Labor costs make way for Maslow

That Apple, and other companies, are deciding to move manufacturing back to the United States is evidence of the diminishing importance of labor costs in decision-making. This implies several things.

Labor is around 4–5% of the retail cost for a computer, according to the article, and will continue to fall as automation increases. Labor costs are a bottom-line decision: a way to extract profit from a sale that has already happened.

As labor costs become less important, companies will instead look for gains on the top-line: competitive advantage that results in the sale being made in the first place. Shipping more quickly, customizing for local markets, and “Made in [your country here]” branding are aided by manufacturing locally.

Another way to think of it is a move up Maslow’s hierarchy. The basic need of manufacturing is satisfied at a low cost, such that it is no longer a focus of companies. Looking up the hierarchy, firms appeal to their customers’ more refined concerns.

Further, one hopes this change will obviate complaints that China and low-wage countries are “stealing jobs”. On the one hand, it neutralizes nativist, uneconomic arguments — a good thing. On the other, low-wage manufacturing is a large part of Chinese citizens’ enormous move up from poverty in recent decades — if “low-wage” is no longer a competitive advantage, the bottom might drop out.

Our assumptions about “cheap” Chinese manufacturing and its role in the world economy are likely to change more quickly than we realize.