Wind of change blows towards Silicon Valley

Apple outsourced manufacture of iPhone and iPad tablet computer to Foxconn's factories in Asia and Latin America. Bobby Yip / Reuters

After initially basing manufacturing in the heartland of the American IT industry, companies switched to cheaper bases overseas. But now it could all come full circle, writes Tony Glover

The days when California's Silicon Valley was an information technology (IT) manufacturing hub with hulking chip-making factories are long gone.

This is largely as a result of local companies such as Apple increasingly outsourcing manufacturing to other countries.

But there is growing evidence the area is again becoming a manufacturing hub. According to a study by the Brookings Institution, based in the United States, Silicon Valley, in the southern part of the San Francisco Bay Area, has the country's highest manufacturing wages and the second-highest concentration of production jobs in big US cities.

According to local industry watchers, however, the resurgence of manufacturing now taking place in Silicon Valley bears little relation to the large-scale production conducted by companies such as Intel. Instead, smaller "boutique" operations using cutting-edge technologies are producing complicated components and prototype products and devices.

Examples of local companies reported to be hiring at the moment include the digital sign maker Altierre in San Jose and custom parts maker IMG Precision in Livermore. More than 162,000 people are reported to be working in Silicon Valley factories today, an increase of 7,900 from 2010.

But some analysts are still sceptical about the Valley's fight to become a long-term manufacturing hub, given its high prices and fashionable Californian lifestyle.

"It is in heavy competition with Texas at the moment and it continues to have tax and cost-of-living disadvantages in this fight which offset and could kill this trend," says the analyst Rob Enderle of the Enderle Group.

However, Silicon Valley is not merely in competition with other US manufacturing centres such as Texas but also with far more cost-effective locations in Asia and Latin America.

Apple has managed to become the world's largest corporation by outsourcing the manufacture of its iPhone smartphone and iPad tablet computer to Foxconn's factories in Asia and, more recently, to new Foxconn facilities in Latin America.

Locating its manufacturing bases outside the US is regarded as a key factor in enabling Apple to grow its profit margins while still having enough cash to plough into the research and development needed to continue to innovate with new products such as the iPhone 5, released last week.

But even companies such as Apple are starting to question the wisdom of relying too heavily on manufacturing bases so far from Silicon Valley.

Working conditions in Foxconn's Chinese facility are widely considered unacceptable by western standards. A few years ago, Apple suffered a remarkably high level of suicides among the ranks of Foxconn workers employed in the manufacture of Apple products.

At the time, Apple hid behind the excuse other well-known IT manufacturers also cut costs by outsourcing manufacturing to Asia and it would hold an extensive investigation into working conditions at the Foxconn facility.

However, the contrast between China's working culture and that of a developed western economy such as the United States continues to plague Apple. This month, there have been reports in the Chinese media Foxconn is allegedly forcing students taking internships to work gruelling hours on its production lines.

But bad publicity surrounding poor working conditions is only one drawback to locating in developing countries. Security is another. Companies that outsource manufacturing to China are foolish not to expect a certain amount of counterfeiting of branded products. But in the case of IT companies, this can sometimes mean stealing western technology.

Securing of intellectual property is particularly important where software is concerned and this is an area that is also growing rapidly. Whether software development is strictly manufacturing is becoming academic as products ranging from smartphones to cars use sophisticated software to power other components.

According to the international research company Forrester, software spending in the US, much of it earmarked for Silicon Valley, will grow by 11.4 per cent this year and by 12 per cent next year.

Software development attracts the kind of employee who expects a luxurious western living environment in addition to a high salary. Silicon Valley is adept at providing both.

There is also a strengthening drive against outsourcing in some US political circles in an effort to combat the huge American unemployment problem. Two years ago, the former Intel chief executive Andy Grove suggested a new tax be levied on goods manufactured overseas. He argued the taxes raised should be spent on encouraging manufacturing within the US.

Whether US corporations will bend sufficiently to the political wind of job creation to shift manufacturing back to expensive facilities is another matter. But as manufacturing bases in the developing world prosper, wages rise and they become less competitive with the US.

Even if US electronics companies continue to use overseas facilities for component assembly and the manufacture of certain products, an increasing amount of specialist and early stage work is likely to be carried out in the US. The logical location for that is Silicon Valley.

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