CC image from caribb

Following up on yesterday’s link post regarding airports, air freight, supply chains, and manufacturing jobs: two posts from Ryan Avent at The Economist.

First, on industrial agglomerations, the impacts on jobs, and how we got to this point:

Unquestionably, Asian governments aggressively pursued manufacturing and subsidised it heavily, both directly and through advantageous exchange rates. As the story points out, Asia has capitalised on other advantages, as well. Cheap labour is one. More flexible land-use, labour, and environmental rules are another; China can erect a massive operation in no time at all, staffed with compliant labour and with little concern about the impact of the factory on watersheds, air quality, and traffic. Skill supply seems to matter as well. China is churning out engineers with basic technical competence (but less, it appears, than a bachelor’s degree) by the hundreds of thousands. It would be incorrect to point to any one of these characteristics as the driving force behind the global shift. Rather, these are self-reinforcing factors within a global economy that has multiple stable equilibria. After some level of Asian development and integration, it became more attractive for manufacturers to locate there as more manufacturers located there.

Clearly, this manufacturing agglomeration is an impressive part of the global trade network.  But it’s not the only agglomeration involved in the creation of the iPhone – the design, software, and other high-value elements of the product come from Silicon Valley.  More Avent:

What actually seems to have occurred is a bit more interesting. Supply chains have indeed continued fracturing, but distance has reasserted itself in two important ways. First, in the advanced world, agglomerations of the talented individuals who design these products have become increasingly important. And secondly, information technology, which allows for better coordination of production processes, has once again made proximity a relevant concern in manufacturing. It’s possible to coordinate a supply chain that’s draped across an archpelago of Asian economies. To maximise the return to this chain, however, it’s still necessary to keep plants reasonably close together. A plant located in America is too distant from Asia to make much economic sense; transit time to the rest of the supply chain in Asia is sufficiently long, in most cases, as to erode the gains to just-in-time production, or unexpected changes in designs or orders. Changing transportation and communication technologies facilitated a shift in manufacturing to Asia, then reinforced its presence there.

“Agglomerations of the talented individuals” are cities, more or less. At least, they are cities at the labor market level. As to employment, the different parts of the manufacture of the iPhone involve different value propositions, and require different levels of labor to scale up production:

Apple, it’s worth pointing out, continues to capture most of the value added in its products. The most valuable aspects of an iPhone, for instance, are its initial design and engineering, which are done in America. Now, one problem with this dynamic is that as one scales up production of Apple products, there are vastly different employment needs across the supply chain. So, it doesn’t take lots more designers and programmers to sell 50m iPhones than it does to sell 10m. You have roughly the same number of brains involved, and much more profit per brain. On the manufacturing side, by contrast, employment soars as scale grows. So as the iPhone becomes more popular, you get huge returns to the ideas produced in Cupertino, and small returns but hundreds of thousands of jobs in China.

Second, Avent looks at trade and the value of time.  Distance still matters, and time is precious, as seen in the increasing usage of air cargo for shipping high value goods. Avent concludes:

The lesson, I think, is simply that there is a limit to which one can or should want to raise manufacturing employment. Having lots of well-paid manufacturing workers isn’t the way one grows rich; replacing lots of those workers with massively productivity enhancing machines is.

This is more or less the same conclusion that Greg Lindsay notes in Aerotropolis – that this agglomeration, while impressive, still isn’t the true engine of creativity and value.  Nevertheless, each is an example of agglomeration shaping urban form and urban economies.