I guess somebody forgot to tell Apple there’s a recession going on.
Defying the struggling economy and crushing Wall Street’s expectations, Apple delivered its best quarter ever, setting record unit sales of both iPhones and Macs, and producing its largest profit in history: at $1.67 billion, a 46-percent increase over the year ago quarter.
Now to be honest, I’ve long been a bit of an Apple fanboy, and an admirer of CEO Steve Jobs obvious genius. While I’ve developed, published and supported software for both Mac and Windows PCs, and am quite comfortable working in a Windows environment, the Mac has been my platform of choice at home for over two decades, and when given the option, at work as well. And with Apple’s share price now hovering near an all time high, the couple hundred or so shares I own in my IRA comprise my single largest asset outside the equity in my home, and by far my best investment ever. (I bought in October of 2001. You do the math.)
But this post isn’t meant to be one of those partisan Apple vs. Microsoft things, for while I love Apple’s products, and have personally profited from its stunning revival, I fully understand that it is just another amoral corporation, whose primary responsibility is to maximize shareholder value. Rather, I thought I’d use Apple’s earnings report as a springboard for making a brief comment on the likely future of Boeing here in Washington state.
On the back of my beloved iPhone, and I suppose on every other piece of Apple hardware these days, is stamped the pronouncement: “Designed by Apple in California. Assembled in China.” Apple used to proudly tout its state of the art US manufacturing facilities, but shuttered its last major domestic plant in 2004. Nowadays it appears that all of the company’s manufacturing is contracted out to third parties, mostly in Taiwan and China. (Apple is infamously secretive to the point of paranoia, so it’s hard to say for sure.)
Apple sold 3.05 million Macs, 7.4 million iPhones and 10.2 million iPods in the last quarter, and I’m not sure they own and operate a single factory. Yet they still manage to maintain some of the highest margins in the industry.
From a shareholder’s perspective, it’s hard to argue with that kinda success.
Now apply that same sort of logic to Boeing, and you get a pretty good idea of where its local manufacturing jobs may be headed.
Of course, jetliners aren’t mass produced, so it would be wrong to make too direct a comparison, but anybody who thinks a sense of corporate citizenship is going to push Boeing executives to keep manufacturing jobs here in Washington state is smoking crack. Nor should we expect the recent meltdown in Boeing’s outsourcing strategy to dramatically alter the company’s long term manufacturing plans.
Boeing is intent on moving production to where labor is cheapest, be it South Carolina, or ultimately, China. That’s what Boeing executives believe it takes to compete in today’s global market, and that’s what they believe they need to do to maximize shareholder value. And there’s nothing we can do to stop them.
So the question is… are Boeing executives right?
Apple excels at innovation, engineering, industrial design and marketing — some of which Boeing itself hasn’t been too shabby at over recent decades — but apart from a few custom chips and case moldings, Apple’s products are largely assembled from commodity components using standard, if generally cutting edge manufacturing techniques. But when Boeing designs a new airplane, it also designs many of its basic components, sometimes right down to the individual rivet. Meanwhile building an airplane is much more labor intensive, and requires many more specialized skills than, say, assembling an iPhone.
But of course the biggest difference between Apple and Boeing is the acceptable level of quality control. When a Mac crashes, the worst case scenario is you lose a little data. But when an airplane crashes… well, I don’t need to draw you picture.
That said, the possibility of outsourcing components, and possibly even final assembly to low cost contractors, wherever they may be, must be awfully compelling to Boeing, especially considering that this option is not nearly as available to its primary competitor, Airbus.
Think about it. Airbus was conceived and subsidized primarily as a jobs program for its European partners, so with the tens of billions of taxpayer euros invested in the venture, it’s hard to imagine the political will necessary to export these high wage manufacturing jobs to China or anywhere else. Boeing on the other hand is unburdened by such demands, putting it at a distinct competitive advantage should it successfully execute its outsourcing strategy.
That it is, assuming, Boeing’s primary competitor really is Airbus.
Like I said, Apple excels at innovation, engineering, industrial design and marketing, skills its Chinese manufacturing partners have yet to master, but which are absolutely critical to successfully selling consumer products with short product life cycles in a crowded global market. Transferring the technology necessary to enable a contractor to assemble an iPod doesn’t give this manufacturer the skills and know-how necessary to create a product that can compete with the iPod and the iTunes ecosystem Apple has built around it.
