Tuesday, June 07, 2011

How U.S. Companies Like Apple Prosper and Create U.S. Jobs Even if Assembly Takes Place Overseas

In the Journal of International Commerce and Economics' current issue, there's an excellent article titled "Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod" (full paper here). Here's the paper's abstract:

"Globalization skeptics argue that the benefits of globalization, such as lower consumer prices, are outweighed by job losses, lower earnings for U.S. workers, and a potential loss of technology to foreign rivals. To shed light on the jobs issue, we analyze the iPod, which is manufactured offshore using mostly foreign-made components.  In terms of headcount, we estimate that, in 2006, the iPod supported nearly twice as many jobs offshore (27,250, see chart above) as in the United States (13,920). Yet the total wages paid in the United States ($746 million, see chart above) amounted to more than twice as much as those paid overseas ($318 million). Driving this result is the fact that Apple keeps most of its research and development (R&D) and corporate support functions in the United States, providing thousands of high-paid professional and engineering jobs that can be attributed to the success of the iPod. This case provides evidence that innovation by a U.S. company at the head of a global value chain can benefit both the company and U.S. workers."

From the paper's conclusion:

"When innovative products are designed and marketed by U.S. companies, they can create valuable jobs for American workers even if the products are manufactured offshore. Apple’s tremendous success with the iPod and other innovative products in recent years has driven growth in U.S. employment, even though these products are made offshore. These jobs pay well and employ people with college degrees. They are at the high end of what might be considered middle class jobs and appear to be less at risk of vanishing from the United States than production jobs."

MP: Part of the current and future strength of America’s manufacturing sector could be explained by the global shift in manufacturing that has leveraged the relative cost advantages of shifting low-end production and assembly to low-wage countries like China, while advanced economies and companies in the U.S. like Apple have increasingly specialized in the research, design and marketing of products like the iPod.  China’s focus on labor-intensive, low-skill, and low-value-added assembly of manufactured goods has allowed America to become even more competitive in the higher-end, higher-skilled manufacturing design and engineering in areas like electronics, aerospace, pharmaceuticals and medicine, industrial machinery, medical and scientific equipment and supplies, computers, software and semi-conductors, and oil and natural-gas equipment.  

The case study of Apple's iPod illustrates the reality that U.S. manufacturing in the 21st century will be increasingly focused on the high-tech, high valued-added, high-skilled, research-intensive, high-paying aspects of manufacturing, with the production and assembly taking place elsewhere. U.S. manufacturing is alive and well, it's just strategically shifted higher up the value chain.  

Update: Based on 2010 sales revenue, America's computer industry (including Apple, HP, Microsoft, etc.) is the second largest U.S. manufacturing sector, behind "Petroleum and Coal Products," and is almost four times larger than the ninth-ranked motor vehicle industry and more than twice as large as "aerospace and defense."  Keep in mind that most of America's computer companies didn't even exist until the 1970s or 1980s, and that high-tech manufacturing industry is now much larger than the traditional sectors of manufacturing like machinery, motor vehicles and electrical equipment.  

41 Comments:

At 6/07/2011 10:37 AM, Blogger Colin said...

After production, the iPods are often times sold by WalMart -- another paragon of the US economy -- at deep discounts .

 
At 6/07/2011 11:04 AM, Blogger Buddy R Pacifico said...

"How U.S. Companies Like Apple Prosper and Create U.S. Jobs Even if Assembly Takes Place Overseas"

What if that assembly took place not overseas but in North America?

The wage differential between Asia and Mexico is very little now. Our Free Trade partner, Mexico, offers real benefit for the U.S. and the rest of the world.

The U.S. creates and engineers, and Mexico produces, would seem to be a winning proposition for the economies of North America.

 
At 6/07/2011 12:00 PM, Blogger James said...

"When innovative products are designed and marketed by U.S. companies, they can create valuable jobs for American workers even if the products are manufactured offshore.”

This study sets up a straw man. Having design here does not preclude having production here. There is no reason that those 27,250 Chinese jobs could not be done here with Americans.

“Part of the current and future strength of America’s manufacturing sector could be explained by the global shift in manufacturing that has leveraged the relative cost advantages of shifting low-end production and assembly to low-wage countries like China, while advanced economies and companies in the U.S. like Apple have increasingly specialized in the research, design and marketing of products like the iPod.”

I know you free traders prefer myth and ivory tower theory to reality but how do you ignore that this has failed with Japan. Hong Kong, Singapore, South Korea, Taiwan, and others who used to do only low-end production and now compete on high end products. China and India will do the same thing soon. Part of the past strength of America’s manufacturing sector was that we made things here.

