Productivity: effects on production

0:00- [Presenter] What have here are two different pictures of ways that cars can be manufactured. Here on the left we have someone literally making a car by hand. They're doing this in some type of a garage, there's no assembly line. While here on the right, we have a very automated assembly line that's producing cars in bulk and what we wanna think about in this video is what is the productivity difference or what could be the productivity difference?

0:28Why does someone, or why does a company take the trouble of creating these massive factories and even involving robots in this case and these assembly lines? It just seems so much more complicated and a little bit less romantic than someone in a garage doing everything by hand.

0:44And the answer there is, as you can imagine, based on the title of this video, it's, "Productivity." So let's imagine that when these cars are finally produced and sold into the market, that they can be sold for the same amount and that's obviously not always going to be the case, sometimes something that's handmade can charge a premium, but let's say in either case they can be sold for $40,000 per car, either of these cars, they are almost, well, they're very similar in terms of what people are willing to pay for them.

1:15But let's just think about the inputs that it takes, the factors of production that it takes to produce each of them. So first, let's think about capital. So you might immediately say, "Well, to do the left hand picture, you need a garage, you need some tools, some wood here," so there's a little bit of capital.

1:36Well, here on the right you need a ton of capital. This factory looks like it might be tens of thousands, if not hundreds of thousands of square feet using a lot of land and actually, let me put, "Land," over here as well. So land plus certain types of capital, it seems like this one on the right uses a lot more, these look like expensive robots.

1:55This assembly line would cost millions if not tens of millions of dollars to produce. So you might say, "Hey, the land and capital is bigger on the right hand side, that is on the left." But when we're thinking about productivity, it's really important to think about it on a per unit basis or on a per car basis and so when you take, even though it's cheaper to have this garage and not a lot of capital, but you're using that garage to produce, in this case, let's say they're able to produce a car every six months because it's being done by hand.

2:27So all of that rent, all of this equipment, you only get two cars out of it per, or if you think about, not even not rent, say you bought the building, well you're going to think about the lifespan of that building, but you're only producing two cars a year. And so let's say the land and capital in the left scenario is it costs on a per car basis, it costs $10,000 on a per car basis, here on the right, the land and capital could be hundreds of millions dollars, but they're also producing tens of thousands, if not hundreds of thousands of cars a year.

3:05So if you take that very large land and capital expenditure, and if you were to divide it by the number of cars, it actually comes out much lower. And I'm making up these numbers, but this tends to be the case, let's say in this case it is $2,000 per car. Now let's think about other types of supplies and actually I should just keep saying, "Capital," well, let's think about other resources, let's think about supplies right over here and let's say that they use comparable components, but in the left hand scenario, they're buying them one at a time, they don't get any discounts, they're not a major customer for the suppliers.

3:43So on the left hand side, the supplies cost 25,000, actually, let me make it a little bit lower just so the numbers work out, let's say that the supplies here cost $15,000 on the left. Now on the right you might say, "Well, wouldn't it cost the same?" Well here you have a lot more purchasing power, you might be able to buy things in bulk, usually when you buy things in bulk, you can get a cheaper rate on it.

4:06And so let's say when they are able to use that buying power, it's $10,000 per car. And then, last but not least, and there's other things we could probably consider here, but let's think about labor, let's think about labor. So here you have one person generating a car every six months and so if their salary is, well, let's just say it's even $30,000 a year, you have $15,000 and obviously you might have benefits and other things, $15,000 of labor per car.

4:43Once again, this is all on a per car basis. Well, here on the right they're using very little labor, we don't even see people in this picture, but let's assume there is some labor involved and let's say it is $1,000 per car, $1,000 per car. So how much profit is each of these?

5:01And I could put in other cost and things, we could think about energy, there, once again, this big factory is gonna use a lot more energy in total, but on a per car basis, it's probably going to be using less energy than what we have here on the left. But let's just factor in what we have already written, we don't have to go into super detail to make the point.

5:20The producer on the left, it's $10,000 plus $15,000, let me circle it, $10,000 plus $15,000, plus $15,000, they are spending $40,000. So let me write this here, so their costs are $40,000 per car while what's going on here on the right? We have $2,000 plus $10,000, that's $12,000, plus $1,000, that's $13,000.

5:51Let me put that in a color you can actually see, that is... That's not a color you can see! That is $13,000, this picture's kind of hard to look at, but you can already see a very big difference in profit. If this car can be sold for $40,000 on the left, they're making zero profit.

6:12Well, here on the right, $40,000 minus $13,000, they're making $27,000 of profit per car. And so, you can see there's a very strong incentive to be this producer on the right. It might take a ton of more land and capital and there's probably many more workers that we're not seeing in the picture and all of these robots and to do things at this scale, it's maybe even riskier, 'cause you're putting a lot of capital to work, but if it all works out and you're able to get this productivity on a per unit basis, you could be making a lot more money per car, not to mention that they're also selling many, many more cars.

6:50Now, this could give this producer, if they really wanna put the other producer in a bind, they could lower price and still make more of a profit or they can take all of that profit and they can reinvest it into even more automation, into more factories, into other ways to improve productivity even more.

7:08And so the more profit, if it's reinvested in innovation, in productivity, then you're actually in a world where they can get a further and further lead.