Manufacturers’ Blues

What Should We Be Making?

Today’s theme on the news feed seems to be manufacturing. Pleaides forwards this number here on Crikey behind a subscription wall. The salient bit is worth quoting so here it is:

But, as much as people didn’t want to lose jobs, most could see that the jig was up — that there was something absurd about making shoes in Collingwood, dresses in Redfern, fabric in Footscray — when they could be done so much cheaper elsewhere. On that, there was a broad deal of implicit agreement between the neoliberal elites and the masses.

The difficulty now, for both major parties supporting this move, is that it’s a one-time deal. Like a diet that goes too far — cutting first fat, and then muscle and organ tissue — the obsessive free trade/comparative advantage mantra makes no distinction about what is being lost. In that, it wilfully blinds itself with the abstract generalities of economic theory, to its particular effects on the ground, and how they are viewed. The  public lacks that bias, and retains its willingness to take things on a case-by-case basis.

Thus, the evisceration of manufacturing could proceed in the Keating era, because everyone could see the sense of it — there was no compelling collective reason we needed to produce our own shoes (though there may be all sorts of social and cultural reasons for it) and most people can see that. But steel is a different matter, and most people can see that too.

That one raises a few questions. First of all, when we sub out our manufacturing to the cheaper countries, do they hold to our standards? Anecdotally at least it seems this is not so. All our detailed standards for steel specifications are hardly met by the steelworks in China and South Korea. They churn out crap steel that ends up causing more problems when we buy their product. I’ve even seen this in a licensed Floyd Rose bridge on an electric guitar where a steel saddle snapped in half. That’s not supposed to happen.

Anyway, the point is not to bash Chinese steel, but you get my point. Once we sub out an industry like steel making, then we’re vulnerable to the crappy product standards of the developing world. We might be willing to live with that in fabrics (it’s uncomfortable but it hasn’t killed anybody has it?) but can we live with that arrangement with something like steel? In a sense, there’s a lot of value added to the steel that comes out of our steel works, simply by having higher standards of specification.

Then there’s Michael Pascoe:

Various people have cited the Barbienomics lesson in recent years, but to the best of my knowledge credit for it belongs to a Hong Kong University post-grad student of Professor Michael Enright. Barbienomics was part of Enright’s presentation at an AICD conference in Shanghai in 2007.

In brief, the student worked across the border in a factory that made Barbie dolls for Mattel. American protectionists seemed to have a particular focus on Chinese toy manufacturers at the time, so the student broke down where the value was in a Barbie doll when it was purchased from an American store.

In rough numbers, the brand – Mattel’s trade mark, the Barbie name and design, the intellectual property – captured 40 per cent of the value. The retailer grabbed another 40 per cent. Parts and materials accounted for about 10 per cent. Logistics, moving Barbie from the factory to the shop, took six or seven per cent, leaving just three or four per cent for the assembly.

Displayed as a graph with a smiling Barbie, the plastic doll effectively asked the audience an obvious question: which part of value capture is most worth having, which part least?
At the time, Chinese were asking just what America was complaining about when China’s factories were capturing so little of the value and doing so much of the work.

Now, that’s interesting information right there. In pursuit of profits, companies will move manufacturing to developing nations, but the point of moving such labor is to pay so little for labour costs it can take a bigger slice of the margins. The furore surrounding Pacific Brands in the last few years was essentially a move to do exactly that. Our cheaper apparel shops are flooded with goods from China but the the analysis quoted above suggests that 40% of the price goes to the brand, another 40% goes to the retailer and the labourers in China or wherever ends up with 6-7% of that pie. This is exactly why being marketed to by brand is a terrible thing for our own personal finances. You can count on the fact that well over 50% of the ticket goes to the brand and retailer for our pleasure of them being who they are and having it in a shop we can get to.

Try Apple for size.

We have become slaves to Apple’s brand, which, according to the research company Millward Brown, today makes up more than half the company’s $US350 billion ($328 billion) book value. By and large, what Apple makes, we buy – unquestioningly.

The logo and name have become the symbol of consumerist cool, an affordable piece of luxury that, if you believe Apple’s marketing, divides consumers the world over into Apple lovers and others, and ne’er the twain shall meet.

But there is nothing very cool about the culture of the company Jobs has presided over since he returned as CEO in 1997, after being ousted some years earlier in a boardroom coup. Its ”my way or the highway” approach to business has earned it few friends. Apple is one of the few technology companies in the world that has succeeded despite having a closed ecosystem that does not work with any other technology. This protectionist approach extends to Apple’s aggressive policy towards patents and trademarks. Any company, be it large or small, that dares use the ”i” or anything resembling an apple in its brand, invites the wrath of Apple’s corporate lawyers.

Which is a bit of a rant article about how Steve Jobs is no saint, but it’s worth pondering for a moment at the sheer power of Apple’s brand and the fact that it is the world’s biggest company by capitalisation – that never pays a dividend to its investors (!). It is worth asking if it is a good corporate citizen at all. If it weren’t for their product, they’d be monopolists like… Microsoft.

There are people committing suicide in Apple’s factories in China because of the grueling conditions and they probably get a tiny fraction of the 6-7% the factory gets out of the price of an iPod or iPad. It’s getting to the point that the factory wants to automate so that it can get rid of labor costs. It’s a contradictory kind of world. To deliver ever cheaper goods, a lot of companies have decided to cut labour costs but in turn this has led to poorer people who cannot afford the cheaper goods because they can’t get the jobs they used to have. And given the cheaper cost of production, these companies all line up to collect the lion’s share of the profits while some of them complain about having competition.

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