The case study of Apple's iPod illustrates the reality that U.S. manufacturing in the 21st century will be increasingly focused on the high-tech, high valued-added, high-skilled, research-intensive, high-paying aspects of manufacturing, with the production and assembly taking place elsewhere.

If you free traders have your way that will happen. So tell me what plan do you have for those Americans who do not go to college? Are you too elitist to care that the nation creates reasonable jobs for high school dropouts? Is it acceptable to you if they vote in a Congress that will back Obama’s socialist agenda? For all its faults socialism does do a better job of handling displaced workers. If you free traders have your way what will prevent it? After a century of harm from free trade the people of Great Britain voted for socialism.

 
At 6/07/2011 12:18 PM, Blogger Seth said...

"There is no reason that those 27,250 Chinese jobs could not be done here with Americans." -James

There's actually a very good reason. It's the same reason you buy most of your food rather than produce it yourself.

"China and India will do the same thing soon." -James

I'm looking forward to this. It'd be nice for everyone to enjoy high standards of living and this will likely result in even a higher standard of living for us. It's a positive sum world, not zero sum.

 
At 6/07/2011 12:56 PM, Blogger morganovich said...

"What if that assembly took place not overseas but in North America?"

you ever try to do business in mexico?

rampant theft, low skilled labor, every kind of government headache you can imagine including one of the most corrupt police forces in the world, violence, and poor utilities and infrastructure.

add in a sideline in kidnapping mangers, and you're really rolling.

it's a disaster. the reason US firms cross an ocean to manufacture is to get away from that.

mexico is bordering on becoming a failed state.

i would not even consider making a capital investment there.

 
At 6/07/2011 1:03 PM, Blogger Whiskey Jim said...

This study sets up a straw man. Having design here does not preclude having production here. There is no reason that those 27,250 Chinese jobs could not be done here with Americans.

Perhaps you forget the straw man argument that the paper seeks to refute; all benefits of the iPad went to China because the USA does not manufacture anymore.

No, the paper will not become a part of the populist cultural meme because it is a straw man. It will not become popular because it destroys one.

 
At 6/07/2011 1:08 PM, Blogger morganovich said...

"This study sets up a straw man. Having design here does not preclude having production here. There is no reason that those 27,250 Chinese jobs could not be done here with Americans. "

sure there is: an iphone would cost $1500. that would severely limit its sales. i suspect it would cut them by 3/4 and each phone would have no more profit that the ones do now. it might well shrink them by 95%+ as motorola, rimm, etc under-priced them.

consider how much wealth and how many jobs you would destroy by doing that.

i think you are the one setting up a straw man by ignoring the reasons they left in the first place and the fact that they face competition from low labor cost, low corporate tax nations.

in a global economy, you have to compete with global prices.

"I know you free traders prefer myth and ivory tower theory to reality but how do you ignore that this has failed with Japan"

this is such a tangled mess of illogic it's difficult to know where to start. what failed in japan? japan has incredibly restrictive import rules. they are not free traders. further, their collapse has its roots in demographics, not trade policy.

then you go on to extol the vitues of manufacturing jobs. low skill manufacturing jobs are crappy jobs and have been for nearly all of history.

the only exception was the 40's and 50's in the US when we had the only manufacturing base left intact and demand from the rest of the world was bottomless as they rebuilt.

you seem to be swallowing this golden era lie about manufacturing being the backbone of the US.

others competing on high end products is fantastic news. it will make them better and cheaper. i doubt you would support having only one automaker in the US. why not? because you know you get better products at lower prices from competition. that does not stop at a national border. to argue as you do is the same as arguing for monopoly profits.

"So tell me what plan do you have for those Americans who do not go to college?"

talk about the mother of all straw men. why do i need a plan? they will compete in the labor market like everyone else. they will get paid according to the value of their skills.

your plan makes everyone poorer. we suffer the deadweight losses of higher prices and tariff protection that ALWAYS occur. this reduces the overall real wealth of americans. the loss is always greater than the gain that a few get from having protected jobs.

this means that you are arguing for lower growth, higher prices, and less wealth. thus, your policy intended to save american jobs actually destroys them.

i recommend reading up on the smoot hawley tariffs to get an excellent example of the disastrous effects of your way of thinking.

 
At 6/07/2011 1:12 PM, Blogger Buddy R Pacifico said...

"you ever try doing business in Mexico?"

Here are 100 Top Manufacturers in Mexico. Many of these companies are adding to new plants and workers. If the work is not done the U.S. (my preference) then Mexico, a NAFTA partner, is the next best place. The country will survive and prosper, despite some dismal pockets of crime.

