The trade war offers us an opening
Helping the US bring manufacturing back home could create a $100bn market for Indian IT firms
When Western companies moved manufacturing to China, it was all about minimising costs. China was a developing country with labour costs amongst the lowest in the world. It also offered big subsidies and readily turned a blind eye to labour abuse and environmental degradation.
Today, China is the world’s second-largest economy and has ambitions of overtaking the West. Its labour, real estate, and energy costs are now comparable to those in some parts of the United States. By 2014, China’s manufacturing cost advantage over the US had shrunk to less than 5%. Add to that the intellectualproperty theft and unfair trade practices that China has engaged in, and it becomes clear why it makes sense for companies to bring manufacturing back to America.
Doing that is not easy. It is hard to hire the large numbers of skilled manufacturing workers in the US; intricate supply chains pose barriers; and retooling factories is expensive. But with the trade war that President Trump launched and with the Chinese government’s rigging the deck against foreign companies, businesses may have a strong motivation to bite the bullet and make the investment. The problems they have long had in the US are also now surmountable.
Robots are now advanced enough to replace Chinese workers. Foxconn’s announcement in August 2011 that it would replace a million workers with robots at its Chinese factories never came to fruition, because the robots of that era were not capable of doing fine tasks such as circuit-board assembly and could not work safely alongside human workers. Today, industrial robots can thread a needle and work hand-in-hand with humans. They can do practically every assembly job as well as packing the boxes the goods are shipped in.
Assembling automobiles is one of the hardest of all manufacturing tasks. But with the help of a new generation of robots, Tesla was able to ramp up production at its Freemont, California, factory to produce more than 100,000 cars per quarter. It did this cost effectively in a region that has amongst the highest labour costs in the world.
Low-value manufacturing can be moved out of China relatively easily. It’s already being shifted to nearby countries such as Vietnam, Thailand, and Indonesia. The challenge — and the prize — lies in the high-value, hightechnology manufacturing such as Apple does in China for all of its products except the Macbook Pro, manufactured in Austin, Texas.
There is a web of supply chains that have developed in China for electronic goods. Products such as the iPhone have hundreds of com- ponents, which are sourced from suppliers all over the world. Over the past three decades, production of these technologies started moving to China, and many of the key suppliers became closely interconnected. It is not easy to disentangle operations from China’s highdensity integrated-circuit ecosystem.
But it is easier than it would have been if Western companies hadn’t feared that China would steal their intellectual property as it has been doing in its efforts to become an innovation powerhouse by 2020 — a focus of China’s 13th Five Year National Plan on Scientific and Technological and Innovation.
In 2015, according to Seamus Grimes of National University of Ireland and Yutao Sun of Dalian University of China, the supply chain for Apple’s products consisted of 198 global companies, with 759 subsidiaries, located in 16 countries. The research, detailed in their forthcoming book, China and Global Value Chains, found that 32.7% of these suppliers were Japanese, 28.5% American, 19.0% Taiwanese, 6.5% European, and only 3.95% Chinese. Of the 391 subsidiaries providing highest-value “core components”, 40.4% were American, 26.8% Japanese, 10.7% Taiwanese, 9.2% Korean, and only 2.2% Chinese.
To put it simply, more than half of the components of Apple’s products are imported into China, and practically none of the important core technologies are made by Chinese companies. Nearly all of the intellectual property in Apple’s products originates from outside China. The researchers found that the few subsidiaries that foreign companies located in China that were producing core components were largely involved in the production and testing of products for just-in-time delivery to locations for final assembly.
It doesn’t make sense for the US to move manufacturing to India. But there is a $100 billion market that Indian IT companies don’t seem to comprehend, despite my repeated efforts to educate them: to help America bring manufacturing back home. Indian IT can design new, America-based value chains and factories; install and program robots; and monitor manufacturing operations in the same way that large data centres are remotely managed. Then, instead of vilifying Indians for taking American jobs away, Donald Trump will laud Indian IT for helping make American great again.