The Outsourcing of Labor and Dis-Integration of Production

Yesterday was Labor Day--a great time to pause and think about how work has changed from the good old days of unions and posh benefits. Outsourcing and global production have undermined corporations and workers alike. But they empower those who can take advantage of the new game.

The extreme edge of this new game can be understood in a provocative thought experiment posed by professor Gerald Davis of the University of Michigan Business School in a recent conference paper (thanks to this New York Times blog for first alerting me to the paper). Professor Davis imagined how you could create a killer new iPhone app called "Remote Drone Assassin" along with actual drones that you could sell to mercenary companies, "without leaving your couch."

First, he wrote, you could go to the Plug and Play Tech Center and rent a  desk and fancy mailing address. (Why bother with a real corporate HQ?)

Second, you could "incorporate online in Liberia for $713.50" through the Liberian Registry site. (Who needs lawyers in Delaware?)

Third, you could fund your idea through the crowdsourcing site Kickstarter. (Who needs venture capital anymore?)

Fourth, you could hire programmers to actually design your software app through ODesk, "the world's largest and fastest-growing online workplace." (Who needs to hire people you even know?)

Next, you could hire a low-cost Chinese manufacturer to make your drones through Alibaba.com (Who needs to make it at home?)

If you don't want to sell through the Apple Store or Amazon, you could arrange payment through Square, which allows you to charge credit cards through your iPhone or iPad. (Who needs to work directly with the credit card companies?)

Finally, when it comes time to ship the goods to the mercenary company, you could use Shipwire. (Why bother with the biggies like UPS or FedEx?)

You never left your couch, and you managed to employ a bunch of subcontractors to bring your drone and its app to market. Still, what have you actually contributed to the US or world economy? Did you actually work? You never left your couch.

An extreme scenario, perhaps, but it illustrates the loss of the ideal of craftsmanship--the satisfaction of being involved in the whole of a process, from beginning to end (a key theme in chapter 5 of my book). Professor Davis' scenario also helps us understand the puzzle of the jobless recovery. Profits and economic growth occur all along the way, but no U.S. workers are employed. Except for maybe one couch potato.

Thankfully, this is an absurd extreme, but it does suggest that if we are not careful we may outsource ourselves to death.

Jobless Economic Growth?

Note: This blog took an unofficial summer sabbatical, but I hope to start posting again as the school year gets rolling.

Why does a company like Apple boom at the same time that few jobs are being created?

Over the last few years the U.S. economy has been growing (according to GDP figures) and corporate profits have been solid (record-setting, in Apple's case). But job creation is stagnant. What gives?

One big reason is the spread of automation, outsourcing, and cloud computing (using networks of others' computers to complete tasks). Today's New York Times ran a prominent  story on Amazon's cloud computing services with two rather telling quotes in it.

First was a quote from the founder of a young company called Cue, which scans huge amounts of data and provides personalized services with it. Its founder said,

I have 10 engineers, but without A.W.S. [Amazon Web Services] I guarantee I’d need 60,” said Daniel Gross, Cue’s 20-year-old co-founder. “It just gets cheaper, and cheaper, and cheaper.” He figures Cue spends something under $100,000 a month with Amazon but would spend “probably $2 million to do it ourselves, without the speed and flexibility.”

So his company may become profitable (as will Amazon) but he can employ a fraction of the engineers he once would have needed.

Another quote reinforces the point. This was from the CEO of Good Data, a company that sifts through data to help with sales:

“Before, each company needed at least five people to do this work,” said Roman Stanek, GoodData’s chief executive. “That is 30,000 people. I do it with 180. I don’t know what all those other people will do now, but this isn’t work they can do anymore. It’s a winner-takes-all consolidation.”

From 30,000 to 180. And we wonder why profits and unemployment (even among tech-savvy groups like engineers) are both up at the same time?

American Manufacturing and Globalization

Jason Reed/Reuters

Yesterday in a speech at the University of Michigan, President Obama stated that "when manufacturing does well, then the entire economy does well." He's trying to press colleges to lower their costs and make higher education more affordable, in the hope that they'll train more wealth-creating workers. Leaving the domestic politics aside, it was an interesting week to make this case, because two stories highlighted how globalization and technological change are hurting American workers.

Maddie Parlier at Greenville Standard Motor Products
Photo credit: Dean Kaufman for Atlantic Monthly

First, the current issue of the Atlantic Monthly ran an excellent story by Adam Davidson on how difficult it is for moderately educated workers to compete in an increasingly global, increasingly automated manufacturing workplace. Davidson, my favorite economics journalist at NPR, focuses on the plight of a 22-year old single mom named Maddie Parlier who has two kids and no college education. She's working an entry-level job at a plant that makes fuel injectors, making around $13 an hour, with little prospect of advancement.