 
At 6/07/2011 1:18 PM, Blogger morganovich said...

wj-

"Perhaps you forget the straw man argument that the paper seeks to refute; all benefits of the iPad went to China because the USA does not manufacture anymore."

this is an important point. who makes all the money on iphones? americans.

if an iphone throws off $300 in gross profit, i'd wager that $250+ of it is made by americans.

foxxcom makes damn near no margin on assembly.

this leads to the interesting question:

why would we ever want to keep a crappy industry like that? why should we make disk drives and flat panels dram and lose our shirts when Asians are happy to do it for us and lose their shirts?

this is where guys like james get the world so backwards.

we should be thrilled to export failing, profitless industries.

that labor is better utilized elsewhere and we wind up richer as a result.

US manufacturing output continues to rise. better, the foreign pressure makes sure that it is more competitive and weeds out the failing industries making our manufacturing base stronger.

 
At 6/07/2011 1:21 PM, Blogger Dan Morgan said...

I'd like to see a similar analysis done on cars sold in the US. Just having assembly done here doesn't show the full picture. If all of the design and development is done in Japan for many models, the made in US claim holds less water.

 
At 6/07/2011 2:15 PM, Blogger morganovich said...

dan-

"made is us" is not much of a selling point for cars though, is it?

the cars made here are pretty unimpressive. (getting a BMW made in germany as opposed to the US will get you much better build quality)

designed here seems even worse.

perhaps it's my personal preference, but there is not a us designed car that i would even look at buying, at least not one made in the last 50 years.

building cars where you plan to sell them makes incredible sense and saves a ton of money. not only are they expensive to ship, but the US has different impact, bumper, emissions, and other standards that the rest of the world. the fact that despite that, i cannot find a US made car i'd own, speaks pretty poorly for our industry.

so i'm not really sure what your point is.

 
At 6/07/2011 2:25 PM, Blogger morganovich said...

"If the work is not done the U.S. (my preference) then Mexico, a NAFTA partner, is the next best place."

why?

why do you care where the things you buy are made so long as they are well priced and of good quality?

you are, of course, welcome to overpay for a crummy US car if you like, but to recommend polices that force others to do so is economically harmful.

also note:

you list is indicative of mexican weakness, not strength.

once you are out of the top 10, they have about 10k employees and under.

hell, the 50th biggest manufacturer has fewer than 3000 employees.

that's hardly a sign of heavy investment.

it's a sign that their manufacturing base is insignificant.

their entire nominal industrial output is about $250bn.

just our big 3 automakers are that big.

 
At 6/07/2011 2:47 PM, Blogger Buddy R Pacifico said...

morganovich states:

"it's a sign that their maunufacturing base is insignificant"

The Top 100 cited are Maquiladora manufacturers. Gee, I wonder why Sony employs over 158,000 employees in Mexico?

One of the issues morganovich is current on is quality of U.S. manufactured cars. Alpha (or high sigma) quality is available from U.S. auto manufacturing sites.

I am defending both Mexico and U.S. manufacturing because I think North American prosperity will be enhanced, in this century, through NAFTA.

 
At 6/07/2011 3:03 PM, Blogger Michael E. Marotta said...

Why should automobiles be made in Detroit, when we could make them here in Ann Arbor? Why should I pay my neighbor when she works at the hospital when I could set up a hospital here and treat myself?

If continental drift brought back Gondwanaland could we admit that it does not matter where something is made?

New World Records has an album of 19th Labor songs, called The Hand that Holds the Bread. Among the tunes is "It's the Chinese, the Chinese, You Know."
Listen here:
http://www.newworldrecords.org/album.cgi?rm=view&album_id=80267

It's an old song.

 
At 6/07/2011 4:19 PM, Blogger morganovich said...

buddy-

you are pointing to an entire industrial sector that wouldn't even be an industry in the US and calling it a big deal.

sony is the ONLY one on that list with a big number.

number 2 drops way off (75% fewer workers), and by 10, you're pretty small. by 50, you're tiny.

that whole list of 100 has fewer employees than our big 3 automakers.

have you ever actually tried to do business in mexico?

everyone i know who has tried it could not believe how bad it was.

and whatever you claim about us manufacturing, of autos, they just do not meet european or japanese standards.

by a BMW made in the US and compare it to one from germany. why do you think they had so many problems with the x5's? us made.

get a german one, and none of the problems.

look what happened to mercedes quality when they built here. those cars are junk.

and yes, nafta will drive prosperity. that is absolutely true, but manufacturing in mexico when asia is cheaper would reduce it. we lose more in higher prices than we gain in wages and corporate profits.

that seems to be the point you keep ignoring.