But the same may not be true of the Chinese aviation industry Boeing will increasingly be forced to partner with as it pursues a business strategy contingent on substantially lowering its cost of production. Commercial Aircraft Corp. of China has already announced ambitious plans to launch a 737 competitor by 2016, and any technology Boeing transfers to mutual suppliers and partners will only make this goal more achievable. Furthermore, with much of the anticipated growth in commercial aviation expected to take place in China itself, the Chinese government backed Comac already has a captive customer in the Chinese government backed airlines that dominate the market.
So, can Boeing successfully transition itself to an outsourced manufacturing model without losing market share to its low-wage partners? Will we eventually see a Boeing airplane stamped “Designed by Boeing in Washington. Assembled in China”…? And if Boeing does manage to leverage its innovation, engineering and design prowess to retain its position as a market leader, even while jettisoning the bulk of its manufacturing infrastructure, what will this mean for Washington state?
I don’t know. But given Boeing’s apparent eagerness to move production out of state, it sure does look like we’re eventually gonna find out.
The eventual goal is something more like “Marketed by Boeing, designed and built in [fill in the blank]”.
There are some tidbits of information leaking out to the effect that Boeing wrote a set of specifications to the subcontractors, and left them a degree of leeway in terms of design detail and manufacturing methods, supposedly to assure that when the chunks all come home to papa, they’d fit together into a flyable aircraft that would meet the acceptable agency requirements. It seems that last part is hitting a few rough spots.
In the meantime, as Boeing’s own senior engineers and production people retire or get fed up and go off to do something else for a living, the company is losing the accumulated “tribal lore” that’s been an important part of its success for nearly 100 years. All too often now, the old guy in the Hawaiian shirt who sits in the back of the room at a design review and gets up every so often and hollers, “That shit won’t work!” isn’t there anymore…or now he gets told to shut up, or there really isn’t a design review in the traditional sense. This may all lead to some really unpleasant consequences.
I thought I heard something awhile back about Airbus assembling some A320s, allegedly for the Chinese Market, in China. Before that, McDonnell Douglas was trying to assemble MD-80s and the failure that was the MD-90 in China. The 737 is definitely going to get competition soon, you have not just the A320, but Canada’s Bombardier and Brazil’s Embraer making moves into the Regional Jet market’s high-end, which just happens to overlap with the smallest 737s and A320s(737-600 and A318/A319) range. The Regional Jet Market is getting so crowded by new entrants, I can see why Bombardier is moving ahead with the CSeries jet, breathing space.
Hey Goldy, Sorry to burst your bubble again… but doesn’t Airbus have an A320 final assembly line in Tianjin?
Just asking…
Puddy found it… Right here…
“Airbus has been criticised by European workers and governments that say the move adds to outsourcing fears amid a global recession and could result in the loss of European technology to a potential jet-making rival.”
If you drive down the I-5 and take a look at the Boeing flight line at Boeing Field, you will see quite a few Chinese 737’s there, in the final stages before delivery. Quite a few years ago China decided that it was cheaper to invest in their aviation and rail system rather than highways, and the massive buying of smaller jets (737’s, A320’s), is the result.
Of course, China shouldn’t be expected to continue to turn over large amounts of cash forever to foreign companies. China made a rather astute decision to subsidize the creation of an airline maintenance industry in the country. They now have facilities in Jinan and Xiamen which are very low-cost competitors for heavy maintenance (C-checks, interior modifications, passenger-to-freighter conversions, etc.). They have put a huge crimp in the market for other heavy maintenance facilities, especially SASCO in Singapore.
What they achieved from this investment is the better part of a decade of experience in learning how to build and maintain airplanes. Their engineers and mechanics go through every detail of the airplanes which come in from around the world for maintenance, and they are becoming proficient in their skills and the peculiar problems of working in a highly regulated industry (including regulations from multiple countries).
They are transfering this experience into building their own narrow-body jet, which as Goldy pointed out is expected to fly by 2016 (several years later than originally announced). When that occurs, Boeing and Airbus can both expect that their orders from China will dry up, and the Chinese entrant into the market will drive down prices for comperable aircraft across the industry.