In order to move up a level on the payscale to "Level 2" and boost her pay by about half, Maddie would need to learn a lot more in order to have the necessary skills to program the machines she currently mans. As Davidson puts it,

It feels cruel to point out all the Level-2 concepts Maddie doesn’t know, although Maddie is quite open about these shortcomings. She doesn’t know the computer-programming language that runs the machines she operates; in fact, she was surprised to learn they are run by a specialized computer language. She doesn’t know trigonometry or calculus, and she’s never studied the properties of cutting tools or metals. She doesn’t know how to maintain a tolerance of 0.25 microns, or what tolerance means in this context, or what a micron is.

Maddie's plight illustrates why President Obama is pushing college affordability and job-training programs.

And Davidson's piece reminds us why workers with limited skills are struggling to keep up these days. Their jobs are being replaced by machines and/or Chinese workers.

Second, speaking of China, the New York Times ran two stories this week in a series on "The iEconomy." The first one, "How the U.S. Lost Out on iPhone Work" made quite a splash, while the second one will disturb anyone who's bought an iPad.

In the first story, the most striking passage captured why China (and not the U.S.!) is getting so many jobs out of the explosion of demand for iPhones:

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

I'm afraid the executive is half right. American plants could probably match the Chinese speed and flexibility, but they would have to pay their thousands of workers a princely sum to be ready at a moment's notice. And then they would have to pay overtime to convince workers into grueling shifts. We just can't match China at a cost-effective rate.

Apple is currently the most valuable U.S.-based company and the symbol of American ingenuity, but it "employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s" (Duhigg and Bradsher).

Globalization of the manufacturing process is not creating enough American jobs to absorb workers with lower skills. How do we get out of this mess?

I'm not sure anybody's figured that out yet. And even if someone did figure out how to start fixing this deep-seated problem, can our politicians implement such policy solutions without politicizing them?

I guess we'll see in the next few years.

Updates: The Occupy Movement and the J-1 Visa Program

Globalization continues to breed contention. Two recent examples:

The Occupy Wall Street protests mushroomed over the weekend to the point that even my little town of Canton, OH saw a protest downtown, with at least 70 protestors. It looks like we are seeing the growth of a social movement that may rival the Tea Party in its energy. As with that earlier wave, new media are a key part of mobilizing and energizing participants. All in all, it's a fascinating development, worth watching closely.

The New York Times reported today on the foreign student cultural exchange visa program that contributed to a work stoppage at Hershey's Chocolate company earlier this year. (For details see earlier posts.) The subcontractor that brought students over, the Council for Educational Travel USA, comes out looking pretty bad. All in all, it looks like the kind of program that was open to abuse, subjecting some of the young people from overseas to some rough treatment. All along, though everyone agrees that they got an all-too-accurate picture of American culture in the process. As one participant was told,

“You wanted a cultural exchange . . . . This is America and this is the way we do things here.” 

Indeed. Subcontracting and exploiting workers? Guess it's just part of our culture.

Update on Hershey's Funky Globalization

In my previous post, I discussed the State Department's J-1 visa program, which brings over foreign students for alleged cultural exchanges. The program was tied to a series of abuses at Hershey's packaging facility that led to a walkout by student workers and two stories in the New York Times.

What's the deal with this visa program? In reality, it turns out to be a way to import cheap workers for the summer, on a larger scale than I realized.

According to an op-ed piece by Fordham University law professor Jennifer Gordon in the New York Times, this program

has become the country’s largest guest worker program. Its “summer work travel” component recruits well over 100,000 international students a year to do menial jobs at dairy farms, resorts and factories — a privilege for which the Hershey’s students shelled out between $3,000 and $6,000. They received $8 an hour, but after fees and deductions, including overpriced rent for crowded housing, they netted between $1 and $3.50 an hour. Hershey’s once had its own unionized workers packing its candy bars, starting at $18 to $30 an hour. Now the company outsources distribution to a non-union company that hires most of its workers from the J-1 program.

Why would employers like Hershey go for such a program? Gordon writes,

the J-1 program is attractive to employers because it is uncapped and virtually unregulated; companies avoid paying Medicare, Social Security and, in many states, unemployment taxes for workers hired through the program. One sponsor authorized by the State Department even offers a “payroll taxes savings calculator” on its Web site, so potential employers can see how much they would save by hiring J-1 visa holders rather than American workers. Visa holders can be deported if they so much as complain, and cannot easily switch employers.