 
At 6/07/2011 4:24 PM, Blogger James said...

sure there is: an iphone would cost $1500.

You assume that is the case. But, of course you would. As a typical free trader you accept soft facts, often invented, to support free trade and insist on hard facts from opponents. This is another response based on what free trade was supposed to do rather than what it really did.

Well Apple is not providing me with hard numbers so here is an analysis with soft numbers:

A search of this site for “iphone” turns up a December 15, 2010 “iPhone Added $2Billion to Trade Deficit w/China” which has a pie chart that breaks down the cost of a $600 iphone as follows:

Design, marketing and profit...$360
Materials.............................187.50
Misc....................................45
Assembly in China....................6.54

The cost of materials is the world cost which would be the same here and in China except for the labor to assembly them. Assume that the labor proportion to assemble the input materials is the same the iPhone assembly that is another $2.04 of labor cost.

So we have a soft number of labor cost as $8.58.

How many hours of labor does that represent? And how much more would it cost in the US? I think well short of your straw man $1500.

Add to this no significant change in the demand curve and how much would Apple raise the price if forced by tariffs to bring production home?

You assume that when production is outsourced for cheaper labor that the cost savings the corporation gets is shared with the consumer. I suggest that is an assumption on your part that you can not back with numbers hard enough that you would accept them if they went against you. Until a significant number of competitors move offshore there is no completive reason for the corporation to lower price just because they get lower costs. The profits of multi-national corporations suggests to me that they are sharing no more than market forces dictate. The lion’s shares of the savings are going to managers and shareholders rather than consumers. Before we had free trade we had the highest real wages in the world. Think about the implications of that statement. It is equivalent of saying we had the lowest real consumer prices. Real wages are declining. The only way that could happen is that wages decline more than prices.

 
At 6/07/2011 5:34 PM, Blogger Ron H. said...

"The profits of multi-national corporations suggests to me that they are sharing no more than market forces dictate."

That's absolutely correct. Every firm wants to maximize profits and market share. That is the very essence of markets. Are you suggesting that YOU know how much profit a company should make, and that it's different from what the market dictates?

Keep in mind that a company finding lower labor costs overseas, forces competitors to find ways to lower their costs also, or lose market share. Any improved profits can only be temporary at best.

If you disagree that companies are forced to reduce prices to remain competitive, then you need to explain why they don't just ignore competition, and raise prices to any level they like. There's no doubt they would if they could.

 
At 6/07/2011 5:38 PM, Blogger Mike said...

James,

Production costs/savings are passed to the consumer and foreign competition makes it so. So, I can back the assumption with the only number that counts, the price tag.
You have a hang-up about moving production off shore without taking in to consideration that the mass of competition was born 'off shore' and continues to do business there.
Even if Morganovich is wrong about $1,500 Iphones, just adding a couple hundred to the price puts it well out of the competitive price range...certainly enough to make it a luxury item and not a pop culture phenomenon.

How 'bout an exercise in common sense.
You continually throw out the term 'free traders' like racial slurs at a KKK meeting. With all that pent up fury, you must have a very reasonable answer to this question:

If there is little or no difference in consumer price, American workers enjoy greater employment (creating far more tax revenue AND greater ability to buy the product) and the product is of equal quality, everything is so super clearly roses and rainbows, why would anybody ever even consider putting up with the headaches, logistical issues and bad press of outsourcing production?

 
At 6/07/2011 6:01 PM, Blogger Buddy R Pacifico said...

"and whatever you claim about us manufacturing, of autos, they just do not meet european or japanese standards."

morganovich would even be more appealing to the ladies if he was driving a Cadillac DTS; the best of category in reliability for customers.

 
At 6/07/2011 6:23 PM, Blogger Buddy R Pacifico said...

morganovich, the Lincoln will give you the highest dependability of any nameplate. Cadillac DTS is the best large luxury but any Lincoln is at the top for all car lines. Check out the link above from J.D. Powers for other U.S. engineered and produced winners for dependability (2011).

 
At 6/08/2011 8:47 AM, Blogger morganovich said...

buddy-

i'm going to stick with the german stuff, thanks.

that's not a terribly good comparison as there are VERY few cars that large made anywhere but the US and that BMW is built in the US.

try comparing it vs an M6 or something really german.

also: the caddy is a crappy car. it rides like a parade float and corners about half as well.

regarding lincoln, note that that was their first time atop the list, that they are a tiny line, and that the other 4 of the top 5 are not american.

