Why It Matters: Is Apple’s Core Changing?
You probably have one. Your friends probably have one. So do your parents. Nearly everyone owns at least one Apple product. All of this consumption of Apples must be good for the American economy, right? It’s not that simple.
The rise of Apple is a wonderful example of the concept of opportunity cost, the subject of a previous column. It is simply what you give up when you make a decision. Opportunity cost does not just apply to individuals. It also applies to businesses.
The goal of any business is to make a profit. Therefore, if a business can significantly reduce costs by employing lower-wage workers in another country instead of higher-wage workers in the U.S.—outsourcing—they will do so. And that’s what Apple (and many other companies) has done.
This globalization of the labor force has opportunity costs. American consumers benefit because we get Apple and other products at lower prices than if they were made by higher-wage, American workers. A company could hire 20-30 Chinese workers for what it would cost to hire one American worker. When a company asks itself what the opportunity cost is of using American workers—what it would be giving up—the answer is usually that they would be giving up the ability to provide a lower cost product, and therefore, higher profit.
If opportunity cost directs business decisions as described above, then why are some companies bringing jobs back to the U.S.? The answer is the same—opportunity cost. It’s just that recently, opportunity costs have changed. Labor costs in some countries such as China are starting to rise. More importantly, businesses have discovered that there’s more to opportunity cost than cheap labor. Previously, if the opportunity cost question had been reversed—what is the opportunity cost of using outsourced labor—businesses probably would have struggled a bit to come up with an answer. But increasingly, they are finding that the costs are significant. A “positive feedback loop” exists when a business has its designers, developers, workers, and consumers all in nearby locations. Changes to the product based on consumer feedback can occur quickly and seamlessly through the loop. It is hard to control shipping and distribution from halfway around the world, so costly supply disruptions can occur.
Apple recently announced that it will spend $100 million to bring some Mac manufacturing jobs back to the U.S., a clear indication that their opportunity costs have changed. Closer to home, General Electric has taken another look at Appliance Park in Louisville, Kentucky. Once home to 23,000 manufacturing workers, by 2011, there were only 1,863 of those workers remaining. But in early 2012, two new assembly lines were opened, with a third under construction. The opportunity cost of “designing at home and producing abroad” has changed for GE. The costs of transporting the finished product back to American consumers has increased, wages in China are five times what they were in 2000, and low natural gas prices in the U.S. mean it is now cheaper to operate a factory here than previously.
Opportunity cost is a powerful concept, not only for individuals, but also for businesses. Utilizing opportunity cost initially led American manufacturing to outsourcing, but is now leading it back to insourcing, as businesses are beginning to understand that there is more to opportunity cost than cheap labor.
Check out a lesson to guide this discussion with your children or students.