Does a series on manufacturing in Silicon Valley make sense?

Some guys know how to have all the fun.

 Me? I’m starting in on what I hope will be a series of columns about manufacturing in Silicon Valley. I’m going to post some of my raw notes below, so you can see what I’m thinking and offer suggestions about where I might go with these stories.

I got started on this because I was walking around thinking manufacturing in the valley was dead. And then I talked to the folks in San Jose’s economic development office.

True, they’re job is to, well, develop San Jose’s economy, and they tend to have a rosy view — at least for public consumption. Still, they told me that the manufacturing sector in San Jose was growing — not wildly, but growing.

Some of that growth has to do with a big move to contract manufacturing for all sorts of electronics companies. Work2future in San Jose helped with a report on the trend, which you can read here.

I started asking questions and I started to learn that manufacturing has the potential to be a bright spot — sort of.  It turns out there is a new flavor of manufacturing, manufacturing that is not your father’s Oldsmobile, or even the way they made your father’s Oldsmobile. New manufacturing, called “advanced manufacturing,” by those in the know, will create fewer jobs and will require better-trained workers to fill them.

I hate to steal my own thunder, but The Atlantic did a beautiful piece describing this phenomenon here. In the coming weeks I hope to visit a number of manufacturing plants in the valley to find out who is manufacturing here, what is it that they’re manufacturing and why is it they’re doing their manufacturing here?

How’s that for an assembly line of questions?

Meantime, I’ve talked to a few dozen people to try to understand the landscape and I’ve come to some very early and tentative conclusions. I’m going to paste them here in the chaotic note form I’m keeping them (think of it as watching the sausage get made). Remember, these ideas have not been fully challenged. This is early reporting.

I’d love to hear what you think — about the ideas and about where my reporting should take me. Write me at mcassidy@mercurynews.com.

Here are my early thoughts:

Manufacturing is not dead:

1)  The East Bay just launched an East Bay Manufacturing group to help outfits over there figuring out cheaper, more efficient ways to do business. Boom in health food manufacturing there and a program to try to pump manufacturing jobs in to inner cities. (pp 4,

2) Some companies are apparently moving jobs back from China, or choosing the U.S. over China, because wage gap is narrowing with automation; they want to protect intellectual property; and there are huge advantages to being close to your manufacturing operations; including ability to do last bit of work in U.S. for tighter quality control and easier customization.

3) The number of manufacturing jobs are growing in San Jose, fueled in part by a boom in contract manufacturing firms, which allow client companies to stay close to manufacturing without building their own facilities. It requires contract manufacturers (6 of the top-tier 10 are in San Jose, the other four nearby) that can turn on a dime, from product to product; and that can work on multiple products at a time. Often they’ll run four or five lines for early product; once they get production down they can move it. The original company has to know the manufacturing process inside and out before off-shoring. Offshoring can’t magically figure out how to manufacture your product. The city is pushing its manufacturing story and helping companies network with suppliers, designers, manufacturers etc. SJ is No. 14 on the list of the countries biggest manufacturing centers. (The city has 5,000 manufacturers, employing 80,000 people. About 1/3 of those jobs are contract manufacturing.)

4) Nearly 160,000 people are working in manufacturing jobs in Silicon Valley (Santa Clara County/San Benito) or about 18 percent of the workforce. That percentage has held steady since 2006, though it’s down from the turn of the century, when it was 24 percent. In 1990 nearly a third of the Valley’s workforce was in manufacturing, according to the EDD. Still, the bigger story might be how different manufacturing is today.

The manufacturing landscape has changed radically and needs to be thought of in radically new ways:

1) Manufacturing jobs can no longer be thought of as only “production jobs.” In fact, those jobs are shrinking in number. But other new manufacturing jobs are growing. One economist says it’s a net plus for the state employment numbers. Think of the manufacturing value chain (or supply chain). It starts with design (a more intense design, given complexity of product and the emphasis of designing for more highly-automated manufacturing. Then production. Then logistics. How do you make the whole process more efficient and how do you get your supplies to the factory and your products to your customers? One quarter of all service jobs (including high-paying ones) are aligned with manufacturing jobs. But these jobs require workers to be able to turn on a dime and retrain because manufacturers’ needs are changing so quickly. (Tech & Professionals, 144k in JV SV study, is one of the fastest growing job sectors.)

2) The new landscape needs a new kind of worker. Workers are going to need more and better education. No, not everyone is going to need a college degree, but they may need certificates from community college or extra training. Math and science are going to be more important because of the increased complexity of the manufacturing tools. But there is a catch: At the same time we need better educated workers, we are slashing education budgets. Shop classes are already long gone and while they don’t teach the needed skills directly, they create the foundation for some of the skills needed by modern manufacturing workers. If there are not enough U.S. workers, they will either be imported, or the jobs will go to countries where the workers are.

Manufacturing is vital to preserving an innovative culture.

1)  Ideas come from the shop floor, either from manufacturing workers or from designers who visit the shop floor. The ideas can be innovations in the manufacturing process itself, or ideas for how to change the product to make it better – or how to design and manufacture a complementary product. Manufacturing operations lead to cross-pollination. Workers might leave to start their own manufacturing operations, or to start a company to build a competing product. Or if someone else wants to build a competing product or any product, they need to have a pool of manufacturing workers to choose from. If there is no manufacturing in an area, there won’t be a pool of manufacturing workers.

2) Smart design is hard to do with manufacturing an ocean away. Without an understanding – and a close relationship with your manufacturing operation, you might design a beautiful tablet that simply can’t be manufactured. You might design a product that requires a part from a sole-source vendor, which puts you at a competitive disadvantage. You will have a harder time reacting quickly to unforeseen problems that arise. There is also the problem of sending your intellectual property into China, where it will sometimes be stolen.

3) When manufacturing moves overseas, innovation follows it (or rises up there) for the reasons stated above.

Taxes don’t matter. OK, they do, but not nearly as much as some would want us to believe.

1) Particularly state taxes are far lower than the federal levies. Taxes make up a relatively small percentage of the cost of production. In fact, land and labor are the big costs – or certainly the big ones in Silicon Valley. This is an expensive place to live, which makes it an expensive place to do business. But some would argue that even labor costs are not that big a deal as manufacturing becomes more and more automated and sophisticated. Think of the labor cost per unit. When an employee is working on a device – particularly a relatively expensive one — for only seconds, the cost of that labor is minimal, whether you’re paying him or her $20 an hour or $2 an hour. Sure executives are constantly complaining about taxes, buy why not? It doesn’t cost them a penny to complain, and if it rallies politicians and some members of the public to their cause, all the better.

One state economist points out that when asked why they make location decisions, executives will give top two answers as: Where are my customers; where are my suppliers. State tax comes up number seven or eight, he says.

Why China:

1) Some argue it’s not because it’s cheaper, it’s because the workers are more flexible. Seems the idea of work/life balance has not yet caught on there.

2) It  still can be a good place to manufacture relatively small things for sale in theU.S.(remember the cost gap is closing, not gone). But you probably don’t want to manufacture refrigerators or Bloom energy boxes there. You’ll lose your cost advantage in shipping costs.

3) There is still something of aSilicon Valleymodel. You design and build here and then you realize you don’t want to concentrate your energy and assets on things that are not your core competency, so you outsource. This however has created a whole new kind of manufacturing worker – the manufacturing professional who manages the supply chain and makes sure everything runs smoothly with the contractor. Tim Cook, anyone? So, Apple doesn’t have very many manufacturing workers working for it at all, but it does have many, many of these manufacturing professionals on the payroll.

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