Some in my office believe that Apple should on-shore its iPad and other product manufacturing. Some have even labeled Steve Jobs a terrorist because he takes advantage of lax and unfair labor laws in China and elsewhere. These folks lament the fact that corporations like Apple ship jobs overseas and rake in billions in profits. “If only Apple would make their products in America – we’d all be better off,” they claim. Let’s examine what might take place should Apple decide to move all its manufacturing to the United States.
Higher labor costs lead to higher product prices
Were Apple to make its products here, I think we all would agree that its labor costs would increase. For the sake of argument, let’s (correctly) assume that increases in labor costs lead to higher product prices. The immutable law of supply and demand inform us that, ceteris paribus, higher product costs lead to a decrease in sales. Apple would surely take measures as a result of a drop in sales by adjusting the size of its labor force. A significant drop in sales could lead to mass layoffs. In any event, it’s unlikely Apple would do nothing in the face of a decrease in sales.
But some might say that because Apple employs Americans to assemble its products, Americans would reward the company and buy their product anyway, despite an increase in price. If you believe this, I have a question for you: why doesn’t Apple just raise the price of its product now? If price increases carry no negative effects, surely Apple is leaving a lot of consumer surplus on the bargaining table, no? The fact is Apple products are prices about right and any increase in the sales price would, in fact, lead to lower sales.
Higher labor costs do NOT lead to higher product prices
“Apple is a rich company and could easily absorb any increase in labor costs,” many might proclaim. Apple is indeed a well-resourced company, so let’s examine this theory. We would all agree that an increase in labor costs, without increasing product prices, would increase Apple’s COGS (cost of goods sold). This would undoubtedly lower Apple’s profit margin and make less cash available for other uses. Another pernicious effect of a lower profit margin would mean less cash for dividends and retained earnings. As a result, Apple’s stock price would almost certainly fall.
“So what,” you say! Well, let’s run the numbers. As of 9-20-2013, Apple stock price was trading at $472.30 per share giving it a market cap of $429 billion. That means Apple has about 908 million shares outstanding. Let’s assume that in response to lower profits, Apple’s stock price falls 10%. Using the figures above, almost $43 billion in value would suddenly be erased. Gone. Vanished. That’s real money (unrealized capital gains) gone from peoples’ 401(k), retirement portfolio, and brokerage accounts. Everyone who is invested in the stock market, including via index funds, would bear this cost.
These scenarios aren’t mutually exclusive and the effects of bringing all manufacturing to the United States, if such a move could even be accomplished given environmental laws, would likely include some mix of what I described. It is my opinion that such a move would not only be detrimental to current and future Apple employees but also to stock holders and consumers. There is no fairytale scenario under which Apple on-shores its manufacturing without incurring costly unintended consequences.