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Lubell: Fix the Hollowing Out of the Supply Chain

After playing (price) tag for more than a year, Apple Inc., the iconic symbol of Generation Y, recently blew past Exxon Mobil Corp. and is riding the wave of success following the release of its new iPad. With its market capitalization pegged at more than $550 billion, the technology giant achieved the uncontested title of most valuable company in the world in 2012.

Environmentalists shed few tears over oil behemoth Exxon Mobil’s demotion, but after a two-part New York Times exposé in January, labor advocates and human rights defenders wondered whether Apple co-founder and CEO Steve Jobs’ tech legacy deserved the accolades it was receiving. As reported in the Times, Apple has about 63,000 employees worldwide, with 20,000 of them working abroad. For a company with a giant global reach, that’s not an unexpected ratio.

But Apple also depends on a contractor workforce of 700,000 people to design and assemble its iPads, iPhones and computer equipment, and almost none of them reside in the United States. Although it has a large retailing operation in this country, like many other high-tech companies, it does its manufacturing almost exclusively in Asia.

Eight months before Jobs died, President Barack Obama asked him why Apple couldn’t bring that kind of work back home. Reportedly, Jobs simply said, “The jobs aren’t coming back.”

The Times examined the reasons behind Jobs’ blunt answer and reported that the cost of labor was the least of them. But you would never know it, based on the drumbeat of public condemnation of Chinese assembly plants run by Foxconn and the alleged abuse of employees.

Without question, Foxconn is the human-interest part of the story, and Apple, along with other high-tech manufacturers, has the obligation to try to remedy any abuse. But the focus on the labor issue has masked the far more troubling problem facing American innovators: the hollowing out of the supply chain.

Designing, engineering and assembling an iPad is a far more complex task than manufacturing clothing. A man’s shirt or a woman’s blouse requires little more than cloth and buttons. An iPad has myriad parts, ranging from the most advanced semiconductor processing chips, flash memories, liquid-crystal displays, touch screens, lithium-ion batteries and miniature circuits that enable Wi-Fi, Bluetooth and GPS to the most mundane hardware components, such as screws, aluminum sheet, power cords and electrical connectors.

The parts must be developed and fabricated, and they must be available when they are needed for assembly. Two decades ago, we had the capability to do all that. Two decades ago, we still led the world in scientific discovery, innovation and advanced manufacturing, and we still had a reasonably skilled technical workforce. We don’t anymore.

Simply put, the rest of the world has vastly outpaced us, and at the same time, we’ve allowed our capabilities to decay. Even if Apple were willing to reduce its profits or increase its prices to accommodate American labor costs, it probably couldn’t build the iPad in the United States today. The supply chain and technical workforce Apple needs are no longer here.

We are still at the top of our research and development game, but if Greg Tassey, senior economist at the National Institute of Standards and Technology, is correct, the clock is ticking down on that as well. Tassey has examined the relationship between manufacturing competency and investments in R&D and has concluded that a vibrant R&D enterprise requires a vibrant manufacturing enterprise.

The proposition that we can maintain a strong economy by doing high-tech research at home and allowing manufacturing to continue to move offshore is wrong, Tassey says. Basing our economy on services and expecting R&D to thrive is also folly.

Innovation is an ecosystem we must nurture. It is the driver of the American economy and job creation. But it is only as strong as its weakest link.

We must step up our public and private investments in science and engineering research. We must revamp our education system to encourage students to become more proficient in science, engineering and math. But, just as importantly, we must provide an affordable path for students who want to pursue high-tech vocational careers. And we must ensure that education and retraining are available for people in the labor force throughout their working lifetime.

Finally, we must enforce our trade laws to prevent “dumping” and violation of intellectual property rights. And we must rewrite tax laws to encourage industry to make R&D investments at home and move manufacturing back to our shores. We must make the research and experimentation tax credit permanent, lower corporate tax rates and eliminate loopholes that encourage companies to manufacture their goods overseas.

If we don’t address these issues soon, our innovation ecosystem will fail and our economic future will be bleak.

Michael S. Lubell is a professor of physics at the City College of the City University of New York and director of public affairs of the American Physical Society.

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