But what you might not have noticed is that outsourcing is pretty rampant across the industry. Last week Mitsubishi Heavy Industries announced that part of the flaps it builds for Boeing 737’s will be built in – Vietnam!
Of course Mitsubishi is entering the market also with a “regional jet” which, like the Sukuoi competitor, tugs at the low end of the passenger count of a 737 and A320. If they can market planes which can carry up to 120 passengers, they will eat away at the highly profitable 737 and A320 markets enjoyed by Boeing and Airbus. The Japanese government is twisting lots of arms to support this effort, and at least one major Japanese airline has already committed to be the launch customer of that aircraft.
Of course, this was Stonecypher’s dream – a company which didn’t design aircraft, didn’t make aircraft parts, didn’t sell spare parts, and only snapped together the major pieces in three days like it’s a leggo set, put a nameplate on it and get FAA certification, and deliver the plane to the customer. Although educated as an engineer, Stonecypher spent most of his time in finance, and Stonecypher saw Boeing as the equivilent of GE Financial from whence he came – a money changer, not a manufacturer. In the meantime Boeing’s teaching it’s contractors all they need to know about designing and building airplanes, which they can eventually do for any other customer or for themselves, if they decide to collect together and do so.
It’s the downward slide of a great company. At this point it will be very hard to turn it around, but I pray that there’s still time to do so.
Imagine the future,
All those Chinese jets, placing large amounts of CO2 into the air and the Jet Stream taking that pollution and bringing it over here to the west coast.
As far as Apple goes, you will find that most consumer electronics manufacturing is taking place overseas now. Very few large manufacturers of electronic circuit boards are located in the U.S., and these are usually for specialized small-run projects. A few of the remaining ones here in California closed down last year due to the rescession. There used to be quite a few just over the border in Mexico, but their work has diminished considerably lately.
It would be easy to say that the work is going to China, and certainly there is a large amount of electronic circuit boards being assembled in China. But the new trend is for those products to be built in even lower-wage areas – Vietnam, Indonesia, Cambodia, etc.
But it’s not that the manufacture of these items is that labor-intensive. It’s because the solder used can be pretty nasty on the environment in large quantities. The traditional solder flux is high in lead and PCB’s, which improves wetability in the manufacturing process. The poorer countries are willing to trade long-term health issues for immediate cash.
There are lead-free and PCB-free solders available, but they are more expensive. But the European Union has already mandated that products entering it’s borders must be made with lead-free solder (I forget the deadline, sometime in the next year or two), so many manufacturers are moving to the lead-free versions anyway. Everyone is expecting the U.S. to follow suit eventually.
Aerospace and defense products are exempt from the rule, because they use traditional military standards which require leaded solder due to increased reliability. After all, if your cell phone quits working, you can just get a replacement. If your flight controls quit working during a flight, it creates an entirely new set of problems.
Goldy–
Boeing is as good as gone.
The KLOWN anti-business agenda in Washington and the Unions last strike was the last straw.
Arrogance results in unemployment.
Tell your Union brethren to wake-up.
But hey, Obama will just create more debt and find out a way to turn over the taxpayer dollars to his union buddies. Just look at the Auto Industry bailout and Kash for Klunkers.
Obama is an obscene bastard.
The real issue is the cost and benefit of labor not whether that labor is done in Szechuan or in Renton. Whether you increase efficiency here, eg with more robots, or outsource to Chinese peasants, the effect is to make things using American capital but not American labor.
The question is, if manufacturing is very inexpensive, ie uses little labor, who will buy stuff when the jobs go away? If you make stuff and sell it in China, ultimately that is where the capital will go as well.
When I ask economists this question they make mysterious and magical remarks about the “services” economy. PMJI but how hard is it to move financial services from Wall Street to anyplace else?
The same issue applies to Microsoft. For all our local pride, what is there in Redmond that could not also exist anyplace else able to string optical cables?
It seems to me that the result is a race between the more affluent societies to move their capital into more productive industries .. whether that id financial services or biotech. Japan tried this without a lot of success. Korea, Singapore, Taiwan have all been there and done that as well. My fear is this strategy is a zero sum game and there is no obvious reason that the capital will flow here.
