Chapter 2 – Page 8 – The OM Blog by Heizer, Render, & Munson

OM in the News: Chip Makers Plot a Future in the U.S.

Nestled at the foot of Utah’s Wasatch Mountains, the IM Flash plant is a paragon of American high-tech manufacturing. Robots glide along the ceiling, moving silicon wafers the size of dinner plates between hulking machines that deposit and etch microscopic layers of material to build the most advanced memory chips in the world. For the 1,700 technicians and scientists who tend to the robots and troubleshoot problems in the delicate manufacturing process, the jobs offer generous pay and benefits.

For Intel and Micron Technology, the two American companies that jointly own and operate IM Flash, the venture allows both of them to sell cutting-edge, 3-D memory chips while sharing the multibillion-dollar costs of a modern semiconductor factory. In many ways, however, the IM Flash plant is an outlier. “While companies based in the U.S. still dominate chip sales worldwide, only about 13% of the world’s chip manufacturing capacity was in this country in 2015, down from 30% in 1990,” reports The New York Times (Feb. 27, 2017).

“It’s quite a bit more expensive to build a factory in the U.S.,” says Intel. The firm (which also has factories in Ireland, Israel and China) estimates that the extra cost for an American plant is more than $2 billion. Chip makers are hopeful that President Trump, who has promised large corporate tax cuts and a tougher approach to trade with China, will help them. The chip industry spends 1/5 of its revenue on R&D.

Looming in the background is China, which is currently a bit player in the industry but has committed to spend upward of $100 billion to create a world-class chip industry. “China is the largest market for us on the planet,” says an Intel OM exec. “It made sense to locate some production in China.”

Classroom discussion questions:

Why has chip manufacturing declined in the U.S?

2. Why is this a critical industry to retain?

OM in the News: Intel’s $7 Billion Arizona Chip Plant

“New chip plants are tremendously expensive,” writes The New York Times (Feb. 9, 2017), “requiring large tracts of land, reliable electricity and water, and a skilled work force that includes people with doctorates in chemistry and technicians who can repair a malfunctioning robot.” Sophisticated equipment is necessary to deposit and etch microscopic layers of material on silicon wafers, which are then cut and packaged into the microprocessors that run PCs, servers, smartphones and, increasingly, other electronic devices.

Countries compete to land such plants, especially modern factories that produce the most valuable chips and bring high-paying R&D jobs. Government subsidies are common, with China vowing to spend tens of billions of dollars to expand its domestic chip industry. While most technology manufacturing, such as computers and smartphones, has moved overseas, American factories still account for 1/7 of global chip production and produce many of the most valuable computer chips, including Intel’s flagship processors. Seventy-six chip plants are scattered across the U.S., from Maine to California.

Intel’s new $7 billion, 3,000 employee, chip plant in Arizona plant will build ultradense chips that Intel refers to as 7 nanometer, with transistors packed more closely together than in the chips the company now builds. The tighter spacing allows for faster, more energy-efficient chips. “This factory will produce the most powerful computer chips on the planet,” says Intel’s CEO, who adds: “the company had decided to proceed because of the tax and regulatory policies we see the (Trump) administration pushing forward.” Intel also has factories in China, Ireland and Israel.

Classroom discussion questions:

Why are chip factories important to the U.S?
Why is chip manufacturing a tough business to enter and succeed in?

OM in the News: The End of Employees?

UPS employees at a facility in N.H. pack jet-engine parts bound for Pratt & Whitney factories. The work used to be done by Pratt employees

No one in the airline industry comes close to Virgin America on a measurement of efficiency called revenue per employee. That’s because baggage delivery, maintenance, reservations, catering and many other jobs aren’t done by employees. “We will outsource every job we can that is not customer-facing,” says Virgin’s CEO.

“Never before have American companies tried so hard to employ so few people,” writes The Wall Street Journal (Feb. 3, 2017). The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry. This “contractor model” is so prevalent that Google, ranked as the best place to work for 7 of the past 10 years, has roughly equal numbers of outsourced workers and full-time employees. About 70,000 temps, vendors and contractors test drive Google’s cars, review legal documents, make products easier to use, manage marketing and data projects, and do other jobs. (They wear red badges, while regular employees wear white ones).

The biggest allure of outsourcing employees, of course, is more control over costs. Contractors help businesses keep their in-house staffing lean and flexible enough to adapt to new ideas or changes in demand. At large firms, 20-50% of the total workforce often is outsourced. Bank of America, Verizon, P&G, and FedEx have thousands of contractors each. In oil, gas and pharmaceuticals, outside workers can outnumber employees by at least 2 to 1.