Well, that explains it. Companies get compliant summer workers and save on payroll taxes. The sponsors and contractors who arrange it all make good money. But the young people have little or no recourse to alter their situation and are stuck here (at least for the summer). Everybody's happy, it seems, but the foreign students who were expecting cultural exchanges. And if they don't like it, they can get deported.

As Gordon points out, these students are getting a taste of today's corporate America, which relies on outsourcing and subcontracting to avoid responsibility. It turns out that they do get real cultural exchange, a real taste of real America. Unfortunately, it's a bitter taste, not all the sweetness of Hershey's chocolates they were expecting.

Students, welcome to America!

Before the Deluge, the Downfall of the Big Three

Avant le déluge--before the deluge--of Arab protest, I usually blogged once a week on a story that related to the book. Today's news may well bring another wave of stories about the Arab world, since it's Friday and young men will soon be pouring out of mosques after midday prayers across the region.

But, before the next flood of stories, consider another huge story that deserves our attention: the near-collapse of the American car industry. Paul Ingrassia's recent book Crash Course: The American Automobile Industry's Road from Glory to Disaster (New York: Random House, 2010) tells this story in compelling fashion, and it's worth spending some time highlighting some lessons from the book for those of us interested in the globalization of labor.

How did Chrysler and General Motors (two of the old Big Three) end up collapsing by 2009?

1. Both the autoworkers' union and car industry executives are to blame.
Ingrassia, a longtime reporter on the car industry for the Wall Street Journal, describes the craziness of the United Auto Workers' (UAW's) Jobs Bank, which paid assembly line workers up to 95% of their wages for not working during layoff periods. Lavish retirement pensions and health care benefits for retired autoworkers strained corporate coffers.

But the executive teams at the Big Three also invite some scorn in Ingrassia's tale--and not just because they repeatedly caved in to union demands. (Note: Ingrassia's story is primarily told from the corporate boardroom, rather than the assembly line, but even then it's still pretty damning of our corporate elites, and he does draw on interviews with one assembly line worker in Illinois.) Executives also played accounting games to generate paper profits (not unlike the disgraced energy company Enron). They also tolerated shoddy quality, turned to SUVs for easy profits, and failed to anticipate high oil prices. They got lazy and complacent.

2. The 1970s hollowed out the Big Three, exposing fundamental weaknesses
The book has an entire chapter that includes the fiascoes of the Chevy Vega and the Ford Pinto (perfect symbols of the excesses of the industry). The Vega was assembled at the GM Lordstown plant, where young workers, perhaps influenced by the hippie movement, rebelled against an attempt to speed up the assembly line from 60 to 70 cars per hour "to an incredible 100 cars an hour" (p. 52). The "Lordstown Blues" became a famous example of disillusioned industrial workers sabotaging their own products. The Vega engine also had design flaws (p. 53).

Meanwhile, the Pinto sedan had a design flaw, with the rear axle behind the gas tank. When rear-ended by a vehicle traveling thirty miles per hour or faster, this is what could happen:



"Ford engineers had known about this [design flaw] when the car was launched . . . [b]ut the company's cost-benefit analysis determined that the number of lives that might be saved weren't worth the additional $5 a car required to strengthen the design" (p. 59). Ouch!

3. Japanese innovations in production processes were never adopted by U.S. carmakers, despite their obvious benefits
In contrast to GM's failed experiment in collaborative work environments at the Saturn plant in Tennessee, Honda built a plant in Ohio that relied on Honda's research and development department, which "was funded by a share of the parent company's revenue and thus was safe from cost-cutting drives" (p. 66).

Honda's US operations started out with a motorcycle plant in Marysville, Ohio, where a 37-year old guy from Canton, Ohio named Al Kinzer was one of the first people hired, after an extensive interview process that tested potential employees for their attention to detail. The Honda manager would ask interviewees "to write their first name on a name tag and to place the tag on their left shoulder. Some applicants would put it on their right shoulder, and others even forgot to wear it at all. They were crossed off the list" (p. 70).  After being hired, Kinzer was unimpressed with the fact that all employees, both management and workers, were to wear the same jumpsuits. Nor would managers get assigned parking spaces near the front door. "At Honda, parking would be strictly first-come, first-served, regardless of rank" (70.) There was "no executive dining room, no separate bathrooms, and no separate locker room to change into their work clothes--all in sharp contrast to Detroit" (p. 70).  It was all about having a common purpose and minimizing hierarchy. The bosses needed to "explain the reasons for managerial decisions and to get consensus where possible" (71).

