The future of manufacturing jobs in developing nations

by on June 28, 2013 at 7:22 am in Current Affairs, Economics | Permalink

Nike is to tackle rising labour costs at its Asian factories by “engineering the labour out” of its shoe and clothing production as it seeks to defend its profits.

Don Blair, Nike’s chief financial officer, said its objective was to reduce the number of people making its products as he highlighted the impact of a sharp increase in wages in Indonesia.

From the FT, here is more.  Here is my recent NYT column on related developments.

prior_approval June 28, 2013 at 9:15 am

‘as it seeks to defend its profits’

Because there is no way that Nike can pay 10 cents per shoe more in labor costs and still defend its profits.

Look at the numbers –

‘The wage rises were supposed to average 40 percent, but were set on a region-by-region basis. Even where the increases were about 40 percent, the minimum wage for skilled and semi-skilled workers still only rose to around $US220 a month. In many regions, the rises were lower. In Bali, the provincial administration set the minimum wage at 1,181,000 rupiah ($US123) per month.’ http://www.wsws.org/en/articles/2013/02/21/indo-f21.html (why yes, that is a link to the World Socialist Web Site)

So even after all the massive wage increases, your typical Indonesian Nike worker can afford about one pair of base LeBron X shoe ats $180 a month – unless they are in Bali, in which case they have to save up. Anyone want to venture how many pairs that same worker has as daily throughput?

Urso June 28, 2013 at 9:53 am

How many shoes will he be able to afford once he’s replaced by a robot?

Frederic Mari June 28, 2013 at 10:17 am

GPWM… until you ask yourself, “but who will buy those shoes, actually?”. Presumably, not the robots.

http://theredbanker.blogspot.com/2013/01/robots-labour-and-sciences-fiction.html

Cliff June 28, 2013 at 10:49 am

How many Nike shoes were the workers buying in the first place? Zero. It’s a stupid joke to talk about paying your employees so they can buy your own product.

Frederic Mari June 28, 2013 at 11:01 am

I don’t disagree that they weren’t. This lack of sustainable demand was hidden for a time by (unsustainable) debt. Not anymore. Hence, the Great Recession and now Muddle Through for the foreseeable future.

My point is that companies are shooting themselves in the foot when they all try to desperately cut their labour costs. As it happens, their labour costs is someone else’s gross revenue. It’s individually rational but collectively stupid.

As to ‘stupid joke’, I don’t know. It worked for Ford for a long long time and for the West too. Or how do you presume we actually got to be the rich countries?

Dave G June 28, 2013 at 9:59 am

I get your point. I’ll try to ignore the violin music long enough to ask a few serious questions:

Can Nike (or other mfrs) ensure that $0.10/shoe extra spent on higher wages isn’t a straight loss? Will the Nike consumer pay $0.20 more per pair for marginally higher wages on the other side of the world? Have any other (popular shoemakers) benefited from more conscious practices? Or, moving ashore, how much would a Nike consumer (or corporate procurement manager) be willing to pay for a Union Made in the USA label?

Frederic Mari June 28, 2013 at 11:07 am

What’s the fraction of Labour costs in the shoe-maker OPEX? Not a stupid question, it might be significant/relevant. IIRC, textile assembly/confection (i.e. the non-weaving bit) is pretty labour-intensive.

If so, a fairly small rise in labour costs might affect profit margins significantly.

Then, the subsidiary question is: How much profit margin there was in the first place? Other relevant issues: Could they compensate for the increased costs by reducing other part of the supply chain? (such as paying less for LeBron’s name and/or TV spots – or getting less of them…)

I don’t know but I suspect LeBron might go for a “I took a pay-cut on my Nike deal so that people in Indonesia might live with dignity and that no children might be forced into slave factory”.

Basically, I suspect management has options beyond raising prices/cutting profits.

RR June 28, 2013 at 9:54 am

Doesn’t Capital always try to maximize profits at the expense of Labour? Why should it be expected to be any different in developing nations?

mm June 28, 2013 at 9:15 pm

doesn’t labor try to maximize income at the expense of capital? The world isn’t zero sum.

mulp June 29, 2013 at 12:37 am

It sure is!

… unless government intervenes.

You can not in the long run spend/consume more than you earn.
You can not sell in the long run more than you pay.

Unless government prints money and spreads it around to those you pay less than you want them to buy….

Without government, it must be zero sum: gross income == gross product == gross consumption == gross expense.

For the producer, gross production – gross expense = 0.
For the consumer, gross income – gross consumption = 0.

mike June 28, 2013 at 10:09 am

These poor Asian countries better start encouraging mass immigration from even poorer African countries, or we’ll have shoes rotting in the fields!

