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How The Sausage Is Made

The Wall Street Journal and Salon are pretty much on opposite ends of the journo-political spectrum, but they both had pieces about the Asian electronics supply chain recently. Salon followed the birth of the PortalPlayer chip that's at the heart of the iPod, from Santa Clara to India to Taiwan to China and back to Cupertino. The WSJ had a more nuts-and-bolts description of the tricky brew of components and politics that goes into laptop manufacture these days, with American branding, Taiwan manufacturers, and mainland Chinese labor. A scenario that lives somewhere between a virtuous circle of economic efficiency or a tangled knot of globalization-gone-amok.

Outsourcing to low-cost, high-quality Taiwanese manufacturers has helped make Dell and H-P the world's top two PC companies in terms of sales. International Business Machines Corp., which outsourced less than half of its laptop production, according to Merrill Lynch, and operated its own factory in China, consistently lost money on its PCs. It sold the business this year to China's Lenovo Group Ltd., which has used Taiwanese companies to make most of its notebooks in China.

It sucks to live at the bottom of the supply pyramid and have our margins squeezed by the contract manufacturers who in turn get squeezed by the big American names.

This shift has some people very worried -- and they are not just out-of-work engineers. They fear that advanced R&D follows the physical location of production. If you are a cutting-edge engineer interested in working with innovative new techniques for chip manufacturing, you will be drawn not to Silicon Valley but to the scores of brand new fabs being built in Asia. So, for example, the foreign-born engineers getting Ph.D.s at Stanford and Berkeley, who used to get jobs in the Valley, will now increasingly go back to their homes where they can work at the top of their field. That is where engineers are being trained to use the newest tools, and that is where further innovations in technology are likely to spring from.

We'll see how long they can keep hollowing out their organizations. Now with the rise of ODMs, new product "development" is just as easy as ordering off a dinner menu. Sure, Dell, et al. can play their little games and set one supplier against another to drive down pricing, and everyone puts up with it because of the volume is a big carrot, but let's see how they do when they've squeezed out all the margins in the core business.

I guess it's heartwarming to see it's not only the big guys who are doing the outsourcing. Thanks to the Internet, even a yuppie couple in a loft can get into boutique manufacturing by clicking on some Chinese or Sri Lankan website.

Instead of looking for garment workers in this city, they plan to have their wares manufactured by low-cost workers overseas. In doing so, they've become micro-outsourcers, adopting a tactic of major American corporations, which are increasingly sending production work abroad.

This is the sort of example that globalists should be holding up as the example of competitive advantage allowing entrepreneurship on both sides to use their respective resources to create economic activity for mutual benefit. On the other hand, the Internet isn't quite that efficient yet. We have a hard enough time keeping our suppliers in line with native-speakers on-site to kick butt. I wonder how many of these micro-outsourcers are getting a reaming for their education in Asian commerce?