How US Manufacturing Was Gutted With A Smile

Latest stories

Indonesia-China drone clash exposes foreign labor oversight gaps

China's Hainan Free Trade Port heralds new era of openness

Thai-Cambodia conflict escalates perilously from land to sea

Cupertino is where it's at with mid-level software engineers commanding compensation north of $200,000 per year and marketing managers on poverty wages of $170,000 per year.

Is it not obvious which ends of the Smile Curve are adding the most value? Just look at the proles in Foxconn's Zhengzhou plant in China – 180,000 workers assembling Apple products for $3.89 per hour plus dormitory housing.

What is that? $10,000-14,000 per year? And what do manufacturing process engineers make? According to Doubao, mid-level process engineers at Foxconn are paid $21,000 per year, with senior engineers making $55,000 per year.

But now, all of a sudden, everyone is telling us that the US must re-industrialize. America has grown dangerously dependent on Chinese manufacturing, they say. The US has lost the necessary skills for an advanced industrial economy, they say. The loss of manufacturing capacity is a national security risk, they say.

Fair enough. Message heard. Loud and clear. The economic efficiency promised by the Smile Curve may need to be sacrificed a bit, just to have a little more slack in the system. Just so China can't turn the screws or, god forbid, think industrial capacity is advantageous in a kinetic Taiwan scenario.

So how come it is so hard? If manufacturing resides at the bottom of the Smile Curve, where the least value is added, should it not be the easiest part of the value chain to replicate?

The higher-skilled workers are, of course, the software engineers, designers and marketing managers in Cupertino. Manufacturing is low-value add. It says so right there, in the cost breakdown of an iPhone, in the compensation of a Foxconn Zhengzhou factory worker and process engineer.

In multiple interviews, Elon Musk explained that manufacturing was two to three orders of magnitude more difficult than design – that's 100x to 1,000x more challenging. All the effort expended on design is ultimately a rounding error of the engineering required to manufacture a product.

Old-school engineers understand this intuitively. Design engineers and manufacturing engineers exist in professional tension. The manufacturing guys made the final call because they were downwards compatible, able to do the work of the design engineers, but not vice versa.

The value of manufacturing only appears low on the Smile Curve because the sell-off of American assets has distorted value capture. The globalization trade, turbocharged by China's 2001 WTO accession, has been to exchange American assets for Chinese goods.

Software engineer, designer and marketing manager compensation in Cupertino is being priced to the value of US assets sold and is not, in all likelihood, doing higher-level work, as many surely believe.

All of this is an expression of the Dutch disease and Baumol's law. Dutch disease refers to the Netherlands' economy in the 1950s after natural gas was discovered in the North Sea. The resulting boom strengthened the currency and redirected capital to the energy industry, resulting in deindustrialization and loss of manufacturing competitiveness.

Rather than selling one natural resource like natural gas, the American economy has been living beyond its means by financializing its economy and selling off all kinds of assets – stocks, bonds, treasuries, agencies, real estate, derivatives and now cryptocurrencies.

Baumol's law is typically used to explain why wages and prices in labor-intensive, low-productivity service sectors (e.g., the arts, healthcare, education) rise with the overall economy, even without productivity gains, making them ever more expensive.

Under Baumol's law, unproductive sector wages must be benchmarked to booming sector wages or risk losing workers. After all, Silicon Valley needs school teachers and nurses to remain school teachers and nurses and not all go to coding boot camp.

Globalization and Dutch disease have corrupted Baumol's law in that it has benchmarked the value and compensation of not especially difficult jobs – software engineering, design, marketing – to the value of America's asset sales.

Outsourced manufacturing was not the easy, low-end part of the value chain. It was, in fact, the hardest, highest-skilled and most difficult to replicate part of the value chain. In a Dutch disease environment, that is precisely why it was outsourced.

By living off asset sales, America was able to keep the fun, cushy and“creative” e-mail jobs whose value was inflated by Dutch disease and Baumol's law while abandoning the difficult, dirty, intricate, frustrating and labor-intensive jobs to China.