New Math at Harvard Business School Blog

Harvard's vaunted business school has some bloggers who don't seem to be very sharp on margins. They hypothesize that by building iPods in the U.S. at U.S. labor prices, thereby increasing labor cost per unit from $4 to $62, the cost of an iPod would increase $58, or a "mere" 23%. Of course, this estimate is qualified:

perhaps they overstate the price differential, because ... they assume Apple passes on increased labour costs entirely to consumers.
Umair Haque via Harvard Business Publishing

Part of what makes Apple so attractive is its margins. Doubling the cost to produce an iPod Shuffle with a $30 labor increase doesn't increase its price $30, it approximately doubles the price unless margins are sacrificed. This business student Haque -- I certainly hope it's a student and not a paid analyst or, worse, an instructor -- seems to suggest that moving manufacturing to the U.S. in order to increase labor costs and possibly decrease net profit will somehow benefit the United States, or Apple, or its consumers. What makes Apple valuable is (a) its profit, and (b) the amount of cost Apple must incur to produce the profit. However, Haque suggests Apple murder its margins with a completely uncompensated $58 cost hike, and consider killing its net profit for an encore (maybe to prop up lost sales numbers) by eating some of this price hike itself.

Mind you, Apple's margins on iPods are high. To maintain margins after a $58 cost hike, Apple would be adding about twice that to the retail cost of Pods. Else, Apple's margins deteriorate and its valuation suffers.

The reason Chinese labor is so cheap is that China is gaming its currency's value to prop up exports. This means that Chinese are made to work at a discount for th benefit of foreigners. Chinese loan the U.S. money with which Americans can buy houses, build houses, and furnish their lives with a standard of living that would have left an earlier century's kings gasping in disbelief. Haque seems to suggest we ought to ignore the undervalued foreign service and supply offerings and somehow create an isolationist community in the United States based on the pride of paying more for local service.

The next step, surely, is to stop importing steel. And automobiles. After all, there are steel workers and auto makers we could be paying more ....

Haque hasn't got an innovative idea to improve value or trade balance; he simply calls for irrational economic behavior so he can cheer the employment of those who can't afford grad school at Harvard. Let's spell it out: he wants manufacturers to pay more for construction, not on the basis of reasoned quality improvements but to consumers can pay over 20% more (this is if the manufacturer charges nothing for its extra capital input, but passes it along "for free"; the number is otherwise on the order of 50% more) for consumer products in which there is active worldwide competition. Should the manufacturer lose a sale, it would be to a foreign manufacturer whose ownership is less concentrated in U.S. retirement plans and whose employees are not earning salaries taxed in the U.S.

To hell with logic! Companies should play chicken with their employees' livelihoods and retirement like G.M. and see what happens! Whee!

Seeing this drivel from Harvard really makes me wonder what they put in the water in Massachussets. I had previously held the place in such high regard ....

Note: Harvard Business Publishing, while owned and controlled by Harvard, is despite its name and the use of Harvard's logo, not apparently a part of any particular Harvard graduate program but is a nonprofit dedicated "to improv[ing] the practice of management and its impact in a changing world." Apparently making less money so you can be driven off the cliff of insolvency like G.M. is the way to improve the world, because the union becomes the company's main shareholder and the workers therefore own the means of production and the great class struggle is ended in voctory. At least, if you didn't consider that the foreigners buying up the remains aren't worker-owned, and that profit derived from US-based manufacuring will be exported to economic competitors and taxed there rather than here, and that once people have lost their jobs they aren't technically "workers" any more and therefore can't claim part of the victory in owning the means of production they are no longer allowed to use.