Apple iPhones are wildly popular. The iPhone is designed in this country, but is manufactured in China with components produced in a myriad of other countries such as the Republic of Korea, Japan,Germany, and the US. The components are then shipped to Foxconn, a company located in Shenzhen, China where they are assembled into the iPhone which is then exported to the US. The value of these imported iPhones adds to our annual trade deficit in goods with the Chinese which last year reached $273 billion.
Yuqing Xing and Neal Detert of the Asian Development Bank Institute published an interesting study on the iPhone and the US-Sino trade deficit that got quite a bit of press. The lion’s share of the discussions of Xing and Detert’s study focussed on their argument that conventional trade statistics did not accurately reflect the bilateral trade deficit between the US and China given the nature of the products, such as the iPhone, being exported from China to the US.
Xing and Detert main thesis was that conventional trade statistic methodology vastly overstates the trade deficit between the U.S. and China related to the iPhone. They stated that if the value of iPhone exports from China were calculated based on the value-added in China itself, i.e., the cost of assembling the iPhone components produced in countries aside from China, the iPhone export value as well as the trade deficit associated with the U.S.’s importation of iPhones from China would be much lower, at only US$73 million. While this discussion was somewhat interesting, another section of Xing and Detert’s paper really caught my eye.
Xing and Detert’s paper included a section entitled “Could the iPhone be assembled in the U.S.?” Xing and Detert analyse two possible reasons Apple chooses to assemble iPhones in China. “The first could be because of fierce competition in the smart phone sector that forces Apple to find a low-cost assembly location. In such a situation, Apple would be faced with either a profit margin that is too low to be sustainable, or price-setting such that it would not be able to find buyers. The other possible reason would simply be the profit maximization behavior of Apple and the demands of Apple’s shareholders.”
Xing and Detert dismiss the first possible explanation for Apple’s decision to assemble iPhones in China. Opining that Apple’s gross profit margin of iPhone was 64% in 2009, Xing and Detert state, “[I]f the market were fiercely competitive, the expected profit margin would be much lower and close to zero in the case of perfect competition. Surging sales and the high profit margin suggest that the intensity of competition is fairly low in the smart phone market, and Apple maintains a relative monopoly position. Therefore, the hypothesis that competition drives iPhones’ assembly into the PRC does not hold. It is the profit maximization behavior of Apple rather than competition that pushes Apple to have all iPhones assembled in the PRC. The unprecedented globalization and well developed production networks make it possible for Apple to utilize a much cheaper location outside the US to maximize its profits on iPhones.”
Xing and Detert then consider the consequences of Apple relocating iPhone assembly to the U.S. Earlier in their study, Xing and Detert opined that the total manufacturing cost of the iPhone 3G was $178.96, of which $6.50 or 3.6% consisted of the cost of labor to assemble the iPhone in China. “Assuming that the wages of US workers are ten times as high as those of their PRC (Chinese) counterparts and their productivity would be equal in 2009, if iPhones were assembled in the US the total assembly cost would rise to US$68 and total manufacturing cost would be pushed to approximately US$240.”
Xing and Detert conclude this section of their study with the following statement; “[I]n a market economy, there is nothing wrong with a firm pursuing profit maximization. Governments should not restrict such behavior in any way. However, corporate social responsibility (CSR) has been adopted as a part of corporate values by many multinational companies, including Apple. It may be an effective policy option to practice CSR by creating jobs for low skilled workers, such as using US workers to assemble iPhones.”
I don’t know about you, but I think Xing and Detert may be onto something. Why can’t Apple assemble iPhones here in the U.S.? According to Xing and Detert’s analysis, doing so would only increase the total manufacturing cost of an iPhone about $61.00, the difference between the cost of an American worker, as opposed to a Chinese worker, assembling an iPhone. Since Apple sold over 20 million iPhones in 2009, we are talking about an enormous number of manufacturing jobs that could be created in this country if Apple chose to shift its iPhone assembly operations back home.
Apple could handle the $61 increased total manufacturing cost associated with a domestically assembled iPhone in a couple of ways. First, they could just pass that cost onto the consumer. Given the fervent following among my iPhone comrades, most iPhone purchasers might not blink an eye a paying a bit more cash for a domestically assembled iPhone. Second, Apple could keep the price of a domestically assembled iPhone the same as the price of an iPhone assembled in China, but lower its gross profit margin on iPhones. Or third, they could do a little of one and two. Bump the price a bit and lower their gross profit margin a skosh.
What do you think about the idea of a domestically assembled iPhone? Would you pay more for it knowing it had been assembled by a member of your extended American family? I would love to have you let me know what you think about this idea. You might also consider letting Apple know what you think of this idea. You can email them and leave them a comment on the idea of having American workers, as opposed to Chinese workers, assemble iPhones.