To understand what has happened step back a few years. Originally Motorola manufactured cell phones in places like Harvard, Illinois, and Bathgate, Scotland. Although some portions of the process were automated, many activities, especially the assembly-related ones were not. In Bathgate for example they had 3,000 expensive, unionized workers mostly doing assembly. When competition heated up Motorola's shrinking margins turned into losses and they looked to these first-world plants to make the cuts. Ericsson's situation was even worse. They closed the plants or sold them to outsourcing firms such as Flextronics and Celestica.

The outsourcing firms were already making a lot of PCB boards for these companies and Motorola saw a way to offload their losses onto these suppliers. Publicly they stated that it made sense to turn manufacturing over to these contractors who "specialized" in electronics, but in reality these outsourcing firm's only real expertise was in making circuit boards--not assembling mobile phones. One solution was to turn over their existing assembly plants to the outsourcers. Predictably this was a disaster. The other was for the outsourcers to build plants in low-rent countries. Motorola was already starting to do this on its own with plants in places like Chihuahua, Mexico. Instead of having expensive Scottish ex-sheep farmers assembling their phones they would have cheap illiterate Mexicans doing it. The outsourcers accelerated this process by creating assembly plants in places like Malaysia and Brazil.

This cut costs but introduced two new problems. One is using outsourcers has costs: shipping costs, communication costs, delay costs, contract costs. If Motorola was slow on its feet before, now it was getting tied into long-term manufacturing contracts that would slow it down even more and lengthening the chain of communication. Every new design has to trickle down an ever-longer, cross-company path to production. Another problem is that Mexicans do not work as hard and smart as Scots do. For example, complex, multi-faceted machines come with complex, multi-page manuals that are not written in Mexican. The only solution is to dumb down the plant. Get rid of any machinery that would be too difficult for the third-world worker to operate and maintain.

While they were saving money on labor costs, Ericsson and Motorola were going backwards in manufacturing technology because their outsourcers had to dumb-down their operations. The effect is that these companies are barely competitive today. For example Motorola is said to be operating on margins of two or three percent.

The third big player in the market, Nokia, has been able to stay ahead of the curve by using automation to keep plants in first-world areas. They do outsource but overall they have a much more automated and first-world operation than their competitors. While their competitors are dumbing plants down Nokia is advancing its manufacturing operations. This is the main reason why they have profit margins so much higher than Ericsson and Motorola. The secret to Nokia's success has been the use of assembly robotics made by a company called PMJ Automec Corporation The key founder is a Finn named Markku Jokela. Jokela was originally a manager in Nokia's PCB operations but saw the importance of assembly. Now PMJ supplies integrated robotic assembly systems to Nokia. Keeping manufacturing close to home gives Nokia flexibility and control that keeps margins above 20%.

What we are seeing here is a taste of the future. The outsourcing to cheap labor is losing out to automated systems operated by highly-educated, literate workers that can program and operate computer-controlled robotics.