost the difference in the labor part between Chinese and American is about 5%, when the total difference is about 40% to 50%.

and one of the main reasons US companies offshore is tax breaks. Why is our government giving tax breaks to companies that offshore?

[Cessna Invesco Palin]

40. That's really not how it works.

I'm once again going to oversimplify here, just so my brain doesn't explode from doing too much math too late in the evening...

Suppose we have a product (Thing A) that takes one man-hour to assemble in ideal conditions (in other words, few errors by the workers) and retails for $100...

Suppose we also have a product (Thing B) that takes five man-hours to assemble in ideal conditions and retails for $500.

Let's further assume that the gross margin on both products is 50%, since that's easy to compute with the numbers above, and isn't that far off from reality for a lot of consumer electronics.

And in order to simplify the example as much as possible, let's further further assume that we produce five times as many Thing As as Thing Bs. So at least in theory we are obtaining exactly the same amount of revenue from Thing A as Thing B, and furthermore we are obtaining exactly the same revenue per hour of work.

Makes sense, right? Business 101, yes?

Wrong. The evil little gremlin in the above equation is volume. Higher volume introduces higher risk. If someone in the factory loads a surface mount soldering machine backwards and it goes unnoticed for five hours, then we might have a problem with Thing B, but the problem is five times as large on Thing A. That means five times the amount of rework to fix the mistake. This is only one small example of how the true cost of labor is not a 100% guaranteed thing. It's malleable just like everything else, and it's especially problematic with unskilled workers in high-volume, technically or mechanically complex products.

Now at this point you're probably asking, "what the hell does that have to do with what I posted?" It goes back to your cost analysis (or cost pulling a number out of your ass) and your assertion that labor comprises only 5% of total product cost. That may be true for some products, but it is not universally true. And in higher wage countries making high volume products, unforeseen labor costs can wipe out the profit on a product. Consider that an hour of factory rework (caused by the aforementioned SMT problem) to fix a Thing A is five times as damaging to the bottom line as an hour of rework to fix a Thing B. In essence, Thing B can absorb a bigger hit on labor than Thing A. This is why you see things like critical medical devices being manufactured in the US as opposed to China - the quality control for small-batch manufacturing here is far superior to that in China, and the high-cost, low-volume nature of the products make them more suitable to situations where unforeseen labor costs will occur.

[Kalun D]

41. General Terms

(you sound like an industrial engineer, and the OP is a really good post)

I'm speaking more in general terms than your reply. Here, I'll take away the numbers (got them from Thom Hartman). The difference in labor costs between China and the USA is not as great a factor as it's generally made out to be in the mainstream media. A higher percentage of the cost difference lies in other sectors of the equation. US labor is frequently blamed for just about everything when the real blame usually lies elsewhere.

Regarding the China US imbalance probably the biggest factor is the 20% tariff on US goods going to China and no tariff on China goods going to the US. There's really no way that's going to be overcome from an overall perspective, even if labor costs were equal. This is intentionally driving the US down and China up.

One example of labor being blamed is the auto Unions. With the US auto manufactures having an older workforce more of them are going into retirement not to mention the companies stealing the pensions. Put the higher price of US healthcare on top of that and it wouldn't matter if the labor cost was equal, it costs way more to build in the US. Then on top of that you give tax incentives for companies that offshore? That's ludicrous, and it's intentional to drive us down and our competition up. Labor is an issue for the domestics but they also have bad management problems. Recently it's been the milking of the SUV with little investment in the future, while Japan is 10 years ahead in things like the hybrid.

It all boils down to the country being dragged down to the level of our competitors. It's a overall scheme to get to a one world government. That's what the EU is leading to and that's the reason for the desired NAU, it leads to one world government. That's why they instituted NAFTA and GATT, and that's why China is allowed a 20% tariff when we have none. But you can't assimilate Mexico and the US until you drive us down and raise them up.

I don't think the differences between volumes of production have very much to do with what I'm talking about, although it's interesting, but doesn't high volume also mean probable higher profit? And not sure what your talking about regarding quality control, maybe in some small niche sectors we are still better. The Chinese already build all the components of PC's and it's just a matter of time before they are right with the Japanese who are ahead of us in several sectors.