Janitorial work and cafeteria services disappeared from most company payrolls long ago. But a similar shift is under way for higher-paying, white-collar jobs such as research scientist, recruiter, operations manager and loan underwriter. Few companies or economists expect this trend to reverse. Moving noncore jobs out of a company allows it to devote more time and energy to the things it does best. Businesses currently spend about $1 trillion a year on outsourcing.

Classroom discussion questions:

What are the disadvantages of this massive outsourcing?
Would students want to take “contract” jobs?

OM in the News: How the iPhone Got Outsourced to China

A crushing work force begins arriving for the Apple early shift at 6:30 a.m., crossing paths with those leaving the late shift — A crushing Foxconn work force begins arriving for the Apple early shift at 6:30 a.m., crossing paths with those leaving the late shift in Zhengzhou.

“Apple was late to China”, writes The New York Times (Dec. 29, 2016). In a bid to lower costs, some of the biggest American technology companies, including Compaq, Dell and H-P, began dismantling their domestic manufacturing in the 1980s and moving work overseas, largely to Asia. Not Apple. Steven Jobs believed that software and hardware development had to be closely integrated.

Rather than close plants, Apple decided to build them — in Colorado, Texas and California. The plants were highly automated, with the walls painted white, just as Jobs liked them, and they were promoted as a symbol of American ingenuity. “This is a machine that is made in America,” Mr. Jobs trumpeted in 1984, after Apple opened a manufacturing facility in California to produce the Macintosh PC.

But by the mid-1990s, Apple began to embrace outsourcing under its new operations chief, Tim Cook (now CEO). Under Cook’s direction, Apple shifted business to Foxconn, then an up-and-coming Taiwanese contract manufacturer that had started to gain a following among big American PC brands. The partnership freed up Apple to focus on its strengths — design and marketing. Apple would come up with a new idea, and Foxconn would find ways to produce millions of units at a low cost.

“They have brilliant tooling engineers, and they were willing to invest a lot to keep pace with Apple’s growth,” said a former Apple executive. When Apple’s sales took off after the introduction of the iPod in 2001, Foxconn had the heft and expertise to meet the demand that accompanied each hit product. Foxconn’s factories could quickly produce prototypes, increase production and, during peak periods hire hundreds of thousands of workers. Now, some 350,000 workers assemble, test and package iPhones in the 2.2 square mile site— 350 a minute, 500,000 a day.

Classroom discussion questions:

Everyone is talking about regaining manufacturing jobs. Can Apple reshore its manufacturing?

2. What is Apple’s core competency? Foxconn’s?

OM in the News: Reshoring Bike Production to the U.S.

Kent International plans to produce 500,000 bikes in the U.S. in 2017, and has set a target to ramp up to more than 1 million bicycles by 2020. — Kent International plans to produce 500,000 bikes in the U.S. in 2017, and more than 1 million by 2020.

After decades of offshoring, bicycle manufacturing is coming back to the U.S. as overseas costs rise and companies realize the value of “local for local” production. “From hand-crafted boutique brands to high-volume manufacturing, U.S. bicycle makers are reshoring bike production,” writes Industry Week (Dec.8, 2016). A confluence of factors are giving rise to new opportunities.

The move of American-made bicycles offshore began with industry leader Schwinn shifting manufacturing to Asia in the 1980s. In an effort to take advantage of low wages, other large bicycle manufacturers like Huffy and Trek soon followed. By 2015, only 2.5% of the 12.6 million bikes sold in the U.S. were made here. (The U.S. was in the top 5 for bicycle production in 1990 at 5.6 million units, but production fell to 200,000 units in 2015).

Now, though, the trend is looking up. Driven by rising offshore costs, the cost savings of automation and innovative processes, and the benefit of “Made in USA” branding, reshoring began to make good economic sense.

For example, in 1991, Kent International shuttered its New Jersey plant, and moved all bicycle production offshore. However, offshore costs began rising enough to make reshoring some manufacturing to the U.S. feasible. Then, in 2013, at the Walmart U.S. Manufacturing Suppliers Summit, Kent began discussing the possibility of opening a factory in South Carolina. With an annual employee turnover rate of 120% at its Shanghai factory and costs soaring, Kent turned to automation to close the total cost gap and return work to the U.S. It took innovative OM ideas, like thousands of feet of overhead conveyors, the latest wheel-building equipment, and other process improvements for the reshoring to make economic sense.