Peter Schaeffer June 28, 2013 at 12:25 pm

Mike,

That’s so true. By importing ‘complementary’ African labor, Indonesia can save its manufacturing jobs and allow Indonesians to move up to higher skill jobs (paying as much as $250 month or more).

Hoover June 28, 2013 at 10:22 am

As the number of robot stories you notice increases, the probability that you will recommend a basic income approaches 1.

JWatts June 28, 2013 at 11:23 am

Ref. immigration debate

Peter Schaeffer June 28, 2013 at 12:28 pm

JWatts,

One of the problems with the Open Borders crowd is that they can never decide if we have a job shortage ‘proving’ that wages need to go down or a labor shortage ‘proving’ we need imported unskilled labor.

Actually, they switch back and forth as the occasion demands showing the Open Borders is their only god and any set of conflicting rationales can be used as need be.

Frederic Mari June 28, 2013 at 11:40 am

Or a capital endowment. Yes. :)

Bob McHenry June 28, 2013 at 11:20 am

Maybe if we allow more of these low-skill immigrants into America, it will relieve some of the unemployment pressures in th developing countries. Everybody wins.

Peter Schaeffer June 28, 2013 at 12:33 pm

BM,

“Maybe if we allow more of these low-skill immigrants into America, it will relieve some of the unemployment pressures in th developing countries. Everybody wins.”

World population 7.095 billion. U.S. population 313 million.

Each low-skill immigrant imposes a net tax cost of around $30K per year (more than 1/2 million over a lifetime). That’s excluding native displacement effects and production factor scarcities.

Everybody loses (other than the immigrants) is closer to the truth.

mulp June 28, 2013 at 11:20 pm

well, that’s because all the low wage workers need to be given vouchers to buy the stuff produced by all the robots owned by mercantilist who lobby politicians to print money to pay low wage workers to buy their robots’ production.

Brett June 28, 2013 at 11:28 am

Wouldn’t this tend to undermine the biggest reason for even having the production in a poor country? If labor costs shrink down as a significant fraction of the costs of production, then you might as well stick the factory in a place where the power is reliable and you won’t be hit up for bribes.

Frederic Mari June 28, 2013 at 11:39 am
Nicoli June 28, 2013 at 11:55 am

The Economist had a special report a few months back on outsourcing and one of the articles noted that as labor prices begin to become more equitable across the world and as more and more processes get automated, there is less of an incentive to move operations oversees. If Nike does eventually decide to move manufacturing back to the United States, it will likely only be because they have figured out how to virtually eliminate the need for low skilled/paid employees.

Nicoli June 28, 2013 at 12:04 pm
JWatts June 28, 2013 at 12:13 pm

When you factor in the fact that US electrical and natural gas prices are generally cheaper than most third world countries, it makes sense to locate your manufacturing to the US if both design and primary sales are already here. I’m not sure what the likelihood of relocating manufacturing to Europe is.

Wade June 28, 2013 at 10:34 pm

Machines will continue to replace human labor as long as machines are cheaper than human labor and people do not ban their use. Right now, you can buy a barrel of oil for about $100, and this barrel contains as much energy as a man laboring eight hours a day for about four years. Even though energy prices have quadrupled in the last few years, they’re still much lower than the cost of supporting laborers, so the process of replacing people with machines will be with us for some time.
If you don’t want to be marginalized by this process, you can A) work at something that machines can not (yet) do, or B) become a rentier, and hope that the propaganda and the police continue to do their work.

mulp June 28, 2013 at 10:51 pm

But who do companies expect to sell their products to?? Governments and people on government dole?

Ed June 29, 2013 at 5:26 am

Maybe we will enter a world where it will be so cheap to mass manufacture sneakers that people do it for the prestige, and given them away for free or even pay people to wear them.

Then it won’t matter that you can’t get paid for making sneakers (because this is done by machines) or to market them (since all the potential customers are unemployed).

mulp June 28, 2013 at 10:49 pm

Is Nike’s business model to sell its shoes to robots?

Or to lobby governments to provide shoe vouchers to all citizens on a means tested basis, and how many shoe vouchers per person does Nike think each person should get each year?

ww June 29, 2013 at 3:01 am

Shoe’s made in Beverton, OR, perhaps.

Jess July 1, 2013 at 1:14 am

Manufacturers will continue to replace the workers with machines, and it’s the same in most manufacturing industries, not only Nike. Possible results to lower the labor cost
are manufacture the products with machines, lobby a government policy, or hire workers from even poorer countries, such as Africa. It seems that people now days value their
life standard even more, causing the rise of labor wage. Maybe, on the other hand, governments are raising the standards for hiring these workers. Nike will either suck up all
these additional labor cost and find another way of fulfilling these cost, or they might just make our shoe price higher (very unlikely.)

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