[Touchdown]

14. Little friend? I thought I was going to see your dick.

:cry:

Seriously though, I've read about Foxconn in the past, since most Apple haters seem to have thought that Apple was the only American manufacturer that uses Foxconn's factory. I would truly like us to begin manufacturing our stuff in our country again... regardless if that means TVs have to go back up to $800+ like they were when they were pieces of furniture you had to polish.

[moondust]

16. I don't see a toxic waste dump in that picture.

Or is it all pretty much a toxic waste dump?

[Cessna Invesco Palin]

19. Depends on where you go.

Shenzhen is basically Hong Kong Jr. There are a lot of westerners floating in and out all the time, so the Chinese government tries to keep it *relatively* clean. But this is another case where China is just totally weird and nonsensical to westerners - As a factory manager in China you can totally get your ass kicked for causing environmental damage - IF someone in a position of authority notices it, and IF that person can't be bribed. (They usually can be bribed unless you fucked up so badly that it made the international news.)

It really is the wild west over there with respect to this stuff.

[old mark]

24. CIP: Almost 30 years ago, I worked as a factory planning designer for Bell Labs,

in Pennsylvania. I worked on a cleanroom project, helping in a small way to design the MOST EFFICIENT chip production facility in the world. We did - and after testing and getting the bugs out, packed it all up and sent it to Singapore. We closed shortly after, moving to a new site which is now totally closed and abandoned.

We designed, built and tested the basic technology here, and sent it there, where they ran with it.

Early in my working life, I was employed by Bethlehem Steel, where I found a decaying plant that had had no improvements or even repairs since WWII ended.

We led the world in technology and manufacturing and we invented the foundation of most of what is around today and we sold it out from under our country.

We could have all the manufacturing jobs we could stand, but the corporations wanted higher profits, lower wages, and fewer employee benefits and rights, and lower pollution and safety regulations.

And of course, our politicians gave it all to them for cash payments.

Can we send our politicians to other countries and maybe start over again with pols who are concerned about the American people?

Rec.

mark

[hobbit709]

27. The last two REAL jobs I had here

Were in facilities that made PCB's. Both are now closed and everything got offshored.

They kept wanting to increase production at the expense of machine maintenance downtime and quality control.
When the machines broke because they started running them 24/7 instead of taking one day a week for maintenance, then we got yelled at for not sending product down the line and it was stacking up at whatever point in the line the broken machine was. When I stated that maybe if they did a little preventive maintenance every now and then that this wouldn't happen I was given the option of shutting up or the door. I chose the door.

At the other place we would get boards that failed initial testing on a regular basis-usually because of someone loading the parts hoppers with the wrong part. Then I and the other techs had to troubleshoot, identify the problem and send it to rework to get htat part changed. The rule was that if 5 boards in a row had the same problem the line was to stop until they problem was identified. Did that happen? HA! So now there are a hundred boards with the same problem needing rework instead of just 5. Our supervisor didn't want to make waves by stopping production because of problems like this. Pretty soon all 20 of us techs had about a hundred board backlog each and so did the rework people. They put this supervisor in charge instead of the person the previous supervisor wanted because she had "Management Experience". Said experience consisting of being the assistant produce manager at a local grocery store-she wouldn't have know what an electron was if it bit her on the ass.

My brother worked QC at what was then Motorola here in Austin. There were chip batches that had a 90+% failure rate but that was acceptable because they could charge enough per chip to cover the losses. Then Motorola went to court to stop the Japanese companies from selling their chips cheaper here. The only reason they were cheaper is because a 90+% fail rate would have been unacceptable at a Japanese company. Rather than improve their quality and lower costs that way, Motorola tried to stop someone else from undercutting their price.

Starting in 1977 when I worked at TI here, every time management bean counters wanted to cut costs, the first thing they threw out the window was QC. Where are these companies now?

[leveymg]

28. This is an interesting topic. Thanks to OP and all commenters in the thread above. eom

[KittyWampus]

31. some day in the future, what was once that little fishing village will look like Detroit does now.

[Cessna Invesco Palin]

32. Yup, and something else will take its place.

Same as it ever was.

[DavidDvorkin]

34. A lot of America's 19th-century growth was funded by British investors

This is history repeating itself.