(and isn't lincoln in the middle of a recall?)

they also have appalling styling and driving characteristics. only an american company could get so little power out of a v8. i've had 4 cylinders with more power than their 8's.

even if they don't break, i can't imagine why anyone would want to own one.

a pet rock lives longer than a pet dog, but that doesn't make it a better pet.

and don't even get me started on US sports cars. what an embarrassing pile of junk they are.

ever driven a viper? tons of grunt to be sure, but it's chassis bends like a rent a car, the handling is so sloppy as a result that i'm not even sure you can call it a sports car, and the interior is about the quality you'd expect from hertz.

the corvette is another overpowered pig. try taking one out on a windy road. i used to race up in marin with a buddy who has a zr-1. you can punk it in an m3 and a porsche turbo leaves it for dead. fast in a straight line, worthless in the turns (especially in hard switches as it has the wheelbase of a ups van) and ugly with a cheap interior and a lousy transmission to boot. it shifts like a jeep.

the cobra? hahahahahaha. what a pile of overhyped junk. it's just lipstick on a pig.


hey, differences of opinion make a market, and if you like driving a lincoln, knock yourself out, but i find nothing about american cars appealing. linclons are big, ugly, slow, and handle like a river barge.

 
At 6/08/2011 8:56 AM, Blogger morganovich said...

ps.

from your own study (which you appear to either not have read or quoted VERY selectively):

"The study finds that while domestic brands have closed the gap in initial quality with import brands, there is still a considerable difference between the two in vehicle dependability, with import brands outperforming domestic brands by 18 PP100 in 2011. This is consistent with findings of the 2008 Initial Quality Study,SM which examined the models included in the 2011 VDS after 90 days of ownership."

 
At 6/08/2011 9:01 AM, Blogger Ian Random said...

From hearing about manufacturers that stayed here, number one is to get rid of labor. Remember an employee must generate value in excess of their costs, so with a minimum wage of $200/month ($1/hour?) in China you can do a lot with. Everything can be hand assembled at that cost. Now in the US at the wonderfully stupid $7.25 wage, they have to be at least 7x as productive not counting nutty environmental or land use laws. Can an American sew 7x times as many shirts? What do you want to pay more for? I actually do prefer paying a little more for a brand name on a Chinese item, since I know someone actually inspected it.

 
At 6/08/2011 9:41 AM, Blogger niknaknoo said...

The problem is there aren't enough Apples to outweigh the flow of capital abroad which is causing the dollar to sink, Americans to lose purchasing power, and unemployment to rise.

 
At 6/08/2011 10:56 AM, Blogger James said...

Mike,

Production costs/savings are passed to the consumer and foreign competition makes it so. So, I can back the assumption with the only number that counts, the price tag.

If that is acceptable proof to you then I would bet you are a liberal arts major with little on no understanding of cause and effect, markets, statistics, inflation, economic analysis, or scientific method.

 
At 6/08/2011 12:53 PM, Blogger morganovich said...

"The problem is there aren't enough Apples to outweigh the flow of capital abroad which is causing the dollar to sink, Americans to lose purchasing power, and unemployment to rise."

this is wrong in every respect.

the dollar is not tanking due to a flow of capital abroad but rather due to preposterous interest rates and money supply growth.

unemployment does not rise as a result of trade. it's always a net gain to the economy in real terms. more real growth and wealth = more job creation.

if you want to keep capital here, cut corporate taxes and ease the insane regulatory and tort thicket our companies must operate within. oh, and stop sending all the promising entrepreneurs we just educated home. that would help too.

 
At 6/08/2011 1:39 PM, Blogger Mike said...

James,

I should have guessed that would be your assessment of what I said. You clearly don't understand even the most basic economics, so I'm not surprised you would try to place a label on me rather than answer my question or make a reasonable argument. I noticed something funny: You know how to tell when someone is so utterly confused that they no longer know which way is up? Morganovich stops wasting his time replying to him.

I'll type slow so you can keep up. In a very competitive global market, there is nowhere to hide your costs/price. The price tag is absolutely the end result of costs + the maximum profit you can squeeze without losing your target consumer group. That's as simple as I can make it for you, and it's not a result of any particular college major I may have had 20 years ago, it's what I've found to be true after owning and operating a business with international clients for well over a decade.

Have you found a different result in the business you own or run?
I'm kidding, obviously you have zero experience in the real world.

Try theorizing on my original question. If there's no benefit, why do companies outsource? Can't wait to hear this....

 
At 6/08/2011 1:45 PM, Blogger Ron H. said...

"and don't even get me started on US sports cars. what an embarrassing pile of junk they are."

