Apple makes good products but flawed arguments

Several points in yesterday’s New York Times story on Apple and why the iPhone jobs are mostly not in America caught my attention, but none more so than the statement by a top Apple executive that " We [Apple] don’t have an obligation to solve America’s problems."

In the 1981-86 period I was one of the U.S. government’s top trade negotiators, especially with Japan. At that time, Apple was trying to crack the Japanese market for personal computers and getting nowhere. Steve Jobs and other Apple executives had the funny notion that the U.S. government had an obligation to help them and asked me and other negotiators at the Commerce Department and the Office of the U.S. Trade Representative to help them get on the shelf in Japan. We did all we could and in doing so came to learn that virtually everything Apple had for sale, from the memory chips to the cute pointer mouse, had had its origins in some program wholly or partially supported by U.S. government money.

Nor have things changed that much in the intervening time. Apple’s products still have a large U.S. government R&D content and I’ll bet that the guy who says Apple has no obligation to help Uncle Sam does strongly believe that Uncle Sam has an obligation to stop foreign pirating of Apple’s intellectual property and to maintain the deployments of the U.S. Seventh Fleet and of the 100,000 U.S. troops in the Asia-Pacific region that make it safe for Apple to use supply chains that stretch through a number of countries such as China and Japan between which there are long standing and bitter animosities.

In this context the comment in the article that Apple is the pinnacle of capitalism also struck me as anomalous. I mean, how would this no-obligation guy and his stock option and bonus baby colleagues feel about investing in those "incomparably scalable and flexible" supply chains if Washington decided to pull the fleets and the troops back to Guam, Hawaii, and San Diego? And those supply chains. Are they the natural product of good old free market capitalism or does that scalability and flexibility and capacity to mobilize large numbers of workers on a moment’s notice have something to do with government subsidies and the interventionist industrial policies and of most Asian economies? It’s the latter, of course. Apple is not the pinnacle of capitalism. It’s the pinnacle of the marriage of Silicon Valley innovation with strategic Asian mercantilism.

Missing from the article was the probing second question. We learn that 90 percent of the parts of an iPhone are made outside the U.S. Then we hear Jobs (as in Steve) say: "those jobs aren’t coming back." But wait a minute. The parts we are talking about are microprocessors, memory chips, displays, circuitry, and chip sets. These are all the kind of advanced, high tech, capital intensive, knowledge intensive, not cheap labor intensive products in which economists, business leaders, and political leaders always say America has a comparative advantage because it is the technology leader. Why are South Korea, Taiwan, and Japan supplying the memory chips and micro-processors and displays instead of the United States. As a leading U.S. negotiator on these issues for some time, I can tell you. It’s not because these countries have better technology or more engineers or cheaper wages. It’s because they targeted, subsidized (through currency manipulation, tax preferences, and other means), protected, and even invested state money in these industries while U.S. government and business leaders largely failed to protest or counter these moves in any way. These jobs could and would come back to America if Washington were to begin to respond tit for tat to the mercantilist game.

Terry Cook, Apple’s current CEO says Asia can scale faster and that Asian supply chains have surpassed what is available in the United States. But he doesn’t say how this happened. He leaves the impression that it was just a natural outcome of Asian hard work and market forces. But nothing could be further from the truth. Asia didn’t always have these supply chains. They were initially all in the United States. Asia got them because its governments and corporations worked hand in glove to get them. There is no reason why the United States government can’t work hand in glove with corporations to get at least some of them back. It’s not rocket science. Just imitate what the Asians ( and Germans) do.

I’m amazed at the one way thinking of many U.S. corporate types as revealed in the article. Corning Glass Vice Chairman James Flaws says Corning has to make its special Gorillas glass (used for smart phone displays) in Asia because that’s where the customers are. Sure, he says, we could make it in the U.S. and ship it but that would take time and be expensive. Sounds plausible at first, but wait. The new Oakland Bay bridge is being built in China and shipped to Oakland. Much glass in new U.S. skyscrapers is being produced in and shipped from China. So if stuff can be shipped to the U.S. why can’t it be shipped competitively from the U.S.? As one high ranking Corning executive recently told me, "we have to produce in China as a condition of being allowed to operate in the Chinese market." In addition, this executive emphasized that Corning intellectual property is being illegally appropriated in China and elsewhere in Asia. I understand that Flaws can’t explain all this because the Chinese government will retaliate against Corning if he does. But it is important to understand what is going on and to understand that the evolution of these supply chains is not some natural, organic process. Rather it is government guided and supported all along the way. And what is thus built can also be unbuilt or rebuilt.

My final point has to do with the statement of the article in several places that America no longer produces the kind of workers with the kind of skills necessary to run the kinds of factories and supply chains that operate now in Asia. That’s true, but the direction of the argument is wrong. The Apple argument is that the U.S. schools and education system are not turning out the kinds of workers with the kinds of skills we need. So, we have no choice but to go overseas. But the truth is more nearly the opposite. It’s because the companies are moving the jobs overseas that no Americans are learning the necessary skills. This is true for two reasons. One is that Americans are generally not stupid and recognize that because of off-shoring there won’t be any those kinds of jobs and thus there is no sense in learning the skills necessary to do them. The second is that most of this kind of job or skill training occurs on the job, and if there are no jobs then there will be no skills.

One only has to look at the fact that Germany and Japan, both high wage high cost societies, have trade surpluses with China and Asia to understand that the Apple arguments are weak and superficial.

It wouldn’ t be difficult to make a lot more of the iPhone in America and to make it competitively  if either Apple or the U.S. government really wanted that to happen.