What Apple says about the State of the Union

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COMMENTARY Having the State of the Union address on the same evening as Apple's (AAPL) earnings report was ironic in a particularly sour way. Shortly before President Obama stressed the importance of bringing manufacturing jobs back to the U.S., Apple announced its biggest ever quarter, driven by the whopping 45 percent average gross margins it sees across iPhones, iPads, and Macs. Those fat margins are possible because the company outsources its manufacturing overseas.

Obama thinks that tax incentives and a more educated workforce will bring manufacturing jobs back to the U.S. Apple claims that outsourcing manufacturing overseas is its only option. Both are spinning stories. Neither this country (nor any other) can reverse the economic and social forces driving jobs overseas, or eliminating them altogether. Yet companies, particularly high-tech ones, could bring jobs back -- only they don't want to.

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Apple's position is one of choice, not option

For Apple to claim that stationing workers overseas is its only option is an act of gall. The company wants solid profit like the more than $13 billion it made last quarter. There would be extra labor costs, of course, if Apple built its products in the U.S. But, really, how much time does it take to make a single iPhone?

For that, look to the example that a former executive gave to the New York Times. For some models of the iPhone, the company made last-minute design change to the screen. New screens were set to arrive at the Chinese assembly plant at midnight. Here's what happened next:

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."

At 10,000 phones per 24-hour period, the manufacturing rate is about 417 phones an hour. Employees simply aren't handling these devices long enough to rack up extensive labor expenses.

Exporting problems, not just jobs

But for the sake of discussion, say that such costs are, in fact, significant -- say it takes an hour of employee time at $20 per hour in U.S. wages to build an iPhone, iPad, iPod, or Mac. Over the roughly 73 million devices that Apple sold last quarter, the additional cost would be just under $1.5 billion, or 11.2 percent of the company's profits. That burden would have left Apple with $11.6 billion in profits, an amount still large enough to crush Wall Street's estimates without raising the prices of its products by as much as a penny. Chances are that with automation technology, Apple would use fewer workers in the U.S. to get the same job done. Maybe the differential would be significantly less than $20.

However, the screen swap example reveals something else even more stunning. What company changes a major design at the last minute? That betrays a serious lack of managerial foresight and planning. In other words, the real reason Apple operates in China is so it can have a captive workforce in what amounts to the high-tech equivalent of a company mining town. Employees are supposed to be on-call at any hour, while earning a pittance, to make up for Apple's mistakes.

Apple isn't the sole offender here, of course. The company is also far more rigorous than its competitors in trying to improve the lot of contract employees. Still, Apple and other high-tech companies do their manufacturing abroad because it allows them to export workplace problems, such as depressed wages, safety issues, and environmental impact, for someone else to solve (or, more likely, ignore).

Obama only wishes education was the issue

This is why Obama was only able to give examples of older types of manufacturers -- automobiles and padlocks, as he noted in his speech -- that are expanding in the U.S. and creating jobs. He wants to believe that education would do the trick by putting people into better jobs. But when it comes to high-tech, you also have to ask this: What better jobs?

Tech companies have an underlying business model that relies on leverage. You create something once at relatively high cost, whether a software application or electronics device design, and then you replicate it at relatively low costs and high margins. The whole point is to make money using relatively few employees.

That's where someone like New York Times columnist Thomas Friedman goes wrong. In a recent piece, he declared that "average is over," arguing that in a globalized age, the kind of basic employee skills that were sufficient to earn a living wage no longer cut it. Technology and low-priced labor in Asia have upended manufacturing, and they're also going to decimate service and professional jobs of all sorts.

Up to that point, Friedman is correct. As a solution, though, he offers the same fix as Obama: education.

There will always be change -- new jobs, new products, new services. But the one thing we know for sure is that with each advance in globalization and the I.T. revolution, the best jobs will require workers to have more and better education to make themselves above average. Here are the latest unemployment rates from the Bureau of Labor Statistics for Americans over 25 years old: those with less than a high school degree, 13.8 percent; those with a high school degree and no college, 8.7 percent; those with some college or associate degree, 7.7 percent; and those with bachelor's degree or higher, 4.1 percent.

Unfortunately for these good intentions, you can't make everyone above average. Yes, those with more education are more likely to be employed ... for now. However, even more highly educated employees are today feeling the pressure. Just ask IT workers, designers, writers, programmers, and engineers -- all occupations that have seen outsourcing.

More education is of limited use when companies find new ways to operate with fewer and fewer people. This is a global issue. For instance, Foxconn will incorporate up to 1 million robots in its manufacturing within three years. The company says that it plans to move 1 million employees up the value chain beyond basic manufacturing work.

Cynics -- or realists -- might wonder how many of those million workers will continue to work at the company and within the organization pyramid it represents, just as with other high-tech businesses. You need fewer people. Where do the others go? Over the side to become someone else's problem.

When Friedman says that average is over, he doesn't grasp how literally correct he is. If high-tech companies aren't part of the solution, trading some profits in exchange for building an economy in which manufacturers can flourish, then they're part of the problem.