Today, Kent is a high-volume, mass-market bike supplier to Walmart, Toys “R” Us, Target and other retailers. This year it will roll out 350,000 bikes from the S.C. factory, operating with 115 employees and assembling bikes at a rate that would require twice as many workers offshore.

Classroom discussion questions:

Why did bike makers move offshore?
Read the article and discuss the reason for Detroit’s resurgence in bike manufacturing.

Good OM Reading: Options as an Outsourcing Contract Ends

We discuss the important topic of outsourcing in detail in Chapter 2. But what happens when an outsourcing contract is nearing its end? The buyer faces a strategic decision: extend the contract in its current form, divide it between the incumbent and more parties, or terminate it. “The decision should not be hastily made, or the solution may be worse than the problem,” writes KPMG in its new report, Extend, Divide or Terminate . Here are the 3 options:

1.Extend and renegotiate the contract with the current service provider: If criteria such as end user satisfaction and service level agreements are being met, the existing agreement with the service provider may be extended. A contract extension can take 2 forms. If the buyer is fully content with the provider’s performance, or if it is looking to buy time, extending the contract under the current terms is a reasonable choice. If amendments are called for to help ensure that the new agreement is fit for purpose going forward, the changes should be renegotiated.

2. Divide the contract: A buyer may also make the decision to transfer part of the responsibilities to one or more alternative service providers. This may be because the current service provider has failed to deliver particular services to the client’s satisfaction, the provider has decided to remove certain services from its portfolio, or the client’s requirements have changed to such an extent that a provider with a different area of specialization is required. When a contract is divided, it is possible that the client will bring elements of the outsourced services back in-house.

3. Terminate the contract: Sometimes one or both parties will decide to end the relationship. In such a situation, the services are transferred to a new service provider or back to the buyer organization itself. To help ensure a smooth transition, a complete exit strategy should be developed and the transition guided by experienced internal staff or an external advisor.

OM in the News: Nafta and the Global Car Industry

“Ending the 1994 Nafta trade pact is relatively easy,” writes The Wall Street Journal (Nov. 11, 2016). The U.S. legally can pull out of Nafta 6 months after notifying Mexico and Canada. But for the auto industry, such a change would be substantially more complicated because of the multilayered connections between U.S. and foreign suppliers and assembly points. The tens of thousands of parts that make up any vehicle often come from multiple producers in different countries and travel back and forth across borders several times.

This is a tenet of modern manufacturing: Where a product is ultimately assembled increasingly has little bearing on where its component parts are made. More than half the parts in the Ford Focus, for example, are made outside the U.S. and Canada, including 20% in Mexico. Ford also ships in some of the car’s engines from Spain and transmissions from Germany.

Similarly, only 10% of the parts that go into the 200,000 BMW luxury crossovers built each year in Spartanburg, S.C. come from U.S. and Canadian plants. The rest are imported from Europe and elsewhere. BMW in turn exports most of the crossovers around the world. By contrast, 70% of the components in the Honda CR-Vs assembled in Guadalajara, Mexico are currently made by U.S. and Canada-based factories. The parts that make up a car or truck, from bolts to motor blocks, window lifts to oil filters, account for 2/3 of its value.

“This industry, particularly in North America, has integrated a lot,” said a Federal Reserve economist. “You can’t buy an American-made car anymore. You can buy an American-assembled car,” adds a Ford veteran.

U.S. and Canada-based factories shipped $29 billion worth of parts to Mexico in 2015, while Mexican plants in turn sent more than $61 billion worth of parts to the 2 Nafta partners. About 1/3 of Mexico’s 1,300 suppliers, which employ some 720,000 people, are U.S. owned. Mexican, Asian and European parts suppliers provide jobs for nearly 600,000 Americans.

Classroom discussion questions:

Explain the purpose of Nafta.
Identify the 1st, 2nd, 3rd, and 4th tier suppliers in the attached seat graphic.

OM in the News: The Toll of Cheap Clothing

Relatives hold photos of workers missing in the Rana Plaza collapse

In April 2013, when the Rana Plaza building in Bangladesh crumbled and killed more than a thousand garment workers, Western clothing executives were chastened. They were the ones, after all, who’d been pressuring Bangladesh’s apparel factories to cheaply reproduce runway trends for consumers in the U.S. and Europe who’d grown used to $10 dresses. Following the accident, H&M, Zara, Walmart, Gap, and other major brands announced they’d fund and oversee factory inspections in Bangladesh, demanding improvements from facilities that fell short and cutting off business with those that didn’t get better.

