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Competition: Where Profit Margins Come From

Tuesday, 06 July 2010 18:19

The NYT warned readers that rising labor costs in China pose a serious threat to many companies that manufacture products there:

"makers of personal computers, cellphones and other electronics — including Dell, Hewlett-Packard and LG — deal with much slimmer profit margins [than Apple] according to several analysts. 'The challenges are going to be much bigger for them,' Ms. Lai said. Most other industries, from textiles and toys to furniture, are under considerably more pressure."

Actually, since China is the low-cost producer, it is not clear that rising wages there will pose a serious threat to even low margin firms. If costs for competitors rise also, due to the higher wages, then all the firms in the industry will be able to raise their prices to cover their costs leaving their margins little affected.

Comments (8)Add Comment
written by Bob Spencer, July 06, 2010 7:50
I wonder if in China, any company that treats their workers better and pays more than the competition attracts the best workers and therefore obtains more productivity and higher quality and especially obtains better and more consistent margins?
written by air max pas cher, July 07, 2010 1:01
In China, many workers who led the ultra-low wages, long working hours are doing a lot of manual work. On the contrary, people did not spend much time and energy in research methods to improve efficiency, so I think il will take a very long period of time to solve this problem.
written by Luke Lea, July 07, 2010 1:22
To say nothing of the fact that as Chinese wages rise the downward pressure on the wages of American workers who compete with Chinese workers will ease. Factor-price equalization I think it is called. Unfortunately that process has many decades to go -- how low can we go?
written by skeptonomist, July 07, 2010 7:18
Apple does not compete on price with most of its products. Its computers are generally almost twice as expensive as Windows computers - you don't need an analyst to know this. It competes with better quality and better customer service, and marketing its products as unique and cutting-edge (although the technology is usually borrowed from others). It is able to do this by its aggressive legal strategy in protecting patents and copyrights, and it won the exclusive right to make its type of computers with an expensive and lengthy lawsuit against a clone-maker in the early days. The importance of price competition is wildly different in different parts of the markets for computers and other electronics, as well as software, in part because of differential enforcement of copyrights and patents.
written by izzatzo, July 07, 2010 7:40
If costs for competitors rise also, due to the higher wages, then all the firms in the industry will be able to raise their prices to cover their costs leaving their margins little affected.

How? Labor is not generally mobile and highly competitive between countries, at least between the US and China. That's why the multi-nationals went to China, and that's why they're looking to move to areas within China with lower wages now. Whatever wage increases they pay as the low cost producer, they're not designed to retain workers from leaving due to nearby competition for labor. They're designed under Chinese capitalism to avoid the ongoing protests and other problems of rising costs in general, a minimum wage floor necessary to avoid disruption of production.

They essentially have monopsony power over labor as a single buyer, while the competition they face is in the global product market. If global product prices increase due to wage increases in China, in order to maintain thin profit margins, it does enable market entry and wage increases from competing countries.

But that's not necessarily an increase in "costs for competitors" in the form of higher wages. It's an increase in product price for Chinese imports, which allows new or additional domestic production in non-China countries to absorb more global market share from China.

It's more zero sum than positive sum. The added global competition can now compete with China at existing wages and margins. China as the low cost producer sets the global bar, then others take what's left.

If instead there was fierce global competition in a tight, global, mobile labor market, the multi-nationals couldn't shop for lower wages by moving around. Instead, labor would move around and shop for higher wages which would break their monopsony power.
I don't get it
written by diesel, July 07, 2010 9:28
Sometimes it seems as though the entire field of Economics suffers from a giant "beam in their own eye" when they discuss "labor". Labor, in theory, may be mobile, but labor in reality--real living human beings--fall in love with their communities and can be as difficult to move as uprooting and replanting a tree. This whole thing--living--is supposed to be about maximizing our own happiness, so what do we gain and lose when we discuss theories in which we treat "labor" as a compound in a chemical equation that we are attempting to balance? If we're not trying to maximize our happiness, then what's the point of the whole human enterprise? Who or what are we striving to become more efficient for, if at the expense of our own happiness?
isthatso and diesel go old school
written by frankenduf, July 07, 2010 1:20
indeed adam smith himself pointed out that a free market was a misnomer for labor, which cannot move about as capital does- he was prescient, as electronic technology has exponentially increased capital movement capability, while labor remains grounded simply by being human- this disparity is analagous to the power struggle between corporate and civil interests- by granting corporations the same rights as citizens in the market, the citizens lose freedom/power, as corporations have much more time, money, and resources to protect their own interests in the market than do ordinary individual citizens
written by malaparte, July 08, 2010 6:40
Does any of this have a threat to inflation here in the states later?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.