Margin Retreat

 

Margin retreat is a well studied marketing phenomena that happens when younger, more nimble, lower cost competitors enter a market and the older, less flexible, higher-fixed costs competitors abandon the "low end" of the market.

For example, a company like McDonalds might virtually abandon marketing simple hamburgers in favor of multi-patty gussied up versions due to pressure from Hot-&-Now and other purely drive-through burger joints. Those rising competitors also lack bonus-eligible executives, stock dividends and huge corporate headquarters.

In the 1970s, the domestic automakers made a couple of feeble stabs at producing economy cars but realizing they could not compete with VW and the rising Japanese automakers they virtually abandoned the market. Their reasoning was that since they could not profitably produce and sell economy cars that they would "give" that segment of the market to the Germans and Japanese and focus on more profitable segments.

Do the names BMW, Mercedes, Lexus ring any bells? The interlopers were not satisfied with the crumbs.

Hey, don't look now but the Koreans are pushing the traditional Japanese marques. It never ends.

National Economies

You can make a credible case that the same thing happens with national economies.

Mining? Dirty, dangerous, loud and polluting.

Manufacturing? Boring, dirty and low-status. Lowers property values.

Agriculture? Ok, but only the parts that can be automated.

Because of the high fixed-cost of labor, entire industries decamped from First World Countries. In light of current conflicts, you could substitute NATO + Japan, South Korea and Oceana for "First World Countries".

Key point: Countries with high fixed-costs must run their remaining industry 24 hours a day, seven-days-a-week to cover those costs. That is how you deal with high fixed-costs, you dilute it with volume. 

Countries with lower fixed costs can get by with running during daylight hours. Said another way, First World Countries cannot survive on the intermittency of Solar and other "Green" energy sources. Ironically, countries where the median monthly wages* are less than $1000 can.

First World Countries largely abandoned the lowest level of Maslow's hierarchy and fled to the higher levels of Maslow's Hierarchy. We now manufacture "pronouns" and "Self-Esteem". We think we add-value by taking inherently simple and robust inventions like diesel engines and tacking on layers of complexity simply because the complexity exists and it signals our concern for the climate or marginalized peoples or something.

The accounting systems in First World Countries have become so Byzantine and non-traditional sources of revenues-and-costs so dominate operations that it is impossible to determine if a product or service is fundamentally profitable or a black-hole for resources.

One potential "blow-out" for the Russian conflict is for China to side with Russia and then every other country with median wages of less than $1000 a month joins against the First World Countries. They will demand a Debt Jubilee and if they stick together we wouldn't have any choice. If push-comes-to-shove, we need their potash, lithium and nickel and manufactured goods more than they need our new pronouns-of-the-month.

*Yes, I know your economics professor told you that wages are a variable cost, not a fixed cost. That may have been true in 1937 but it is no longer true in First World Countries. Wages are a fixed cost. Furthermore, high wages drive management to increase investment in automation which your professor did agree is a fixed-cost.

Bonus data of a select sampling of countries. Source

Rank	Country	Average Monthly Net Salary (After Tax)
4	United States	3612.85
21	France	2501.83
27	Saudi Arabia	1783.99
28	Oman	1749.39
29	Italy	1594.78
39	China	1078.18
46	Poland	903.34
49	Greece	820.90
50	Malaysia	808.13
64	Mexico	556.57
71	Guatemala	476.52
73	India	462.07
75	Ukraine	444.68
81	Brazil	394.72
82	Argentina	392.37
83	Russia	384.38