“Those jobs aren’t coming back.”
— Steve Jobs
Before I left institutional (trading for large accounts) Wall Street several years ago, whenever there was a sustained lull in trading activity (and thus, potentially, a lull in profits) the same refrain would be heard all around…
“Well when the trading volumes come back…”
It made sense on the surface…and it was, at times, comforting to those of us in the middle of a transaction based business.
Unfortunately, when the volumes came back it was business done at a constantly declining rate as average commissions were in free fall. So, though we did see volumes resume and, in some cases expand, revenue not only didn’t move higher, it fell.
For example, when I arrived on the International Trading desk at my firm, we were charging even big customers 6 cents/share on listed (NYSE) stock transactions. So if I traded 1,000,000 shares for a customer, the commission on that trade would be $60,000.
By the time I left my post almost 10 years later, the rate had been halved to 3 cents [$30,000 for that same trade]… and was still falling. Note: In 2012 the average rate on the same type transactions is less than 1 cent [$10,000 for a trade that once paid $60,000]…
Now you may say $10,000 is still a lot of money for 1 trade. But if you own a business, tell me if you would still be in business if 1 of your primary revenue generators fell by more than 80 or 90%. And don’t go saying something silly like you would make it up on volume…
It doesn’t take a nuclear physicist to understand how the result of the death spiral in commissions was a constant stream of layoffs from Wall Street’s commission-based transaction businesses that continue to this day.
This is the natural dilemma of big organizations trying to “right-size” their necessary, but low margin businesses.
Where did all that volume go? Did it disappear altogether never to be seen again? Not at all… A big part of the volume shifted to what’s called “the box.”
When equity shares (stocks) change hands electronically, we say they “traded in the box.” In essence, these are transactions that involve the least amount of human interaction possible. Because they require so little interaction, they are faster, more efficient and, yes, cheaper.
Those differences between pushing a button to trade thousands of shares and placing a call/sending an electronic message (faster, more efficient and cheaper) cannot be understated.
It was in its infancy before I left to trade independently, but growing fast. I would hear from buy side traders (good clients who had become good friends) that they would love to trade more shares with me, but could not justify paying me 2 to 3 cents to trade the same shares they could trade “in the box” for less than a penny.
It was an argument to which I had no response. Hard worker that I was, there was no way I could add sufficient value to most transactions to justify a commission premium of that size.
Taking this oversimplification as a given, along with the fact that buy side traders were under as much (if not more) pressure of their own to keep transaction costs down, there was no way for me to argue with these friends that they should trade more shares through me.
The situation is similar across any number of industries.
The quote at the beginning of this article was attributed to the late Steve Jobs in response to a question from President Barack Obama regarding what it would take for Apple to make iPhones in the U.S. That sentence was shorthand for a few simple, but undeniable facts:
- Since so many of the components for iPhones (and other products) are made in and around Asia (China specifically), it would present daunting logistical problems to assemble those products in the United States
- The concept of JIT (Just In Time) production can be applied in Asia. Because the components are close, the factories are enormous but easily converted and labor is flexible and inexpensive (many workers live on site and can be pressed into service at a moment’s notice), companies like Apple can maintain enormous control over the details and timing of production
- China has an enormous pool of qualified, but inexpensive workers to fill available slots with a deep bench behind them
- The wages paid in China while paltry by U.S. standards are sufficient (and arguably an improvement over what one might expect to earn in their home village)
- Offshore labor isn’t really even the threat anymore… Automation is. Even if production is brought back to the United States, much of the manufacturing that once represented a “good job” will be done by a robot
The iPhones are literally made “in the box.” Companies can make their products faster, more efficiently and cheaper offshore than they can in the United States.
Those jobs “ain’t comin'” back.
Increased margin has always been the primary goal of companies. One way to do that is to increase the size and value of a company’s output while keeping inputs constant.
Another way is to reduce input costs while maintaining the value of output. Nirvana for companies is reducing input costs while increasing the value of their output. China (and other countries to which work is outsourced) effectively help companies move toward nirvana.
Many of these points (and more) were better made in a January 21, 2012 New York Times article that we missed at the time that it was published. The article notes that
“…what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.”
While their frustration is somewhat understandable given their positions, they seem to miss much of the point… companies create products, not jobs.
Employment was always a byproduct of the production process… a necessary evil as it were.
I’m sure Apple and its counterparts would be more than willing to produce their products in the U.S. if they could get component production moved on shore (or at least closer) and if U.S. workers were sufficiently qualified AND willing to work for equivalent wages while living in close proximity to the production facility and available at a moment’s notice (including weekends). Until those things happen (or something close), those jobs will not be returning to U.S. shores.
Originally published 20 February 2012