“Three years have passed, and an uncomfortable truth is emerging,” reports BusinessWeek (Oct. 31-Nov.6, 2016). Of some 1,600 factories, more than 80% are behind schedule on improvements. The government, too, has made limited progress: It’s shut down just 39 facilities that posed an “immediate” danger to workers. Meanwhile, investigators keep finding defects: faulty sprinklers, exit stairwells used for storage, missing fire doors.

Surprising? The craze for cheap, on-trend clothing that helped turn Bangladesh into the world’s second-biggest apparel exporter, after China, has actually intensified since the disaster. Low-priced brands keep undercutting one another, and that keeps squeezing the factories that produce their clothes. This is the backdrop against which factory owners are expected to make time-consuming, expensive improvements.

So far, the government has shut down only those factories that posed an imminent risk to employees. If it lets imperfect, if not immediately dangerous, factories continue to operate, that could endanger garment workers. At the same time, the garment industry is a major employer, credited with helping to cut the country’s poverty rate almost in half since the 1990s, to just over 31%. Also, Bangladesh’s garment industry is facing serious competition from other countries, and if it becomes costlier to source clothing from Bangladesh, Western brands could migrate to Cambodia, Vietnam, Burma, or Ethiopia.

Classroom discussion questions:

What is the ethical dilemma facing both U.S. brands and the Bangladesh government?
Why are the safety fixes not corrected more quickly?

OM in the News: Reebok Starts Reshoring

“Sports equipment manufacturer Reebok is bringing some of its shoemaking back to the U.S., unveiling plans to open a new manufacturing lab next year using innovative liquid material and 3-D drawing,” reports IndustryWeek (Oct. 24, 2016). Some parts of the shoes planned will come from Asia, but the most technical components will be manufactured in Michigan.

German chemical giant BASF developed with Reebok a liquid material that is drawn across the outsole of the shoe for a three-dimensional fit with the help of 3-D drawing. The material helps absorb shock. “This is the very first use of this process to make athletic footwear. We borrowed and enhanced it from a process we found in the automotive industry,” said a Reebok executive. “The Liquid Factory concept is proprietary to Reebok.”

All of Reebok’s shoes were previously made in Asia.

In the short term, Reebok will only produce a small series of the shoes at the relatively high price ($189) due to still expensive development costs. In the long term, Reebok hopes to use this technology to create a product with competitive prices. “The Liquid Factory process is very flexible in that each machine can be used to create as many different concepts as imagination allows — it’s programming, not molds,” Reebok explained. “Scaling up is a matter of installing more Liquid Factory machine setups. The local manufacturing also gets us much closer to the consumer in terms of speed to market.”

Reebok is not alone in localizing production. In May, Germany’s Adidas announced it was opening a production site operated mostly by robots in the city of Ansbach, due to begin mass production next year. An Adidas site is due to open next year in the US.

Classroom discussion questions:

Why is Reebok reshoring some of its production? Why not more?
Explain the Liquid Factory concept.

OM in the News: It’s Getting More Expensive to Make Cars in Mexico

When car companies began flocking to Mexico more than two decades ago, the big lure was labor, which was plentiful and inexpensive. “Today,” writes The Wall Street Journal (Aug.15, 2016), “with an auto-production boom in high gear, those advantages are being chipped away.” Toyota, BMW, Ford, and several other auto makers have committed to spend a combined $15.8 billion to build new assembly plants or expand existing factories. That is on top of the more than a dozen plants already in operation and billions more being spent by auto-parts suppliers to keep pace.

The competition for employees—both finding and retaining them—is nudging up labor costs. The going rate ranges from under $1 an hour at some parts factories to nearly $3 an hour at the large assembly facilities. That is well above Mexico’s minimum wage of 73 pesos, or $4 a day. Still, it is too low to attract the quantity and quality of workers needed to fill the surging number of openings. Retention and retraining programs are becoming the norm as are bonuses for employees who agree to stay in place, especially those with valued skills. Some factories are luring recruits with perks such as a new cowboy boots. Vacancies are becoming the norm.

Auto-industry investment in the country accelerated in the 1990s after the signing of Nafta. In the lead were Detroit car makers and parts suppliers looking to avoid high labor costs at their unionized plants in the U.S.

Classroom discussion questions:

1.Why did so many auto manufacturers select Mexico?

