Tuesday, January 31, 2012

What an American engineer can't do

WASHINGTON: Apart from sheer speed and flexibility, another critical factor that led Apple to manufacture in China was that it provided engineers at a scale that the United States could not match.

Apple's executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company's analysts had forecast that it would take as long as nine months to find that many qualified engineers in the US.

In China, it took 15 days.

Companies like Apple 'say the challenge in setting up US plants is finding a technical workforce', said Professor Martin Schmidt, an associate provost at the Massachusetts Institute of Technology.

In particular, companies say they need engineers with more than a high school education but not necessarily a bachelor's degree. Americans at that skill level are hard to find, executives contend.

'There are good jobs, but the country doesn't have enough to feed the demand,' Prof Schmidt said.

Some aspects of the iPhone are uniquely American.

Its software, for instance, and its innovative marketing campaigns were largely created in the US. Apple recently built a US$500 million (S$630 million) data centre in North Carolina. Crucial semiconductors inside the iPhone 4 and 4S are manufactured in an Austin, Texas, factory by Samsung of South Korea.

But even those facilities are not enormous sources of jobs. Apple's North Carolina centre, for instance, has only 100 full-time employees. The Samsung plant has an estimated 2,400 workers.

'If you scale up from selling one million phones to 30 million phones, you don't really need more programmers,' said Mr Jean-Louis Gassee, who oversaw product development and marketing for Apple until he left in 1990. 'All these new companies - Facebook, Google, Twitter - benefit from this. They grow, but they don't really need to hire much.'

It is hard to estimate how much more it would cost to build iPhones in the US. But various academics and manufacturing analysts estimate that because labour is such a small part of technology manufacturing, paying American wages would add up to US$65 to the expense of each iPhone. Since Apple's profits are often hundreds of dollars a phone, building domestically, in theory, would still give the company a healthy reward.

But such calculations are, in many respects, meaningless because building the iPhone in the US would demand much more than hiring Americans - it would require transforming the national and global economies. Apple executives believe there are simply not enough American workers with the skills that the company needs or factories with sufficient speed and flexibility. Other companies that work with Apple, like Corning, also said they must go abroad.

Manufacturing glass for the iPhone revived a Corning factory in Kentucky, and today, much of the glass in the phone is still made there. After the iPhone became a success, Corning received a flood of orders from other companies hoping to imitate Apple's designs. Its strengthened glass sales have grown to more than US$700 million a year and it has hired or continued employing about 1,000 Americans to support the emerging market.

But as that market has expanded, the bulk of Corning's strengthened glass manufacturing has occurred at plants in Japan and Taiwan.

'Our customers are in Taiwan, Korea, Japan and China,' said Mr James Flaws, Corning's vice-chairman and chief financial officer.

'We could make the glass here and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that's 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.'

Corning was founded in the US 161 years ago and its headquarters are still in upstate New York. Theoretically, the company could manufacture all its glass domestically. But it would 'require a total overhaul in how the industry is structured', Mr Flaws said.

'The consumer electronics business has become an Asian business. As an American, I worry about that, but there's nothing I can do to stop it. Asia has become what the US was for the last 40 years.'

Modernisation has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers and then salesmen and middle managers. These shifts have carried many economic benefits, and, in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed, economists said. Mid-wage jobs started disappearing. Particularly among Americans without college degrees, today's new jobs are disproportionately in service occupations - at restaurants or call centres, or as hospital attendants or temporary workers - that offer fewer opportunities for reaching the middle class.

But as Apple's overseas operations and sales have expanded, its top employees have thrived. In the last fiscal year, the company's revenue topped US$108 billion, a sum larger than the combined state budgets of Michigan, New Jersey and Massachusetts. Since 2005, when Apple's stock split, share prices have risen from US$45 to more than US$427.

Some of that wealth has gone to shareholders. Apple is among the most widely held stocks, and the rising share price has benefited millions of individual investors, 401(k)s (a US retirement savings plan) and pension plans. The bounty has also enriched the company's workers. In the last fiscal year, besides their salaries, Apple's employees and directors received stock worth US$2 billion and exercised or vested stock and options worth an added US$1.4 billion.

But the biggest rewards have often gone to Apple's top employees. Chief executive Tim Cook last year received stock grants - which vest over a 10-year period - that, at today's share price, would be worth US$427 million, and his salary was raised to US$1.4 million. In 2010, his compensation package was valued at US$59 million, according to Apple's security filings.

A person close to Apple argued that the compensation received by the company's employees is fair, in part because it has brought so much value to the nation and the world. As the company has grown, it has expanded its domestic workforce, including manufacturing jobs. Last year, Apple's American workforce grew by 8,000.

While other companies have sent call centres abroad, Apple has kept its centres in the US. One source estimated that the sales of Apple's products have caused other companies to hire tens of thousands of Americans. FedEx and United Parcel Service, for instance, both said they have created American jobs because of the volume of Apple's shipments, though neither would provide specific figures without permission from the company, which declined to provide details.

'We shouldn't be criticised for using Chinese workers,' a current Apple executive said. 'The US has stopped producing people with the skills we need.'

What is more, Apple sources said the company has created plenty of good American jobs in its retail stores and among entrepreneurs selling iPhone and iPad applications.

Towards the end of US President Barack Obama's dinner last year with late Apple founder Steve Jobs and other Silicon Valley executives, the two men spoke again.

'I'm not worried about the country's long-term future,' Mr Jobs told Mr Obama, according to one observer.

'This country is insanely great. What I'm worried about is that we don't talk enough about solutions.'

At dinner, for instance, the executives had suggested that the government should reform visa programmes to help companies hire foreign engineers. Some had urged the President to give companies a 'tax holiday' so they could bring back overseas profits which, they argued, would be used to create work. Mr Jobs even suggested it might be possible, some day, to locate some of Apple's skilled manufacturing in the US if the government helped to train more American engineers.

Economists debated the usefulness of those and other efforts and noted that a struggling economy is sometimes transformed by unexpected developments. The last time analysts wrung their hands about prolonged American unemployment, for instance, in the early 1980s, the Internet hardly existed. Few at the time would have guessed that a degree in graphic design was rapidly becoming a smart bet, while studying telephone repair was a dead end.

But what remains unknown is whether the US will be able to leverage tomorrow's innovations into millions of jobs.

In the last decade, technological leaps in solar and wind energy, semiconductor fabrication and display technologies have created thousands of jobs. But while many of those industries started in the US, much of the employment has occurred abroad. Companies have closed major facilities in the US to reopen in China. By way of explanation, executives said they are competing with Apple for shareholders. If they cannot rival the company's growth and profit margins, they will not survive.

'New middle-class jobs will eventually emerge,' said Harvard economist Lawrence Katz. 'But will someone in his 40s have the skills for them? Or will he be bypassed for a new graduate and never find his way back into the middle class?'

The pace of innovation, said executives from a variety of industries, has been quickened by businessmen like Mr Jobs. General Motors went as long as half a decade between major automobile redesigns. Apple, by comparison, has released five iPhones in four years, doubling the speed and memory of the devices while dropping the price that some consumers pay.

Before Mr Obama and Mr Jobs said goodbye, the Apple executive pulled an iPhone from his pocket to show off a new application - a driving game - with incredibly detailed graphics. The device reflected the soft glow of the lights in the room. The other executives, whose combined worth exceeded US$69 billion, jostled for a position to glance over his shoulder. The game, everyone agreed, was wonderful.

There was not even a tiny scratch on the screen.