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The Surprising Way Apple's Supply Chain Reforms are Self-Interested

http://www.nytimes.com/2012/03/30/business/apple-supplier-in-china-pledges-changes-in-working-conditions.html?_r=2&smid=tw-nytimes&seid=auto
Apple, in a statement, said the company fully supported the monitoring group’s recommendations. "We think empowering workers and helping them understand their rights is essential. Our team has been working for years to educate workers, improve conditions and make Apple’s supply chain a model for the industry, which is why we asked the F.L.A. to conduct these audits."
Setting aside humanitarian issues, let's consider this purely from a business perspective. Apple asked for these audits; it's taking initiative to make this happen. Why would Apple do this?

An answer is revealed in Apple's desire to be "a model for the industry".

What happens when the whole industry makes changes like this? Increased cost of labor.

And in the whole industry, Apple will be hurt the least by increased cost of labor. All of Apple's competitors will be hurt more. Increased cost of labor will give Apple a competitive edge over its lower-profit-margin, lower-average-sale-price rivals. (To learn more about Apple's financial situation, follow http://www.asymco.com/)

Apple has a robust business with long term viability. Apple is a highly efficient creator of value. Apple benefits from cheap Chinese labor but does not require it to have a successful business. Labor costs will increase over time and Apple is already in a position to thrive in that future scenario.

Apple's rivals are inferior in these regards. They bring less value to the table and get more of their profit from the *temporary* low cost of labor. Their businesses are less sustainable going forward.

If Apple can accelerate labor cost increases, its rivals will have less time to adjust and more of them may fail.

In a free market, profits are always somewhat temporary. There is always pressure over time for progress. Companies must continuously innovate to keep up or their profits will decrease. The most efficient companies, the best value creators, and the best innovators will thrive , and companies doing nothing special will fade away.

Accelerating this process benefits the best companies and puts increased pressure on the worst ones.

John Rockefeller used this technique in the past. In some cases he lowered his prices to where he could make a profit but his competitors could not (source: http://www.theobjectivestandard.com/issues/2008-summer/standard-oil-company.asp ). This demonstrated to his inefficient competitors how their companies weren't good enough and didn't have a long term future without improving. He shortened the period of time that poor competitors could hang around.

By ending cheap labor early -- something the well-run Apple can easily afford but some of its competitors will struggle with -- Apple is, like Rockefeller, trying to more quickly remove *temporary*, *unsustainable* market conditions that prop up inferior competitors.

Some of Apple's critics are genuine humanitarians. But others dislike Apple in particular and wish to harm Apple. Ironically those critics may end up bankrupting some of Apple's competitors and strengthening Apple's position.

Apple genuinely values humanitarian interests but I wonder if Apple also sees the business advantage in more quickly ending the temporary condition of cheap labor that helps prop up its competitors' inferior business practices.

Elliot Temple on April 5, 2012

Comments (3)

But surely this artificial rise in Chinese wages will decrease the profitability of Apple and thus eventually replace their competitive advantage to the point whereby other companies will catchup? It seems to be the same kind of mistake as Fair Trade.

Karl Stocker at 3:07 AM on April 7, 2012 | #2141
What? Apple's competitive advantage isn't cheaper Chinese labor.

Elliot at 6:56 AM on April 7, 2012 | #2142
"Apple genuinely values humanitarian interests "


How can you know this?

James at 12:07 PM on April 8, 2012 | #2143

What do you think?

(This is a free speech zone!)