Reshoring Cash: Why Tech Industry Should Come Home

By: Andre Mouton, Minyanville

It’s called reshoring, and it’s a popular thing to do. Apple announced last December that it planned to bring some of its PC production back to the United States, sparking protests from Hewlett-Packard, who claims it never (entirely) left. Lenovo is looking to build some Think-branded notebooks in North Carolina, while Foxconn is mulling the expansion of its US operations.

“In general, customers want more to be done there,” said a Foxconn spokesperson. Tim Cook, Apple’s CEO, argues that the company has “a responsibility to create jobs.” In other words, this has nothing to do with increased labor costs in China, Apple’s supply chain issues, or anything that might alarm shareholders. It’s simply the right thing to do.

At the same time, President Obama has made reshoring (or “onshoring”) a part of the national agenda. General Electric (GE) dutifully became the poster child for the movement, and a story in the Atlantic chronicles the company’s attempt to relocate appliance manufacture from China to Kentucky. GE was surprised to discover it could cut the price of a water heater 20% by producing it domestically.

It seems there are some advantages to having a factory close to market, and even more to employing assembly-line workers who share a common language with R&D staff. Outsourcing allows companies to make existing products cheaper, but throws roadblocks in the development of new designs, and hinders the ability to produce new products quickly and in the desired quantity. In the early and mid-’00s, HP and Dell moved PC production overseas to remain competitive in laptops, where the market was mature and competed on price; but they found themselves outmaneuvered when netbooks and tablets arrived. These segments were quickly dominated by Asian firms Asus and Acer, and of course Apple – as always an outlier, and proof of the gains to innovation.

So moral imperative isn’t the only reason for bringing some production home. The economics can be compelling as well, and tech companies have an even stronger motivation: cash. Outsourcing has left the industry with bloated balance sheets and little to invest in. Apple holds $120 billion in cash and investments; Cisco, $50 billion; Dell and HP, $15 billion apiece. Much of this is earning marginal interest overseas and can’t be returned to investors without paying an enormous sum in taxes. Capital investment would allow them to bring this money back to the US, productively and tax-free.

It would also give them a competitive edge that Asian manufacturers can’t afford to match. Intel was onshoring before onshoring was cool. It never spun its foundry business like Advanced Micro Devices, and it didn’t move production offshore when conventional wisdom dictated it. As a result, the company holds a generational lead in manufacturing technology, and earns higher gross margins than any of its fabless competitors. This advantage, Intel’s greatest asset as it struggles with ARM Holdings in mobile devices, was made possible by the fact that Intel was integrated — that it had both capital and somewhere productive to invest it. Compare this to Taiwan Semiconductor, a company whose cash has dwindled as it struggles to fund an R&D program that, as a percentage of revenue, is only one-half the size of Intel’s, and Qualcomm, which nurses a $27 billion nest egg as it complains about its supplier.

There is something absurd, and a little grotesque, about these massive cash hoards. As Foxconn slowly replaces a million workers with robots — that is, as a company with $5 billion in operating cash flow attempts to digest a $20-25 billion capital program — Apple sits on a cash pile that could fund the automation of five Foxconns. Mac assembly is outsourced to a Quanta plant in California, when with pocket change Apple could build a more automated, more efficient, and lower cost facility of its own. Perhaps it’s too much to suggest that Qualcomm enter the foundry business, or that other tech companies enter a manufacturing world they have no specialty in; but something is horribly amiss when American firms, facing global competition, are unable to lever their enormous capital advantage into any kind of competitive edge.

What’s surprising, then, isn’t the fact that some companies are moving production back to the US, but that they’re not doing it faster. Apple’s $100 million investment is less than overwhelming, but it’s one of the bolder steps being taken by Silicon Valley, where the fear of physical assets seems to have become pathological. The only companies showing much initiative are the Asian manufacturers who have the least to gain; but the opportunity exists, and it offers more than good feelings and a momentary cachet.

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