The iPad and Dreamliner Economy, Redux

Not long ago, a Forbes.com article titled The iPad and Dreamliner Economy discussed the innovation that was taking place inside the US and why domestic technological innovation was far from a standstill.

While the article reads like a litany of US brands the author’s firm likely holds an interest in, the article’s title is what grabbed my attention. It suggests something far beyond domestic technological innovation, which, I should add, is a monopoly held by no one country.

What the latest analysis shows is that the smallest part of Apple’s costs are here in Shenzhen, where assembly-line workers snap together things like microchips from Germany and Korea, American-made chips that pull in Wi-Fi or cellphone signals, a touch-screen module from Taiwan and more than 100 other components.

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Airframers are perpetually jockeying for position in China’s rapidly growing market; moving component and structural assembly to achieve significant cost savings with lower labor rates while cultivating market access for state controlled airlines to select their fleets accordingly. Even homegrown final assembly lines set up by Airbus (Tianjin) and Embraer (Harbin) avoid high import tariffs while delivering directly to Chinese fleets.

But how will this shift to higher wages and inflation impact the aerospace industry at large?

The list of Chinese content on western jetliners is continually growing and will, for example, eventually include 5% of the A350, the center fuselage of the CSeries, the rudder, vertical stabilizer leading edge and outer wing-to-body fairing panels of the 787, as well as the horizontal stabilizer, inboard flaps, ailerons and spoilers of the 747-8.

The rising labor rates for consumer electronics production may or may not translate to higher wages for higher skilled manufacturing jobs in China, though the increased costs of doing business could shift the dynamic for increasing workshare.

The tilted playing field toward low labor costs, driven by an undervalued currency, and strategic market access made the shift East a virtual necessity. Though if rising labor costs, which still may be competitive against western wage rates, significantly increase the cost of doing business in China, how will this impact the shape of aerospace supply chains in the future?

This will be a trend to watch.