There is, however, one unique option. The USA is still dominant in what I do .. Universities. Something like 2/3 of all high end science comes from places like the UW. Besides creating IP, these places attract super bright people who come,stay here, and create the jobs so sought after by our competitors.
No other country can compete with the US for offering a multicultural opportunistic society.
A couple hundred shares of Apple works out to about 40 grand. Boeing shares soon will be toilet paper. Phil Condit should’ve listened to the union, and let American union workers build the plane.
I’m reading a novel so good I simply must recommend it to literate (no, not you, puddy) readers of this blog. It’s called “How I Became A Famous Novelist.” Here’s an excerpt:
“My roommate, Hobart, was eating instant mashed potatoes right out of the pot. This was the only thing he ever ate. Hobart had hair that looked like a nest made by an incompetent bird. But lifewise, he had me beat. Hobart was a grad student at Harvard, studying for a joint MD/double PhD in chemistry and economics. The only books on his shelves were volumes of medical reference and a thin guidebook called The Gentleman’s Code: Etiquette for the 21st Century Man. This was produced by ‘MacAllister’s Distillers, Crafters of Fine Spirits Since 1818.’ Hobart had gotten it for free with a bottle of whiskey he bought one night after a pained conversation with his girlfriend back home in upstate New York. At least half of his conversations with this woman were followed by hours of piercing sobs. This was his major flaw as a roommate.”
Shit, I can’t write like this! I’ve been trying for years. Anyway, it’s about angst. That’s why I think you should read it. I know almost everyone (no, not you, puddy) on this blog is consumed by angst. Reading this book will help you put your problems in perspective. Your problems are nothing compared to what the protaganist of this novel goes through to become a writer. This book also exposes the writing business for the shifty, dishonest grift that it is.
Even though it’s an awfully good novel, it’s not the greatest novel I’ve ever read. That would be Steinbeck’s Of Mice And Men, which is about a retarded guy who loves rabbits. That’s the greatest plot line any writer ever came up with, which is why Steinbeck won the Nobel Prize for it.
I’ve been working for years on my own version of the Great American Novel. I can’t write about a retarded guy who loves rabbits because that one’s already been used. So my novel is about a retarded guy who hates rabbits because he was hatched from a rock and is too stupid to know any better. It won’t have a sappy happy ending. It’s kind of a Romeo and Juliet story where everybody dies, except the rabbit, of course.
Needless to say, I got “How I Became A Famous Novelist” at the public library so I can read it for free. If you don’t want to wait for me to return it to the library, you can buy it from Amazon for only 10 bucks.
http://www.amazon.com/How-I-Be.....038;sr=8-1
I’m learning how to be a writer from this book. I want to finish my novel so I can claim tax deductions for my library fines and other writing expenses.
Thankfully Intel believes in the good old USA.
“I want to finish my novel”
Don’t we all? Mine is about the world’s first cat detective. It is a story that absolutely must be told.
@8 Boeing’s as good as gone, alright, but not for the reasons you stated. Production delays. Cancelled orders. Supplier screwups. That’s why Boeing’s gonna be gone. They should’ve used union labor.
@14
Yea Boeing had/has one key advantage over all it’s current competitors, it knew composites and had been building major portions of various aircraft out of them for years. It is something that even Airbus is going to take a while to catch up on. Unfortunately they made the rather silly decision to transfer some of the hard bits out of the company. In particular outsourcing the wing assembly was stupid.
Still, assuming the 787 ever flies and that Boeing can be the first out of the gate with an all-composite aircraft in the A320/B737 size class it should continue to do well for a while.
Hey Roger,
Don’t worry about Puddy. Novels ain’t my forte. Puddy read Mandela’s AutoBio on three plane rides. Puddy enjoys technical manuals. Right now SharePoint 2007 by O’Reilly is my favorite read. Puddy reads something which will fortify my personal position in the technical world.
Stay stupid. It wears on that scruffy coat well.
Puddy–
The Pelletizer has proved over & over & over that he lives in a DREAM World.
His grasp of reality is tenuous at best…scarey really.
For Roger Rabbit.,,,life is a novel.
That’s what happens to lifetime Guv’mint employees that fail in the private sector.