You didn't mention the Ford GT. My only personal experience with them is drooling on them, but I've heard and read good things about them. Jeremy Clarkson tested the 750hp version on an episode of Top Gear, and wouldn't get out of it when segment was done.

Obviously they were a very limited production car, and maybe not a fair example, as they are no long made, but I'd be interested in any comments you might have..

 
At 6/08/2011 2:05 PM, Blogger morganovich said...

ron-

thart may be the one exception, but still, for the money, wouldn't you rather be driving ferarri or an r8?

the 911 turbo will walk all over a GT for $50k less.

the run on that car is so small it's not really a production car.

what are there, 4k in the world?

the doors are a horror too. cool, but don't park next to anyone. ever.

it also has a turning radius like a supertanker.

it's internal trim screams "cheap ford" too.

also note:

they don't make them anymore.

to buy one now you'll pay as much as you would for a carerra GT, which is twice the car to drive and 50 times as pretty.

 
At 6/08/2011 2:35 PM, Blogger Ron H. said...

"thart may be the one exception, but still, for the money, wouldn't you rather be driving ferarri or an r8?"

Well, maybe, but I have no way of knowing, as I haven't driven any of them. I purposely avoid driving cars like these, as I know that would lead to "got to have it", and all good sense would leave me. Buying one would probably mean I would also have to live in it. That being the case, that Cadillac would probably make a better home.

"the doors are a horror too. cool, but don't park next to anyone. ever."

Is that really a problem? I can't imagine anyone who owns one actually considering getting out of it. I know I wouldn't.

"it's internal trim screams "cheap ford" too."

I suspect this was Ford's way of proving to skeptics that it actually was a car built by Ford.

 
At 6/08/2011 2:42 PM, Blogger Ron H. said...

"The problem is there aren't enough Apples to outweigh the flow of capital abroad which is causing the dollar to sink, Americans to lose purchasing power, and unemployment to rise."

I think you have this exactly backwards. If dollars were actually flowing out of the US and not returning, the value of those remaining would rise, and buying power would also increase.

The causes of the problems you see are much closer to home, in fact just accross the Potomac river.

 
At 6/08/2011 2:48 PM, Blogger Whiskey Jim said...

@morganovich

Vehicles are intensely personal, so I will disagree with you; there are some very well made domestic vehicles, admittedly not that many.

- Comparing sticker prices, the Corvette is a heck of a car. Comparing it to a Porsche turbo makes the whole point. And if you want to see cheap interiors, let's begin with the lower end BMW's and Porsche's, that no 6'4" man could ever fit in.

- I'll take my Tahoe any time:)

- I'd much rather drive a Caddy than a Lexus, which I have no respect for at all. Just sayin'.

- Talk to any professional limo driver. There are many reasons they mostly buy Lincoln Town cars, and if you've spent much time in their competitors (which I have), the advantages of dependability and comfort are appealing.

- There are reasons the Ford 150 is perennially the highest selling vehicle in the nation.

Besides the disgusting management culture and union influence on domestic car manufacturers, the Cafe laws force GM and Ford, who gave up the low end decades ago, to build a lot of cars they would not otherwise build. That is not entirely their fault.

If you look in their sweet spot, the domestics make a number of very good vehicles, especially given the gob-smacking mistakes management has made over the years, over-extended union contracts being one of them.

 
At 6/08/2011 3:39 PM, Blogger Mike said...

I know this is subjective, but I'd have to agree with Morganovich. I don't really care about speed or cornering, so I buy 'bells and whistles' and what ever I like the looks of. Based on my most recent experience (we ended up with a Lexus) there was just something cheap looking and feeling about all the US cars....especially the interior. I'm not a car guy, so I can't put my finger on what it is exactly (too much plastic and rubber??). I've never seen anything US-made come close to the quality of leather I have in mine....it may exist but I haven't seen it....To be fair, I don't like the caddy exterior, so we didn't look at them too closely.

The reliability factor doesn't seem to be as big an issue these days...I think the US makes cars that run as long as anybody, it's purely look and feel for me and, in my eyes, the US has a way to go.

 
At 6/08/2011 4:30 PM, Blogger James said...

Mike,

Ok, fair point. I will give a more detailed response.

Your assertion was:

Production costs/savings are passed to the consumer and foreign competition makes it so. So, I can back the assumption with the only number that counts, the price tag.

To make that stick you would need to at least show:

1) A statistically significant sample (one will not do it) of products previously manufactured in the US and now outsourced along with the prices then and the prices now inflation adjusted to a common time. These would have to be average prices not a loss leader price.

2) Each product set would have to be of the same design. That is no quality differences.

