Guardian: Apple would still be highly profitable if production was in U.S.

[Syt]

http://www.guardian.co.uk/technology/2012/apr/23/bad-apple-employ-more-us-workers

Apple: why doesn't it employ more US workers?

The electronics giant assembles its gadgets in China. But, according to new research, if it moved its production home, it would still be hugely profitable and create thousands of jobs

An old rule states that you are a mere six degrees of separation away from anyone else on the planet. For some people, however, the world is even smaller. So let me propose an amendment: you are only one relative, friend or acquaintance away from one of the late Steve Jobs's creations.

You may be browsing this on a new iPad, one of the 30m Apple sold last year. Or perhaps you're viewing it on an iPhone screen – which would be unsurprising, since the market analysts at Mintel say that the iPhone 4 is the most popular handset in Britain today. Maybe your children are reluctantly putting away their iPods, of which Apple sells 5m worldwide every three months (a remarkable figure, but half the 10m Jobs and his colleagues were shifting each quarter in 2008 and 2009).

And if you've really never done any of those things, rest assured your prime minister has. "The cool thing is that I now control my iMac from the iPad, to play out through the speaker," David Cameron boasted to the Telegraph a few months after moving into No 10. It was one of those canny-to-the-point-of-irritating references the Old Etonian used to specialise in; a flash of his real-world accreditation.

As Cameron knows, Apple is a byword of everyday sleekness. Yet there is another way of viewing the company. Focus instead on the way it does business, and all those iPhones, iPods and iPads aren't just exemplars of design and user-friendliness: they are devices that destroy western jobs. And they do so needlessly, because if the California-based giant manufactured its goods in America rather than China, it could still make profits that would be the envy of every other US business.

This is, I know, an unorthodox position. When journalists or politicians discuss the way that western companies make goods in China, or anywhere else in Asia, they almost always start from the premise that this is how business is done nowadays. This is the commonly accepted logic of globalisation, which enables companies to keep their costs down, which allows the ordinary American or Briton to spend less money shopping, and which also offers poorer nations in the east to develop their economies. Expensive shirts might still be made in Italy; high-end kitchens might be assembled in Germany – but the future of mass production inevitably lies in China.

Apple has both made and benefitted from that argument. In January, the New York Times ran a lengthy investigation of the technology firm's manufacturing processes, which began by disclosing a conversation in 2011 between Jobs and Barack Obama. The president asked why Apple products could not be made in the US. The most admired man in Silicon Valley was reportedly blunt: "Those jobs aren't coming back."

Very few people argued with that assessment. In other ways excellent, the New York Times' piece had an elegiac tone, conveyed by the headline How the US Lost Out on iPhone Work. And the following commentary went on in this it's-not-you-it's-me vein. It wasn't Apple's fault it didn't hire Americans to make its goods: it was America's. US workers weren't skilled enough; not enough of them were trained in engineering.

All this should be familiar to anyone who's followed the Westminster debate on globalisation, where prime ministers from Thatcher to Blair to Cameron have agreed that if Britain is to attract employers, its workers need to shape up. Students need to brain up and get degrees, adults need to retrain or sharpen up their attitudes. Even then, the British have to prepare for a post-industrial future, where they do the design and marketing and the Chinese (or the Indians, or the Vietnamese) make the goods.

Such national self-abasement has the merit of at least feeling like a policy; but it's debatable whether on its own it really will pull in big employers. Apple, after all, used to base its manufacturing in the US. Jobs used to boast about how the Mac was "a machine that is made in America". And according to new research given exclusively to the Guardian by the Centre for Research on Socio-Cultural Change (Cresc), it's clear that it would not only be affordable for Apple still to make its goods in America, it would remain hugely profitable.

Using a mix of Apple's own filings and industry data, the academics broke down the cost of making one product in particular: the wildly popular 4G iPhone. Assembled in China, the total cost of putting together just one phone was $178.45. Compare that with a sale price (including downloads) of $630 and Apple makes $452 on each phone: a whacking gross margin of 72%.

Chinese labour accounts for a tiny proportion of the company's costs: $7.10 for each phone, which accounts for about eight hours of assembly. So what would it cost to make the same iPhone in America? The Cresc team took the average wage in the US electronics industry of $21 per hour and calculated that the total production cost would increase to $337.01. That is a big jump – but it still leaves Apple with a gross margin of 46.5% on each iPhone – a level that Cresc's Sukhdev Johal estimates would probably still make it the most profitable phone in the world.