Goldy,
Our high-dollar policy contributes here. After all, Boeing wing assemblies from China are imports, contributing to the trade deficit.
See Dean Baker for more.
The last wave of 777 dreamliners was the most profitable and efficient production line ever on planet earth. It still is. Designed and built in Seattle area by union labor. And that line had every design and structural problem the dreamliner did. The difference was the machinists and the engineers worked together and solved every problem as it developed. Amazing. And the line launched on time and at cost.
The idiots like Cynic and the Seattle Times who want to blame the strike have their heads up their ass, and never bothered to learn any facts. A two year delay compared to an eight week strike, when three days of profits would pay for the machinists health care for a year, together with idiots who thought building planes is like building lego toys, is why this line is floundering.
But I guess the business school geniuses who took over Boeing and are running it into the ground know better than we do…
Of course the business geniuses who designed our financial products were also brilliant and had the best interest of the economy at heart, because the market is always right. Oops, I guess that was a bit wide of the mark.
Fuck Boeing, take away their tax expenditures; Fuck The Seattle Times, take away their tax expenditures; Fuck the subscribers of The Seattle Times, take away their sales tax exemption.
Boeings going to leave but the unions will get SomeOthatObamamoney. Where does it come from? I dunno, he be da Prezident!
12)Uptown, well, Intel might be staying, but Dell is leaving, but after taking money from North Carolina when they were thinking of actually having their production stay in the US. Roughly 4 years after building the new plant in NC.
http://www.jimhightower.com/node/6961
@19
Another mistake Boeing made was in not promoting Alan Mulally to CEO. Though who knows Boeing might be able to win him back once he’s done saving Ford.
@16 “Novels ain’t my forte.”
I’m convinced that reading, knowledge, and education in general aren’t your forte.
Another book worth reading is Bruce Bartlett’s “The New American Economy: The Failure of Reaganomics and a New Way Forward” which you can buy from Amazon for under 20 bucks.
http://www.amazon.com/New-Amer.....038;sr=8-1
Bartlett was a Reagan policy advisor who also worked in Bush41’s Treasury Department. As a dyed-in-wool conservative and one of the architects of Reagan’s supply-side economic policy, he is especially authoritative when he argues in this book that supply side doesn’t work and the U.S. should return to a Keynesian economic model.
Quote of the Day
“Until conservatives once again hold Republicans to the same standard they hold Democrats, they will have no credibility and deserve no respect. They can start building some by admitting to themselves that Bush caused many of the problems they are protesting.” — Bruce Bartlett, quoted in Wikipedia
Hey hatched-from-a-rock, if you read something besides technical manuals once in a while, you might learn something useful.
Washington Unemployment Trends – September 2009
Washington Unemployment Trends Visualized as a Heat Map:
Washington Unemployment in September 2009 (BLS data)
http://www.localetrends.com/st.....PE=curr_ue
versus Washington Unemployment Levels 1 year ago
http://www.localetrends.com/st.....YPE=m12_ue
Wow Roger what a beat down. You read fiction AKA left-wing whackamole crap, Puddy reads technical books.
Ouch such a beat down.
RR @ 25: Gee, it seems that a rational person working inside a Repubican administration can’t help but come away completely dissolusioned with the right wing. Reagan’s budget director, Stockton, wrote that his budgets were all “rosey scenarios” consisting of “smoke and mirrors”, with no reference to reality – as dictated by the anti-tax conservatives in the Reagan administration. Now Bartlett’s got a book too? I’ll have to pick that one up.
My Cynical @ 8
You’re back! Good news.
I’m still eagering awaiting your answer to this question:
In your libertarian utopia, does the government pay for the administration of elections?
For the viewing audience, I ask, because you’ve emphatically stated that government’s only role is infrastructure, defense, and public safety. That leaves out education, the courts, and election administration (among others).
Hi Goldy.
A relevant example…
My buddy (Peter Cyrus) designed the toy Parvia. It’s a modular town building system, like a cross between Legos and model railroads.
The “toyness” and aesthetic design was done here in Seattle. The engineering design was mostly done in Vancouver BC. The manufacturing was done in China.
Peter explained to me that his toy couldn’t be built in the USA any more; we no longer had the expertise to do this kind of work. As a society, we basically forfeited. This kind of analysis is covered in Porter’s The Competitive Advantage of Nations.
