In order to write this blog and my book Simply American, I read a lot of articles about Made in America issues. Some of them discuss Apple. I came across one of these the other day. It was in the Atlantic Magazine written by Derek Thompson who is a senior editor at The Atlantic. The article was titled “How much would the iPad 2 Cost If It Were Made in the U.S.? About $1,140.”
As you may know, the iPad is assembled by Chinese workers at Foxconn, which also assembles Apple’s iPod and iPhone. Foxconn’s biggest plant is located in Shenzhen, China. According to Mr. Thompson:
“Average U.S. manufacturing/mining/construction compensation is $32.53/hour as of December, according to the BLS. Research firm iSuppli estimates the iPad 2 costs $10 to manufacture, which – using the $1.11/hour rate – works out to about 9 hours each to complete. If assembly and manufacture took the same amount of time in the U.S. as it does in China (another possibly unrealistic assumption), the cost of making each iPad 2 comes out to $292.77!
Again, according to iSupply, the material cost for the 32gb iPad 2 WiFi + 3g – which sells for $729- is about $325, or $335 including labor, which puts Apple’s gross margin (ex shipping/handling) at 54%. Just using the simple math above, if the iPad 2 was made in the U.S it would cost $617.77, bringing Apple’s gross margin down to 15.25%! Of course, Apple is not in the business of self-immolation, and given their relatively substantial pricing power, they could just make the iPad 2 more expensive, let’s say, increasing the price to the point where their gross margins stayed intact, from $729 to $1,144.02!
It’s a rough approximation, but the final point is uncontroversial: We make stuff overseas because the Chinese are paid 1/30th of our median manufacturing salaries.”
I was intrigued. And I discovered that, as with most things, the devil of comparing wage rates is in the details.
I clicked on the U.S. Bureau of Labor Statistics citation Mr. Thompson cited to in his article. The $32.53 hourly rate he cited was for “goods producing workers” who are workers in the mining, construction and manufacturing industry groups. That seemed like a fairly high rate for workers assembling electronic equipment like iPads. So, I dug a bit deeper, but I didn’t need a very big shovel. I went to the U.S. Bureau of Labor Statistics web page for Computer and Electronic Product Manufacturing. I scrolled down to table 5 entitled Median hourly wages of the largest occupations in computer and electronic product manufacturing, May 2008. There I found the U.S. median hourly wage rate for electrical and electronic equipment assemblers, which pretty accurately describes the work done by all those Foxconn workers assembling iPads. It wasn’t $32.53 an hour as stated by Mr. Thompson, but rather $13.34 an hour. The plot thickens.
Now, if it took 9 hours to assemble an iPad in U.S. like it does in China, the labor costs of assembling an iPad 2 in the U.S. comes out to $120.06 ($13.34 x 9), not $292.77. Using the correct labor costs of assembling an iPad 2 in the U.S., an iPad 2 made in the U.S would cost $445 ($325 for parts + $120 for labor), as opposed to a Chinese iPad’s cost of $335 ($325 for parts + $10 for labor). Assembling the iPad 2 in the U.S. and selling it for $729 would bring Apple’s gross margin down to 39%, not the 15.25% cited to by Mr. Thompson. Whether Apple would consider a 39% margin on an iPad 2 to be an act of “self-immolation” is a decision only Apple can make, but most firms that can realize a 39% margin don’t feel hard done by.
Is the idea of Apple making iPads in the U.S. beyond the pale? While it seems like a distant memory, Apple actually used to make things in this country in places like Elk Grove, California and Fountain, Colorado; in the mid-1990s Apple employed 1,500 in Elk Grove manufacturing circuit boards and desktop computers. But not anymore. We should all encourage Apple to move production back to this country. Apple sold almost 15 million iPads last year. Do the math. 15 million x 9 hours. 135 million hours of work for U.S. electronic equipment assemblers assembling iPads for you and me. A full time electronic equipment assembler works about 2000 hours a year (40 hrs x 50 weeks) 135 million hours of work divided by 2000 equals full-time work for 67,500 U.S. workers. And all we have to do is to convince Apple that a 39% margin, as opposed to a 54% margin is acceptable. Hell, I’ll split the difference with Apple. I will pay $784.oo for an iPad 2 made in this country if Apple will agree to live with a 46% margin. What could be more fair than that?