3) Some adjustment would have to be made for the normal year to year price changes not attributable to outsourcing. As an extreme example of this consider the Eversharp ballpoint pen which came out in 1945 at a price of $9.75 each. Prices came way down from there without outsourcing. In the product you put forth to prove outsourcing reduced consumer price you would need to prove that the price reduction was in fact the result of the outsourcing and not other factors.

If you did all that, a non-trivial undertaking, you are still only half way home. I do not say that outsourcing does not give the consumer lower prices. I said that outsourcers are giving themselves much of the savings and that the net savings for most Americans, the 80 percent covered in the Average Weekly Earnings is less than what they lose in wages. I support this by noting that real wages are going down. Lower prices should make real wages go up.

Now let me point out that you made the claim that you saw the savings in the price tag. Yet you shared neither that price tag nor the price tag of the previously domestic made product. Thus demonstrating one of my major complaints about free traders: you are so sure that free trade does what the theory and the myth say it is supposed to do that you assume that its value is so self evident that it need not be defended with facts.

Now be honest. Give the devil his due. I nailed your liberal arts degree did I not?

 
At 6/08/2011 6:20 PM, Blogger Mike said...

James,

Good lord! Do you work for the government? I've never seen so much mumbo jumbo. Tell ya what, you do all that stuff and I'll go do something that might actually put me closer to my goal. I believe you are making the mistake of only seeing the price tag I mentioned and not attaching the product that goes with it. Price savings are not only money, they're increased value due to improvements as well as added features.

(1) This is why so many career politicians screw up the economy.
I don't need to do any of that to prove the point...that is a bunch of nonsense and a waste of time (especially when the product was never produced in the US or never produced at all, read: new product).
This is a global market, the product didn't have to be produced here at one time to show price savings. A more efficient US firm can still enter a field and change the game.

(2) If you had ever actually made or wholesaled anything, you'd know that silliness you just spat out means next to nothing, mostly because those numbers would have to be largely theorized and that theory would sound very different depending on if it came from me or you. No quality difference? Using our cell phone example, one small feature is a quality difference.

(3) You can pull out your old text book and tell me about a 1945 ballpoint, but how about I give you facts rather than oddities:
I'm currently working on a project that is web based and the software/developing will be very labor intensive because there is nothing like it to this point. Preliminary numbers are showing me that I can get this moving for about 30% less by moving it over seas. Working with these numbers, I can see that it will be possible to offer a better product in a crowded field for a better fee structure to clients. For the record, I do not want to deal with this. I'd much rather speak English and call across town, but it ain't gonna happen.
There is absolutely no reason to enter a crowded field unless you can improve over your rivals....and, believe it or not, making a dramatically different product in a very established field isn't something you can just snap your fingers and come up with. So, the best way to enter that field with any hope of swaying long-time business is....c'mon, you can do it...that's right! Price!

 
At 6/08/2011 6:21 PM, Blogger Mike said...

You make this decision every time you buy something...you either choose product differences that are important enough to pay for, or you choose cheap. In many sectors, product difference is minimal and price competition is the only competition.
And, please, don't embarrass yourself by arguing that.

Apple doesn't have to be the cheapest because of their army of zombies that would buy anything they put out and then gladly put an Apple window sticker on their car for the privilege...yet, they still stay in the 'normal' price range. I believe they could charge more for every product they make and their base would still be pleased to pay. But they wouldn't get as many conversions. The market controls their pricing parameters, but their innovation, quality and service command slightly higher prices.

Perhaps more important (certainly to me), that 30% savings I mentioned may very well be the difference between me being able to attract the right investment or not at all.
So, don't leave out the very real possibility that some products simply wouldn't exist, let alone have potential to pass savings on to clients or force a tired, old industry to evolve. Apple would not be in their current phone business if there was no outsourcing.
As a start-up going against the big boys, the entrenched can, and do, lower their profits and prices to squeeze out competition (when they can't get gov't to pass new regulation)...leading to fewer choices for you and, ultimately, higher prices in actual costs and quality.

I can't believe you need reams of data to see what's in your pocket. How much was your cell phone 8 years ago and what did it do? Now?
The technology fairy didn't sprinkle dust on it. You have the end result of multiple companies trying to beat each other by giving you more and/or charging you less and there's only one way US companies can play in this game. If you believe there's room in there to start your own company, knock yourself out.

Oh, and in total honesty, no...swing and a miss on lib arts.
I've answered your question, now you should answer the one I've asked you twice.

 
At 6/08/2011 7:26 PM, Blogger Ron H. said...