2. What can OM managers do to retain employees?

OM in the News: China Begins to Lose Jobs

Some assembly line jobs are reshoring or moving to cheaper countries

Between 1999 and 2011, the U.S. lost 2 million jobs because of a surge in Chinese imports. With its large pool of workers who earned much lower wages than their U.S. counterparts, China attracted manufacturers seeking to reduce costs, bolster profitability and keep prices low. But “China’s labor market has changed sharply in recent years. China is moving up the value chain,” reports The New York Times (July 23, 2016).

Wages for Chinese factory workers now average $424/month, 29% more than just 3 years ago, and labor costs are now significantly higher than in many other emerging economies. Workers in Vietnam earn less than 1/2 the salary of a Chinese worker, while those in Bangladesh get paid 1/4 as much. The costs of manufacturing in China are now almost the same as in the U.S., after taking into account wages, worker productivity, energy costs and other factors.

Without the lure of large cost savings, more American companies are “reshoring,” with 24% saying they are actively shifting production home from China or are planning to do so over the next 2 years–up from only 10% in 2012. As a result, the number of manufacturing workers here is expected to increase over the next 5 years.

But it is not just the U.S. that is taking jobs away. Almost 1/2 are moving into other developing countries in Asia, while nearly 40% are shifting to the N. America. Foxconn, which makes Apple iPhones in Chinese factories, is planning to build 12 new assembly plants in India, creating 1 million new jobs there. Many Chinese companies are burdened by excess capacity, and downsizing may be unavoidable. China estimates that 1.8 million workers could lose their jobs in the steel and coal sectors alone.

Classroom discussion questions:

1. Will the U.S. recapture all the manufacturing jobs it lost? Why?

2. What is China doing to stay competitive?

OM in the News: Call Center Jobs Are Going to the Robots

As technology improves, an increasing number of the Philippines’ 1.2 million call-center workers, such as those shown above in Manila in 2012, will be at risk of having their jobs outsourced to customer-service robots — As technology improves, an increasing number of the Philippines’ 1.2 million call-center workers will be at risk of having their jobs outsourced to customer-service robots

“The Philippines’ economically important call-center industry has joined the growing list of businesses at risk of being gobbled up by automation,” writes The Wall Street Journal (June 22, 2016). In recent years, the Philippines, like India, has capitalized on its relatively large pool of English speakers to attract Western companies eager to cut costs by shifting customer service and other tasks to lower-wage countries.

But robots already are starting to displace some humans from low-end tasks such as monitoring the performance of digital networks. And, while robots aren’t yet smart enough to replace the human phone operators who do jobs like fielding calls from bank clients or helping people reset their modems, they will be within 5 years or so, say industry experts. Automation has also taken a significant toll on India’s outsourcing industry, which is heavily involved in networking and information-technology services. Not long ago, some of those services, such as network monitoring, required dozens of human network engineers, but can now be done with a handful of people who oversee a largely automated system.

Climbing the value ladder won’t be easy. TaskUs, a U.S.-based outsourcing company with operations in the Philippines, is among those that are trying. “Innovation is the key to survival,” said its CEO. He says just 1/10 of the company’s 5,000 employees actually are answering phones. Most are managing content on websites or handling customer relations via online chat. A decade ago, nearly all Philippine outsourcing work was phone-based. Now, it is just 60%.

Classroom discussion questions:

What must the call center industries in India and the Philippines do to survive?
What are the implications for U.S. operations managers?

OM in the News: Human Rights and Overseas Factory Workers

Bangladeshi volunteers and rescue workers at the scene of the Rana Plaza building collapse in April 2013 that killed 1,135 people. — Bangladeshi rescue workers at the scene of the Rana Plaza building collapse in 2013 that killed 1,135 people.

After more than 1,100 deaths exposed dangerous labor conditions in Bangladesh in 2013, brands like H&M, Walmart and Gap were among the most powerful companies that pledged to improve the safety of some of the country’s poorest workers. “But 3 years later,” The New York Times (May 31, 2016) writes, “those promises are still unfulfilled, and that safety, labor and other issues persist in Bangladesh and other countries where global retailers benefit from an inexpensive work force.“

A new report by the Asia Floor Wage Alliance has put another spotlight on the conditions. In Bangladesh, tens of thousands of workers sew garments in buildings without proper fire exits. In Indonesia, India and elsewhere, pregnant women are vulnerable to reduced wages and discrimination. In Cambodia, workers who protested for an extra $20 a month were shot and killed.

