Apple, Trump, And The Real Cost Of Making Things

President Trump’s pushback against iPhone maker Apple’s plans to expand its manufacturing base in India raises two questions. First, can India assume that the bid to diversify supply bases away from China and its satellite economies such as Vietnam necessarily mean a flood of investments into India? Is the so-called China+1 opportunity for India exaggerated if China-based American firms simply relocate to the US?

Second and perhaps more important is the question that invariably follows from President Trump’s efforts to get Apple to make in America instead of India. Is it possible to make in America, at least at costs and ultimately end-product prices that remain competitive?

The first place to look for clues is the wage differential between the US and India. Using minimum wage data provided by the International Labour Organisation, manufacturing in the US does not seem viable at all. Gross monthly minimum wages in India are a paltry $233 compared to $1,257 in the US. These are incidentally adjusted for Purchasing Power Parity as of 2021 as a base to make them comparable. Minimum wages in Vietnam at $693 are incidentally three times as high as in India.

However, wage comparisons are not enough. Businesses ask the following question: How do wages fare relative to productivity? Wages might be low, but does this simply reflect the low productivity of labour? Do they need three or four workers in India to produce the same output that a single American worker can produce? 

Things get murkier when this element is considered. ILO’s estimates of productivity show that an American worker produces $82 of GDP per hour while the Indian worker produces only about $11. These are again measured in PPP terms. A Chinese worker produces $19.8, and a Vietnamese worker $12.4.

If labour costs and efficiency were the sole determinants of a company’s decision to locate, it might want to look at the wage-to-productivity ratio. The lower the ratio, the more attractive the destination. 

A comparison of productivity-adjusted wages produces some counterintuitive results. The wage-to-productivity ratio for the US is actually a little lower than in India. Thus, prima facie, it makes business sense to relocate to the US from China instead of setting up shop in India.

There is a somewhat obvious lesson in this. While some companies like Apple that are already manufacturing in India, the benefits of reshoring to India might stem from incumbency. For instance, it might well have a solid vendor network that it can rely on when expanding capacity. 

It could also have a well-oiled logistics machine for imports of inputs and exports of the final product. But this might not be true for those new to India. Productivity has to rise on the back of better skills and training for India to improve rather quickly, for India to emerge as an offshoring destination.

However, there are risks to the Trump plan of Making in America again. This has to do with two things. The standard measure of productivity or GDP per hour reflects the structure of the economy. The dominance of services and high-tech industry in the US, typically associated with high productivity levels, might be pulling average productivity up. If America pivots towards old-fashioned brick and mortar factories, where productivity is typically lower, GDP per hour is bound to fall. The wage productivity ratio is also likely to fall. In India’s case, the converse is true. If “China+1” does pull workers out of the informal sector that currently dominates the economy into formal blue-collar jobs, average productivity will increase. Wage productivity ratios might start to look very different in such a scenario.

Finally, there is the problem of the US’s enduring productivity-pay gap. Since 1979, productivity growth has outstripped wages. A study by the US-based Economic Policy Institute, based on data from America’s Bureau of Labour Statistics, shows that between 1979 and 2025, productivity increased by 86%, while hourly pay increased by only 32%.

While several factors, such as the “union bashing” by the Reagan administration in the 1980s, played a role in creating this pay gap, offshoring to China and other emerging markets, where an abundant labour supply meant cut-throat competition for American workers, played a role in suppressing wages. 

If US manufacturing takes off, wages will likely increase as workers regain pricing power.

The bottom line is that cheap labour alone might not make India the best destination to “reshore” away from China. It needs to get productivity up. Second, if productivity is considered, manufacturing in America might not be the absurd fantasy as is often claimed.

There are risks to investing in capacity in both countries if one looks forward. It is this balance of risks that will determine how much of India’s China+1 aspiration and Trump’s Make in America dream are fulfilled.