This great article from Der Spiegel, a German news weekly, addresses the complexities of globalization by looking at the innards of an iPod. It provides reasons why the US trade deficit doesn’t matter…
The evolution of chip manufacturing has relentlessly followed a process clunkily dubbed "vertical disaggregation." One step after another in the supply chain gets spun off to those who can do it more cheaply and efficiently, leaving the companies at the top of the value chain increasingly focused on their core competency. One-stop shops have been replaced by what academics call "cross-national production networks."
The rise of vertically disaggregated, cross-national production networks can be seen as a persuasive demonstration of the free market in action. Individual entities, like PortalPlayer, constantly in search of a competitive advantage, dispense with any task that someone else can do more cheaply or efficiently and focus R&D on the particular job that it does best. The wide, immaculately groomed avenues that connect Silicon Valley’s business parks are jammed with hundreds of other companies doing exactly the same thing.
It’s hard to refute the oft-heard argument in favor of outsourcing that suggests that companies like PortalPlayer would not exist at all if they did not rely heavily on offshoring. In other words, the 80 employees that PortalPlayer has in the United States would not be possible without the 100 in India.
…and why it does…
If outsourcing leads to a critical mass of technology expertise and manufacturing capability migrating to locations outside the United States, the long-term consequences could be severe. So the Pentagon is worried that it won’t be able to find local suppliers of chips necessary for next-generation weapons systems. Economists worry about spiraling trade deficits.
An odd, intriguing aspect of globalization is that the decision by the fabless design houses to pursue their individual interests — cheaper costs — plays right into the hands of national entities focused on their own strategic imperatives. It is no accident that Taiwan became a leader in bleeding-edge, made-to-order chip manufacturing, or that China looks set to follow in its much smaller neighbor’s path. Before Chang started TSMC, he directed a government research institute that targeted strategically important technology development. In both Taiwan and China, the government has encouraged the chip industry with tax breaks, real estate deals, loans and an assortment of other incentives.
That’s because government and business leaders in East Asia consider the chip industry not just as a source of economic profits but as a key component of national strength. So while the fabless companies shed what they consider nonessential, East Asia eagerly snaps up everything it can. As a result, "disaggregation" on the one side has led to "reaggregation" on the other. Look at the PortalPlayer chip: manufactured in Taiwan, tested and packaged in Taiwan, Korea or China, and plugged into an iPod in China.