Part 2 in the Apple Series

Posted: January 30, 2012 in Current Affairs, Economics
Tags: , ,

This is not about CRM.  It is the last in a series on globalization and labor arbitrage.

There’s been a predictable response to the revelations about Apple’s labor relations in China.  Pundits have trotted out that old chestnut that it’s not Apple’s fault but the free market—you and me—who crave cheap and insanely great products etc., etc.  But really it has nothing to do with consumer demands and everything to do with mercantilism and globalization.

Capitalism routinely attempts to source the lowest cost materials and labor for two reasons.  First low costs make it possible to have high margins.  Second, the inevitable commoditization that is also part of capitalism erodes high margins on the journey from branded product to commodity.

Apple’s latest earnings show the company made more than a billion dollars in profit per week during the most recent quarter.  That’s profit not revenue.  But those profits come mostly from the newer iProducts not the computers that the company built its reputation on.  To be clear, profit is good, good, good but only if it is gained fairly and not by taking advantage of the powerless.

Today you can buy a computer with the latest Windows operating system and get most if not all of the features that made the Mac special a few years ago—at a lower cost.  That’s commoditization in action.  Commoditization is a good thing because it forces us all to continuously innovate to develop new products and services that can demand top dollar.  We all know this.

The working conditions-related labor problems we see between Apple and Foxconn are both historic and unique to globalization.  In previous eras of globalization, notably the eighteenth and nineteenth centuries, globalization and labor arbitrage were mostly, but not exclusively limited to raw materials and agricultural products.

Sugar, cotton, rubber and spices production were all centralized in tropical or sub-tropical regions where national sovereignty was extended at the point of a bayonet and slavery was common.  Where slavery was impossible such as in the cotton-processing regions of New England or the British Midlands, starvation wages, child labor, poor sanitation and high infant mortality were the norm.  By comparison today’s Chinese sweat shops with their dormitories, cafeterias and company-supplied healthcare are paradise.  Just ignore the forced overtime, unsafe conditions, low wages, and dictatorial management.

Factories and the significant investments required to situate one were once a barrier to entry for cutthroat competition from low cost labor countries.  Every factory needs supplies of water, energy and a shipping infrastructure to facilitate the supply chain.  But once the host country covers these significant costs the ability to situate and take advantage of low labor costs becomes practical and even an imperative.

But the argument that consumers demand the low prices that drive low wages is something of a canard.  First, we were all leading our lives before the introduction of iProducts and other gadgets and while these gizmos have added to productivity and enjoyment, few people were walking around saying “If I only had a device that.…” If they had more of them would either have filed patents or begun careers writing science-fiction.  No.  The devices are in demand because they are both novel and because they satisfy an economic need.  But neither of those conditions sets price or wages or anything else.

In an economy where for the vast majority real earning power has not expanded in decades (and has actually declined) low prices are what maintains purchasing power.  So we have the condition where even a new device enters the market well down the price commoditization curve.

Low purchasing power has driven the low price points for these manufactured products.  But in order to satisfy the low cost/low purchasing power conundrum, you need to produce in an even lower price culture and that’s mercantilism.  And actually as we saw in the last decade, even low prices were not enough to satisfy demand as millions of people took money out of their homes (negative savings) to support lifestyles centered around demand for cheap goods.

This is the beginning of a deflationary spiral, which is unsustainable.  Labor conditions and wages will improve in China and in some areas this is already happening.  But once that happens producers will go shopping for new low cost places to manufacture.  One of the issues revealed but not addressed in the current flap over Chinese manufacturing is that, in part to maintain low costs, even primary manufacturers are beginning to outsource to other manufacturers further inland.

But the contracts that an Apple or an HP has with, say, a Foxconn are not transitive, they don’t necessarily affect Foxconn’s suppliers who are then free to ignore any agreements regarding labor and environmental conditions made with Foxconn.  That goes for quality control too.

Away from national laws governing labor and other relevant concerns, companies are free to do whatever they can get away with in the host country, which turns out to be a lot.  The purchasing country suffers from this arrangement also through job elimination and with it a decline in the quality of middle class life.

As in the eighteenth and nineteenth centuries the real winners were not the masses who got cheap sugar, nutmeg or cotton garments and they certainly were not the subjugated people who worked in conditions of slavery.  Today we get cheap iProducts but grand fortunes are being made by the tiny fraction of those who take advantage of globalization.

The solution is better government and better regulation to ensure fair competition but the globalists have us convinced that all regulation is bad and no government can do anything right.  Not everyone believes this of course.  Zuccotti Park was no accident.

So, what did you think?

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