The Descent of Microsoft

    

Manaus Brazil is probably the least lean manufacturing location on the plant. It is virtually unreachable by land. Some 750 or so miles up the Amazon River it is a manufacturing hub that is heavily subsidized by the Brazilian government in an effort to create lots of low wage jobs for the native folks who call the Amazon rain forest home. The only road in – a wretched two lane affair, impassable for the most part, runs 400 miles west crossing a number of rivers by ferry – away from ports and markets - before shooting 600 miles back east, finally connecting with the Brazilian road network – but still close to 2,000 miles from the big markets in Rio de Janeiro and Sao Paulo.

The most widely used logistical route is by water – a five day trip down the Amazon to the Atlantic coast, seven or eight days coming back - but occasionally unusable depending on the cycles of rain and drought. And, of course, there is always air freight.

Far from markets and suppliers, a transportation nightmare, Manaus has two things to offer: Plenty of cheap labor and a wide array of tax breaks and other subsidies from the government. Most companies looking to make an entry into Brazil take a hard look at Manaus, then opt for locations nearer to Rio, Sao Paulo and the coast. Even those with the least concern for cycle times, inventory and waste shy away from Manaus, opting instead for the Byzantine collection of federal, state and local taxes, tariffs and fees in the rest of country totaling 35% or more. No one wants cheap labor badly enough to locate in Manaus – except for the select few for whom cheap labor is the alpha and the omega of manufacturing.

Microsoft’s new acquisition, Nokia, is in Manaus in a big way.

On the other side of the planet, the pursuers of cheap labor who were caught with their pants down when China costs began an absurd (but very predictable) escalation had a range of choices. Many returned to the USA and their western home countries, having learned a hard lesson about the high cost of low wages. The hardly few that didn’t, however, looked south to Vietnam. The levels of corruption, pollution, oppression, logistical incompetence and just about every other measure are worse in Vietnam than China, but the wages are far lower. Vietnam is a good place to move final assembly while the suppliers base transitions from China.

Nokia is just such a company. With two plants in China, Nokia got caught. While they have paid off better than 10,000 employees world-wide and have closed their flagship plants in their home country of Finland and in Germany, they have built a new plant in Vietnam and are eagerly awaiting its imminent production launch.

In acquiring Nokia, Microsoft has gone from a software company with a newly minted strategy of becoming an integrated device, software and service company to one of the least lean, cheap labor focused manufacturers in the world. They now have a manufacturing footprint that includes China, Manaus, Vietnam, Mexico, Hungary, India and Korea …. And nary a single manufacturing facility in Western Europe, the United States, Canada or Australia – the places where their customers and product development engineering will take place.

Like the driver who says he is hopelessly lost – but making very good time – Microsoft and Nokia have few attractive products, are slow to the market, and drag an enormous logistical tail, but they lose very little money on each product they sell.

On a final note – the architect of Nokia’s strategy to transition from a world class, global manufacturer to an all-in cheap labor chaser, all else be damned, CEO Stephen Elop, is widely rumored to be the next head honcho at Microsoft. They better hope they are great product innovators because, with the Nokia acquisition, Microsoft is shaping up to be perhaps the least innovative manufacturing, least innovative strategy, least innovative supply chain company on the planet.

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