Sunday, October 21, 2012

Manufacturing Matters

In the end, Steve Jobs got his revenge.  Once marginalized by Microsoft and its monopoly on PC operating systems, and then kicked out of Apple, the company he founded, Jobs was recalled to Apple as it was sliding into a death spiral.  He proceeded to rebuild his brain child into the most successful business corporation today.  Apple is the leader of its market segment--that segment being the mobile world.  It manufactures visually attractive and highly efficacious mobile devices.  Okay, they had a problem with maps.  But Apple has overcome its previous belly flops, and it will surely overcome this one.  Its high prices may keep it out of the reach of some consumers.  But those that can afford its products tend to be the well-off who are highly sought by advertisers.

By contrast, Google and Facebook are now looking at the abyss.  They haven't figured out mobile, at a time when mobile products are the fastest growing consumer high tech segment.  Both Google and Facebook rely heavily on advertising, but mobile screens are too small for the kinds of ads that have proven successful on PCs and traditional laptops.  There isn't yet a mobile-specific advertising strategy that really works.  As the world becomes more mobile, Google and Facebook face the potential for a Yahoo-style decline, unless they solve the advertising problem or find alternative revenue sources.  Solving the advertising problem requires gathering more and more detailed information about individuals using their products.  But that could bring them into greater conflict with governmental protections for privacy.  This is a particular issue in Europe, and a growing issue in America.  These privacy protections will ultimately limit the extent to which Google and Facebook can facilitate the targeting of ads.  One interesting notion is perhaps Yahoo, with its banner ad business (which doesn't rely on detailed personal information), will eventually prove the tortoise in its race against Google and Facebook.

In part, Google and Facebook confront the problem of all successful high tech companies.  No matter how well you're doing, the next big thing is coming and you'd better be prepared for it or others will out-innovate you and leave you in the dust.  IBM didn't anticipate the PC, and it lost its standing as the predominant computer company.  Microsoft didn't anticipate the ubiquity and importance of the Internet, and it's in a slow fade.  RIM didn't anticipate how consumers would flock to the smart phone, and it's barely staying alive on its corporate customer base.

But failure to anticipate the next big thing isn't the only dynamic.  Part of the dynamic is that Apple manufactured the next big thing.  By creating products that elevated the mobile experience by quantum leaps, Apple made consumers want mobile products.  By manufacturing and selling these products, Apple derives a very large part of its revenues from selling hardware and software packaged together.  It doesn't give consumers stuff for free and hope that it can slip in a few ads here and there.  It makes and sells stuff for cash money.

Making and selling stuff has, for millenia, been the heart of economic activity.  The evolution of the industrialized world revolved around elevating the manufacturing process to a grand scale, so that vast quantities of stuff could be made efficiently and sold at prices a lot of people could afford.  Steve Jobs' relentless commitment to manufacturing--and thus control over product design and quality--placed Apple at the core of the industrial process.  By manufacturing high quality and innovative stuff, Apple avoided the commoditization of PCs (which bedeviled Dell, Hewlett Packard and other companies) and elevated itself to the top of the high tech world. 

This isn't a sales pitch for you to run out and invest in Apple.  Its stock, on a tear earlier this year, has been falling back recently.  Its maps debacle hurt, and its future--always uncertain because it's in the most volatile of industries, high tech--has been made more unpredictable by the death of Steve Jobs.  The point here is that Apple's business strategy of manufacturing made it strong, and is a sound idea for American economic policy.  America increasingly doesn't manufacture.  But you can't build a strong national economy on management consulting, investment banking, hedge funds, law practice, health care, restaurants, and services like hair salons, pet walking, personal shopping, and the secondary and tertiary retailing in websites like eBay.  The foundation of a strong economy is manufacturing.  Look at Germany.  Look at China.  America was once the manufacturing giant of the industrialized world.  While it can't return to that status, it can look for ways to encourage manufacturing.  We all know Apple manufactures a lot of components in China.  But well under half of its revenue dollars are spent in China.  Much more is allocated to spending in America, for things like retailing, distribution, employee payroll and so on.  Successful manufacturing companies make their home countries strong. 

Most of the debate today over fiscal policy revolves around the amounts of federal spending and federal taxation.  But fiscal policy isn't just a matter of accounting.  The nation benefits by spending and taxing wisely.  Keeping Social Security, Medicare and Medicaid in the black will be easier if we have a robust manufacturing sector.  The pie is much easier to divide if it's bigger.

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