James,

You don't need to show your falling wage chart again, as I have seen it several times, but I have found some that use the same source - BLS - and draw quite different conclusions. Note that these are all from this very blog. Can you explain what's wrong with them?

Here's an interesting comment on the BLS CES data you rely on to demonstrate fallinmg real wages. I realize that Edwin Dean is just one more economist discussing wage data, but I think he makes some valid points. Can you refute them?

By the way, it appears that political hack Krugman agrees with you.

 
At 6/08/2011 8:50 PM, Blogger VangelV said...

I would love to see the wage distribution curve. It is possible that most of the money paid out to American employees accrues to the top 50 or so individuals responsible for the program. It is not as likely that the distribution would be the same for overseas employees where most would tend to get paid in the same ballpark as their fellow employees.

And it would be nice to see the full compensation data after-tax and adjusted for purchasing power.

 
At 6/09/2011 3:03 PM, Blogger Mike said...

Look, James...
I've been trying for days to get you to say that the only reason companies outsource is to boost profits, not to be competitive. I know that's what you think, but you won't say it. I'm sick of this conversation, so I'm just going to post the reply I've been sitting on.

I UNDERSTAND YOU!

Companies do not pass on cost savings to consumers.
Knowing that it's impossible to simultaneously pass on savings while not passing on savings, that necessarily means pricing is completely arbitrary when companies outsource or cut other costs.

That also means that competition is irrelevant and consumer prices would be the same if we only had one company making each product. That sounds like a good idea...easier to keep an eye on 'em that way and make sure wages are distributed fairly.
I think we should do that.

While we're at it, you know better than anybody how much profit these companies should be allowed to earn, so I'd like to nominate you as Profit Czar. Sound good, comrade?

I'm counting on you using all of your incredible expertise in cause and effect, markets, stats, inflation, economic analysis and scientific method when you write our manifesto.

 
At 6/14/2011 1:38 PM, Blogger James said...

You don't need to show your falling wage chart again, as I have seen it several times, but I have found some that use the same source - BLS - and draw quite different conclusions.

Ron,

No wonder you believe in free trade! You are not a keen observer of detail.

The BLS has several measures of wages. They differ is several respects among them who is covered, what is counted as compensation, and what price deflator is used.

The BLS series I used was average hourly earnings while your source used total compensation. These two series are not the comparable, because, among other things, they contain different groups of people. Average hourly earnings only refers to production workers, construction workers, and non-supervisory workers, whereas the compensation series includes all wage and salary workers as well as a compensation imputation to proprietors. The divergent trends between falling wages and rising compensation in part reflects an increased share of compensation going to non-wage income, and in part reflects the growing wage gap between non-supervisory workers on the one hand and supervisors or proprietors on the other.

For the purpose of seeing the impact of free trade on the vast majority of Americans I contend that average hourly earnings is the more telling data series. There is little doubt that managers benefit from free trade.

If there's no benefit, why do companies outsource? Can't wait to hear this....

Mike,

I never said there is no benefit to companies. Companies gain substantial benefit from outsourcing. I question the benefit to the vast majority of Americans.

To my original argument that free trade does not benefit consumers as much as commonly perceived because companies retain much of the savings as profit I would like to note two other economic forces working against consumers getting lower prices as a result of free trade:

First, American consumers pay higher prices on their consumption of goods exported. From basic supply and demand the additional demand from other countries made possible by free trade causes an increase in price for domestic consumers.

Second, the decline in the value of the dollar causes the price of all imports to increase. Part of the reason the government wants the dollar to decline is to make exports more attractive to foreigners. The collateral damage of a weaker dollar is that import prices to the consumer go up.

Note that band of states from North Dakota south to the Gulf of Mexico. The recession has not hit these states nearly as hard as the rest of the nation. In these states International demand for grain and a weak dollar have pushed up the price that Americans consumers pay for products of these states grain and energy.

 
At 6/15/2011 6:23 PM, Blogger Tom said...

I hear Germany mentioned time and again in reference to auto production and generally better built machines. Germany is one of the few nations with a SURPLUS of trade with China, mainly large machinery for Chinese factories. They've kept an industrial base through intensive vocational training of their workforce, renegotiation of trade union contracts, tax breaks to their industry, and yes, gasp, socializing health care costs - a not insignificant leveling of the playing field for business. We ain't got none a dat stuff here in da USA no more. I went to my niece's graduation last week (in a fairly well to do community) at the very high school I went to 30 years ago. A full quarter of the kids were honor students - but there are no more auto, wood, or machine shop classes. What profession is available to those who don't fit into the "new" (now not so new) knowledge based work force?

 

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