Many fail to grasp how partnerships with Asian manufacturers benefit the United States.
In his inaugural address, Donald Trump painted a moribund picture of American manufacturing, decrying the “rusted-out factories scattered like tombstones” across the country. This decline in manufacturing was part of what he termed “American carnage.” While Trump hung much of his presidential campaign on the promise to restore this sector of the economy, he has hardly been the only politician to make such pledges in recent years: Both conservative and progressive politicians and pundits have vowed to restore manufacturing jobs that the United States has lost to outsourcing. These activists, however, miss one fundamental fact: In the last four decades, capitalism in the United States, and indeed, throughout the world, has steadily changed. Today, the sellers and not the makers of consumer products are the firms that now drive the global economy.
Reliance on contract manufacturing has become a characteristic feature of capitalism today.
No longer can we say, “What is good for General Motors is good for America.” Instead, we champion merchandisers (like Apple and Nike), retailers (like Amazon, Walmart, and Best Buy), and internet giants (like Google and Facebook), none of which make the products that they advertise and sell. Capitalism today is led by demand, that is, by the ability of merchandisers and retailers to use point-of-sales data to reliably calculate consumer demand for the products they sell and, based on that calculation, to order those products from contract manufacturers.
Reliance on contract manufacturing has become a characteristic feature of capitalism today, and contract manufacturing itself has become a highly specialized and advanced sector in the global economy. Even Boeing and Ford no longer make many of the parts that go into their planes and cars. They, too, each in their own way, have become merchandisers and assemblers. So who and where are these contract manufacturers?
This sector is now mostly located in Asia. However, relatively few economists and policy makers know much about contract manufacturers or about the reasons that they have become so significant. What most Americans hear from policy wonks and public figures is the unfortunate rhetoric about how some named Asian country is undermining the US economy, how that country is using its cheap labor, low-priced jobs, and manipulated exchange rates to capture if not destroy American jobs. Thirty years ago that country was Japan. Today, China is in the hot seat.
Yet what few grasp is that the “Made in China” label found on many consumer goods does not mean that Chinese-owned firms manufactured those products. Today the leading exporters of consumer goods made in China (as well as in Vietnam) are actually Taiwanese firms.
Relatively few economists and policy makers know much about contract manufacturers.
For the past thirty years, we have studied contract manufacturing from the contract manufacturers’ points of view. We have interviewed over eight hundred Taiwanese owners and managers of firms, and have re-interviewed some as many as ten times during this period. Our concentration on Taiwanese industrialists was fortuitous; they were close at hand when we started our collaboration in 1985, but these industrialists have turned out to be among the most important contract manufacturers in the world today.
Currently there are over 90,000 Taiwanese firms registered in China, most of which are associated with contract manufacturing. Ten of these firms are among the top twenty exporting firms from China. Foxconn, Apple’s main supplier for many of its products, including the iPhone series, is the best known and largest of these Taiwanese firms, but Foxconn’s prowess in contract manufacturing is not an exception, but rather the rule. Taiwanese firms currently serve as the lead assemblers for most of the world’s smartphones, computers, televisions, shoes, high-end bicycles, as well as many other products. Other Taiwanese firms supply these firms with essential components, including the lion’s share of specialized semi-conductor chips, called ASIC (application-specific integrated circuits) that are integral to most consumer products today, everything from toasters and smart phones to automobiles and spacecraft.
Taiwanese firms currently serve as the lead assemblers for most of the world’s smartphones, computers, televisions, shoes, high-end bicycles, as well as many other products.
The chief competitors for these Taiwanese industrialists are not American firms, with whom they collaborate, but rather South Korean conglomerates, especially Samsung and LG, that manufacture most products in firms they own, and Chinese firms that are trying to catch up to Taiwan’s highly sophisticated level of manufacturing capability.
Our book, Making Money, chronicles the increasing importance of Taiwanese contract manufacturers in the global economy from their beginnings in the late 1960s to 2016, the date of our last interviews. We juxtapose the retail revolution in the United States with the rise of contract manufacturing in Asia. Organized cooperatively in a small firm economy, Taiwanese factory owners started out as makers of relatively inexpensive products sold in batches to US firms, which in turn fixed their own brand names to the products. Over time, the Taiwanese became increasingly adept manufacturers producing a vast range of well-made goods on contract for American and European merchandisers and retailers.
US policy makers do not realize that the real beneficiaries of Asian contract manufacturing have been American firms. These firms profit mightily from selling products without having the expense of manufacturing them. Hundreds of thousands of US jobs can be directly or indirectly attributed to this alliance between American and Taiwanese firms. Big-box retailers employ large numbers of Americans, but the largest beneficiaries are those working in the internet economy. These employees depend on the hardware—the smart phones and computers—that makes this economy possible. In addition, hundreds of thousands of Americans have profited from the rising stock prices of internet companies in their portfolios and retirement funds.
It is true that the losers in this new capitalist economy are those who lost their manufacturing jobs and were unable to get comparable jobs in the new economy. However, counter to the political punditry in vogue today, restricting foreign trade will not restore those lost jobs. It will only hinder the most advanced sectors of the US economy and reduce American competitiveness.
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