Once the Honda car lines were up and running, workers had to hustle:

working on the Honda assembly line was an aerobic workout that caused some associates to lose twenty pounds after a few months on the job. Factory discipline meant associates couldn't swig soda, smoke cigarettes, or munch on snacks while working, as the workers in Detroit's factories could do. But there were benefits. Instead of being told, in effect, to check their brains at the door, Honda's workers were being encouraged to contribute their ideas, as well as their manual labor, to the manufacturing process. If their suggestions produced efficiencies that eliminated someone's job, even their own, the person would be transferred to another job instead of being laid off. Workers were told they wouldn't be laid off, except as a last resort, and Honda's growing U.S. sales . . . meant layoffs never happened (pp. 74-75).

Shocking! And when the UAW tried to get Honda workers to unionize, the workers refused. This was not the American model of dysfunctional industrial capitalism, made famous in the Dilbert cartoon. And, sadly, the American model has never really been updated in car manufacturing. GM tried to imitate Honda in its Saturn experiment but that experiment failed.

In chapter 5 of the book, I highlight two examples of corporate innovation that tried to empower workers, but they seem like minor exceptions to an overwhelming trend of dreary American workplaces (as in the TV series The Office).

Chrysler's plant in Belvidere, Illinois was all too typical. The autoworkers' cushy safety net created a "who cares?" attitude that was reinforced by management, which claimed to care about quality but was more worried about keeping up quantitative production schedules.

Sometimes when workers pointed out defects, they were ordered to ignore them, because "it's just a Mexico car"--that is, bound for the Mexican market. Once when [one worker] suggested a more efficient method for installing windshield wipers--the sort of suggestion the Japanese welcomed in their factories--he was rudely rebuffed by his supervisor. After that he pretty much kept his mouth shut (p. 199). 

Ouch! And then we wonder why the US manufacturers have lost market share.


4. The 1980s and 1990s "comeback" of the US companies was illusory.
Although the American manufacturers learned from Japanese competition, they still failed to learn the deeper lessons. For example, in 1982, GM demanded that the UAW make concessions: a wage freeze through 1984, postponing some cost-of-living raises, and getting rid of some paid holidays. But on the same day they got this concession, GM announced a new plan that would make it possible for executives to earn bigger bonuses (p. 80). Chrysler's Lee Iacocca also launched a cost-cutting plan, but spared his company suite in Manhattan's Waldorf Towers, where the company paid $2 million for gold-plated faucets (p. 94).

As Ingrassia puts it, "Tone-deaf executive excess would be a constant in Detroit, right up until the Big Three boarded their corporate jets in 2008 to beg for a government bailout" (p. 94).

The 1990s were the decade of highly profitable SUVs. With low oil prices that worked for awhile, but it left Detroit unprepared for the future. For a long time, the Japanese companies were puzzled by the SUV trend and left Detroit to its own devices. Eventually, they caught up and started to out-compete the Big Three. Even in this protected corner of the market, the Big Three started to lose out.

5. A little virtue goes a long way
Ingrassia argues that William Clay Ford, the head of the Ford family, which still has a controlling stake in the family company, basically "fired himself" as CEO in 2006: "stepping aside required a portion of courage and self-awareness seldom seen in the corner offices of American companies. Changing the CEOwould prove to be the move that saved Ford Motor, while sticking with the CEO would be the decision that doomed GM" (pp. 188-89).

By contrast, GM stuck with Rick Wagoner for a long time, despite his failure to change GM's culture, which destroyed itself through "complacency, arrogance, and hubris" (p. 273).

6. The bankruptcy process might have saved GM and Chrysler (and UAW) jobs . . . but for how long?
As befits a former Wall Street Journal reporter, Ingrassia covers the financial maneuvers between the car companies and Obama's White House task force in 2009. Although there were some odd twists and turns in the process, it did help to force the companies to take steps that they wouldn't take on their own.

7. The old model of American industrial capitalism is in question
Ingrassia writes,

General Motors had virtually invented the modern corporation, with professional managers, as opposed to family founders, presiding over decentralized operations that were governed by central financial control. It had pioneered modern marketing, public relations, and the hierarchy of brands that made automobiles vehicles for social as well as physical mobility. It had set standards for everything from style to design to corporate healthcare plans (p. 273). 

What comes next? Will Apple, Google, Facebook, and the rest of Silicon Valley lead the way? Can they create thousands of jobs that allow ordinary workers to send their children to college?

It's not clear how we'll ever return to the boom years when what was good for GM was good for America.