What does Apple’s outsourcing have to do with farming and manufacturing in Kerala ?


If you chop a tree for firewood, you should plant a tree to compensate. And you should do it even if you are not into the whole green thing. Or else you will be turning in your grave constantly when your children and grand children swear ad-nauseum about the trouble you put them in . But I digress.

So Apple outsourced a LOT of manufacturing to China. You should read this excellent NYT article http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?_r=1&hpRT , and feeling depressed after reading it should be expected.

Does that make them evil – probably not. They are a profit seeking entity, and they sell all over the world. They can do whatever works for them. Did China win that work because of cheap labor? yeah – they probably did. But the manufacturing did not flourish there solely because of cheap labor. It flourished because China has plenty of engineers, built an ecosystem around Apple’s manufacturing needs and then started offering that service to other companies. And then other innovative companies started investing in China to build manufacturing. The story repeats in concentric circles – and it seems to fuel itself.

Did America lose out big because Apple outsourced manufacturing? yeah – I guess it did. But Apple was not the first to do so. And neither is manufacturing the only thing that got outsourced. But did America get anything in return? yes of course. We can now walk into mega marts and buy things a lot more cheaper. We can walk to an Apple store and buy an Apple product much cheaper than if it was manufactured locally.And so on and so on.

So is this a fair trade off? hardly, in my opinion – if what is happening to farmers in Kerala is an indication.

Kerala, my home state in the southern tip of India, literally means “land of coconut palms”. And Kerala is a place where people eat rice in some form 2 or 3 times a day. When I was young – the state had a large number of vast rice fields and coconut plantations. Around the time I was in high school, this was not the case any more. Many farmers moved from growing rice and coconut to growing rubber. Rubber was a “cash crop” which fetched handsome prices from tire manufacturers etc. Fast forward to today. Keralites still eat rice and coconut based food 3 times a day, but they have to buy these (and most vegetables) from neighboring states for a huge price. And rubber values fluctuate so much that not many farmers got rich that way. As agriculture declined, the problem was compounded by lack of supply chain efficiencies in buying and storing food grains and vegetables. End result – farmer suicides started happening in an accelerated manner. Many of them lost their land and fortune and their loved ones. And prices still go up significantly most years.

While Keralites are extremely enterprising and capitalistic when they live and work outside their state, they are mostly left leaning when they live in Kerala. Manufacturing has steadily declined in the state, and it has become a consumer economy for the most part. The state has 100% literacy, and has extremely high standards for health, higher education etc compared to many other Indian states. But despite all of this – manufacturing won’t flourish there. Both parties (well, alliances of convenience is a better phrase) that typically rule Kerala are left leaning to various degrees, and both have strong trade unions which actively discourage manufacturing. Except for IT, I think everything else in Kerala that generates money has a union presence that threatens its existence. This environment is the prime reason why lots of Keralites get out of the state after their education, and live and work outside. I am one such guy too – who finished college and could not wait to get out of there. Due to many people leaving the state, there is a positive side too – these people send a lot of money back to their families that live in Kerala. So the consumer economy generally has always been excellent.

When I read the article on Apple’s outsourcing to China, the situation of Kerala is what rushed to my mind immediately. The long term implications are stark – once you let go of something you do well, you have to be prepared to pay the price. And you should be able to invest in something else to compensate for the long term repercussions. It is the price to pay when economy takes a global flavor. You cannot pick up your toys and go home arbitrarily when you don’t like the game after some time – you need to stay in the game and invest wisely for future. Globalization is not exactly a bed of roses – it is a mixed bag.

IT outsourcing is something I am very familiar with. If a company outsources some IT functions and uses the savings to invest elsewhere, it works great. If it just eats up the savings, and don’t invest elsewhere – it just won’t survive in the long term. Outsourcing might create other kinds of jobs too – like Apple being responsible for increased demand for AT&T etc and creating jobs there. Or the outsourcing companies in India creating jobs in the US when they want to get into high end consulting etc. Apple has a large consumer base in China – and makes money in that market. One day when tax laws make it attractive to bring that money to US, Apple might do that – and it will help US economy. It is pretty hard to judge – at least for me – on how much these indirect benefits will offset the long term costs. But at a minimum, it does offer some relief.

Outsourcing of manufacturing and IT and other things won’t go away – although in an election year, many might say it will. The question is how will we compensate for the long term impact ? There is no one magic bullet – it needs a lot of things to fall in to place – on both public and private sector. And sadly, it might not get much traction in US till the presidential elections are over.