Now some rambling…
Libertarian cultists will try to say it’s the “free market” (and unicorns) in action. That’s wrong.
Our nation’s “industrial policy” these last 30 years has been to develop financial products and offshore labor. It was believed that all the profit was in the financing and services portions.
(This view is not entirely wrong; we USA consumers benefited from Japan, South Korean, etc. subsidizing their chip manufacturing. But they did so at a loss, in hopes of buying marketshare. Success was hit or miss.)
But there’s a crucial counter example. Toyota, arguably one of best run companies today, retains internal expertise on every aspect of their business, even if it means doing so at a loss. Toyota reasons, correctly, that their competitive advantage is in knowing their systems end-to-end so that they can innovate everywhere.
In my line of work, software, there’s tremendous pressure to send our jobs overseas. This almost never works. But the bean counters can’t acknowledge the empirical data. Wall Street demands cost cutting and all they see are cheap hourly labor rates. Nevermind all the other costs, including the cost of failure.
Sorry, this is kind of rambling. I’ve never been able to wrap up my thinking on this into a tiddy thesis.
I’ll conclude with one point:
Growth requires investment. Outsourcing and offshoring is a cost cutting exercise. I can’t think of an example of growth through cost cutting.
(Yes, Apple invested HUGE money in their supply chain. Like Toyota, they tell their partners how to do things “the Apple way”.)
RR @ 25
re Bartlett. Thanks for the tip.
I’ve read most of Kevin Phillips work. Also a conservative economist who worked for Reagun. By “conservative”, I mean reality-based fiscal conservative, not a Wall Street corporate crony shill.
As I wrote here, I asked Phillips if we were poised for another cycle of progressive reform (as he documented in Wealth and Democracy in America).
Phillips said no, not while the money people were still in charge.
So while I’m disappointed that we haven’t gotten the necessary reforms with Obama, I’m not surprised.
Puddy @ 16
Sharepoint? Whoa.
I’d rather eat glass.
Our office neighbors were a sharepoint VAR/consulting shop. We’d cross paths. Those devs always looked like they wanted to go play in traffic after a day with sharepoint.
At least now I know why you’re a little bit crazy.
RR @ 10
Yup. Boeing’s competitive advantage had always been their brains.
Outsourcing manufacturing is one thing. Once you figure out how to do it yourself, you can teach someone else how to do it.
Outsourcing design and engineering was just about the stupidest decision imaginable. A decision made by bean counters who had no idea how to make planes. “Look at all these expensive engineers and experts! Labor costs too high! Must outsource. How hard could it be?”
This is the recurring tragedy of software development right now. The people sending our work overseas have never done the work.
From the Jason School of Management: You can only manage (delegate) work that you can first do yourself.
rhp @ 5
Exactly right. Good post.
This trend defies reason.
Anyone familiar with organizational psychology, the overhead and complexity of communication and coordination, would know that outsourcing makes the situation worse.
Increased operational costs quickly swamp any reduced labor costs.
Jason
I have known Kevin since High School.
IMHO he is a good writer contaminated by a serious case of self importance.
Not sure why I posted this, but he has been a disappointment.
We’re really dealing with a whole new enterprise after “McDonnell Douglas bought Boeing with Boeing’s money”–it’s becoming more and more evident why Al Mullaly decided he’d rather try to salvage Ford than deal with the mess he found himself in the middle of. Furthermore, before the last merger it was really a capital “McDonnell” and a lower-case “Douglas”. The clowns from St. Louis had already pretty much destroyed Donald Douglas’s creation and like the alien race in Independence Day were looking for another planet to rape and pillage. And the real problem with McDonnell is that they operated for so long entirely as a “beltway bandit” that they don’t think it’s really necessary to make anything work–just keep tinkering around, dream up some cockamamie excuse to extend the program and run up the cost, supply expensive Scotch and a few high-priced whores to some cracker Congressmen and Air Force flunkies, lather, rise and repeat.
Maybe the real master plan is to keep screwing up and go begging at Uncle Sam’s doorstep, claiming that some massive subsidy is “the only way to save the vital American commercial jet industry”. Spreading the pretend-to-be-manufacturing process to as many states as possible would certainly help with this.