Microsoft Closes US Surface Factory, Moves Production to China

Back in 2015, Microsoft trumpeted the opening of a new factory in Wilsonville, stamping “Made in Portland, Oregon” on each and every huge touch-screen computer it made in the US. The company hired more than 100 people to build Surface Hubs. The Surface Hub is an extremely expensive machine, at ~$22,000, so this obviously wasn’t a high volume product. But Microsoft insisted it could make the economics work.

Now, just two years later, Microsoft has announced that it will close the Wilsonville plant and fire all 124 employees that worked there. Panos Panay, head of Surface development, went to the plant and announced that Microsoft is consolidating its manufacturing and will build the Surface Hub in the same place as its other Surface devices. Microsoft has previously disclosed that it builds its Surface hardware in China, so that’s the assumed location for these new products as well.

The Oregonian has published a story on the layoffs and factory history, which reads in part:

The company hasn’t explained, in public or to its Wilsonville employees, why it gave up on domestic manufacturing so quickly and didn’t respond to repeated inquiries for comment. But the only thing surprising about Microsoft’s decision is that it tried to make its computers in the US in the first place.

These layoffs are ironic, arriving even as President Trump heralds “Made in America” week. In reality, virtually all tech manufacturing is now done in East Asian countries like China and Taiwan. For all the emphasis placed on manufacturing jobs and the blue collar workers that have them, US-based manufacturing has shrunk drastically over the past 47 years.

In 1970, manufacturing jobs accounted for 25 percent of all US employment. Today, manufacturing jobs are just 8.5 percent of all non-farm payroll employment. That’s not to say that manufacturing jobs are unimportant. But in the US, employment in this sector peaked in 1979 and has fallen dramatically even since 2000.

Oregon’s high-tech jobs. Data and graph by The Oregonian.

The problem with manufacturing in the United States isn’t just a question of wages. It’s also about supply lines, and how easy it is to hire and train qualified employees and source proper components. As The Oregonian reports, the vast outsourcing of manufacturing to foreign countries has made it easier to source components and industrial supplies from China or Vietnam than it is to buy them locally.

The other two factors in play here are whether the Surface Hub sells in any kind of sustainable volume and Satya Nadella’s clear disdain for manufacturing actual products. Since Nadella took the helm on February 4, 2014, Microsoft shut down its Windows Phone manufacturing division. Nadella has previously stated that Microsoft will eliminate 3,000 jobs, mostly in sales, as it shifts its focus to cloud computing. Devices like the new Surface Pro are iterations on existing products, not trendsetters in the way the original Surface RT and Surface Pro were supposed to be. And as for the new Surface Laptop, I’ve made my thoughts on that rather clear.

Microsoft’s decision to shift Surface Hub manufacturing to China highlights the difficulty in bringing manufacturing jobs back to the United States. It’s not just a question of opening a factory and hiring employees. There are supply line considerations, source costs, and the simple fact that American companies now produce many more products with far fewer employees than they used to require in the 1970s, thanks to automation and improved productivity.

The real value of the dollar tends to lag roughly five years behind the current account.

The 20-percent BAT (Border Adjustment Tax) that Paul Ryan and some other GOP members favor could also make it more difficult to build and sell products in the US, depending on how the BAT is implemented and which goods it applies to. If applied universally, it would raise the cost on a number of materials that aren’t as readily available in the US as they are elsewhere.

China, for example, produces 5x more rare earth materials than the rest of the Top 10 producers combined. Some economists have argued that the dollar will appreciate sharply if the BAT passes, but it’s not clear whether this will happen immediately or over a longer period of time. A BAT that affects finished goods wouldn’t impact raw material imports, but would still hit companies like Amazon, Walmart, Best Buy, and Costco pretty hard. While this could boost local sourcing of some products, it could also lead to less demand for US exports, depending on how other countries react to the BAT (if enacted).

As the graph above shows, the value of the US dollar tends to lag its current account balance by roughly five years. (The current account is the difference between a nation’s savings and its investment; a more expansive definition and explanation is available here.)

In short, tech manufacturing in the US isn’t really showing much sign of growth, thanks to complex issues that could be adjusted in the long term, but are likely to be highly resistant to sharp, short-term change. “Made in America” remains a complex proposition depending on how you define “made.”

Top image credit: Microsoft