The brands say that in recent years they have made significant progress in structural repairs and monitoring of factories. But the report accuses Walmart of benefiting from forced labor and other abusive practices in a number of Asian countries. In Cambodia, for instance, workers at factories who make Walmart products are required to work 10-14 hours a day in sweltering heat, without access to clean drinking water or breaks — conditions that have contributed to “mass fainting episodes.” Workers who refuse or who try to speak up for themselves risk being fired.

Factories in many developing countries are under enormous pressure to churn out billions of dollars worth of goods at costs low enough to beat out the competition for business from foreign companies. H&M, with $25 billion in sales, is one of the biggest beneficiaries of the so-called fast-fashion craze, relying on factories in many countries to help quickly refresh its clothing offerings.

Classroom discussion questions:

What are the ethical responsibities of OM managers whose supply chains are in developing countries?
Why is it difficult to meet labor condition commitments?

OM in the News: Walmart Promises to Buy American

“We are committed to American renewal,” writes Walmart, with the announcement that it will purchase an additional $50 billion in U.S. products by 2023 . The commitment means a cumulative increase in U.S. manufactured purchases of U.S. products of $250 billion. Items that are made, sourced or grown in American already account for about 2/3 of what Walmart spends to buy products for its U.S. stores.

Walmart says that 1 million new U.S. jobs will be created through this initiative, including direct manufacturing job growth of 250,000, and indirect job growth of 750,000 in the support and service sectors. “Purchasing products closer to the point of consumption enables procurement of the best price, highest quality products and the most reliable sourcing of goods,” adds the firm. The effort allows Walmart to respond to the customer faster, respond to seasonal demands, and mitigates risks such as currency and volatility in port delays. Sourcing U.S. goods improves in-stock rates and sales.

Walmart states that Made in USA is important to its customers for 3 reasons:
– Made in USA is a strong driver of purchase decisions – 2nd only to price
– 85% of women said it is important for a retailer to sell Made in USA products
– Products are perceived to have higher quality if U.S. manufactured

Our coauthor, Prof. Chuck Munson, notes: “The most interesting aspect about this to me is that when Sam Walton was there and I lived in Bentonville back in the 1980s, Walmart had a big “Buy America” program. They were very proud about how they helped local business thrive. Then it was abandoned as they starting sourcing so much from China. Now we see them move back in the other direction. As the biggest retailer, their demand can move the bar on U.S. manufacturing jobs. And they are recognizing once again that their customers (many of whom are manufacturing workers) care about this issue.”

Classroom discussion questions:

Why is sourcing in America advantageous to Walmart?
What has Walmart’s impact been on the sustainability movement in the U.S? (see Supp. 5)

Teaching Tip: Explaining NAFTA to Your Students

Making car mats in Mexico. NAFTA put U.S. automakers in competition with Mexican workers.

Your students have undoubtedly been hearing about Donald Trump’s threat to “break” the North American Free Trade Agreement. Auto industry workers offered up some of his loudest cheers. But there are still more than 800,000 jobs in the U.S. auto sector, and The New York Times (Mar. 30, 2016) makes the case that without NAFTA (see Chapter 2), there might not be much left of Detroit at all. To be sure, the deals to reduce trade barriers threaten the livelihood of workers in the industries exposed most directly to foreign competition. NAFTA put them in direct competition with Mexican workers earning 1/5 of their compensation.

The American trade deficit in autos and parts tripled in the 2 decades after the NAFTA deal took effect in 1994, to about $130 billion in 2013. The industry lost 350,000 jobs, 1/3 of its workers, a massive shift in a flagship industry. Still, NAFTA itself had a relatively modest impact on the size of the U.S. trade deficit with Mexico. And autoworkers in Detroit were not just competing with cheap workers in Mexico. They were also competing with American workers in the union-averse South, where many car companies set up shop. They were competing with robots and more efficient Japanese and Korean automakers.

The integration of production across countries with complementary labor forces — cheaper workers in Mexico to perform many basic tasks, with more highly paid and productive engineers and workers in the U.S. — turned out to play a central role in reviving our auto industry. The Honda CR-V assembled in Mexico, for example, uses a U.S.-made motor and transmission– and 70% of its content is either American or Canadian. This regional integration gave the U.S.-based auto industry a competitive edge that was critical to its survival. There was a concern 20 years ago that an auto industry supply chain would develop across Asia, including China and Taiwan and Southeast Asia. Now, as Chinese wages rise, almost every car manufacturer is setting up shop in Mexico.

Classroom discussion questions:

Explain the purpose of NAFTA.
Why is this an OM issue?