So: two models of making one of Apple's most popular products, and two models for distributing the profits. The made-in-America model still leaves the California giant with a profit margin that most companies can only dream of, but would create hundreds of thousands of manufacturing jobs in the US to boot. That may strike you as laughably naive, but it's more akin to enlightened self-interest: just think of the way Henry Ford raised wages so Ford workers could buy his cars.

The made-in-China model, on the other hand, has carried no such social benefits, either in Apple's home country or in the People's Republic. Last year, Apple built up cash reserves of $100bn – more than the US government. Indeed, it was so much money that the company was stumped how to dispose of it. Tim Cook, who is now CEO of Apple, announced a few weeks ago that he would begin buying back shares and paying dividends to investors. Among other people who benefited from this arrangement was Cook himself, who was awarded $376.3m in Apple stock when he took over last year. That pile of shares is now valued at around $634m. The people who win from the made-in-China model are big investors and top executives.

In the case of Apple, outsourcing manufacturing is not about keeping costs to customers down – they are still paying huge prices for the latest handset or tablet computer. Nor is it about the company's survival: it would still do tremendously well were it to bring those factories back home. No, in the case of Apple, moving jobs offshore has become a way of directing ever more money to those at the top of American society.

This is not just my conclusion, or that of the Cresc team; it is backed up by the Asian Development Bank. In a 2010 study of an earlier model of the iPhone, ADB researchers concluded: "It is the profit maximisation behaviour of Apple rather than competition that pushes Apple to have all iPhones assembled in the PRC."

This division of labour has certainly not helped China very much. Foxconn, which makes those iPhones, has to work to an incredibly tough contract with Apple that forces it to keep all costs to a minimum. This surely helps account for why Foxconn, whose client list is almost a Who's Who of the smartphone sector, has had repeated troubles with its workforce, including at least 18 suicide attempts by workers in 2010 alone. After that, and the terrible publicity that followed, Apple put pressure on its subcontractor to raise workers' pay and improve conditions. But it didn't take the most obvious route of doing so, which would be: pay more to Foxconn, and direct it to use that surplus to increase wages.

The reason for concentrating on Apple in this fashion is not because it's a terrible company, but because it's an exemplary one. It has become the business success story of our age: the firm others want to emulate, and prime ministers want to name check. And yet there is a paradox here. For all the stylishness and sleekness of its products, the Apple business model is an unattractive and, over the long term, possibly an unsustainable one. It subcontracts work that offers the Chinese little prospect of economic development, while at the same time selling to Americans and others products they want but increasingly don't have the jobs or incomes to buy so readily.

Apple's rise to primus inter pares in the business world has coincided with a wider social trend: a general anxiety about the decline of the west. Some of the reasons for why America, Britain and others are on the slide are large and abstract. But some of the factors are smaller and closer to hand, like the iPhone in your pocket or the Mac waiting for you at home.

• Cresc is holding a workshop on the "Apple Business Model" at Senate House, University of London on Wednesday

[Monoriu]

The benefits of manufacturing in China are more than just costs.  Chinese workers can't strike, for example.  They can't disrupt production.  Also good luck in finding that many US workers for these jobs.  If you employ so many people, you'll drive wages up, increasing the differential with China. 

[Fate]

I don't know if that's an advantage specific to China. Can people really strike in Mississippi and other Deep South states? You'd figure Hailey Barbour, et al would put down any slave revolt with such swift and brutal force that it would make Foxconn look like daycare.

[alfred russel]

The article (like many others) ignores a major dynamic of what is going on. Corporate taxes in the US are 35% plus state and local. Taxes in China vary, but are much less. The huge cash reserves Apple (and many other US companies have) are a result of this. They attribute their income to tax advantaged overseas locales where they have sourced production and can pay low rates, but then can't repatriate the money to the US without paying a surcharge on their tax savings. So they keep their money overseas where it shows as a huge cash reserve. Then they wait for any overseas investment opportunity, or wait out the next repatriation tax holiday in the US.

[Valmy]

The benefits of manufacturing in China are more than just costs.  Chinese workers can't strike, for example.  They can't disrupt production.  Also good luck in finding that many US workers for these jobs.  If you employ so many people, you'll drive wages up, increasing the differential with China. 

When was the last major manufacturing strike in the US?  1985?

Especially as these factories would be in non-union states.

[Admiral Yi]

This is not just my conclusion, or that of the Cresc team; it is backed up by the Asian Development Bank. In a 2010 study of an earlier model of the iPhone, ADB researchers concluded: "It is the profit maximisation behaviour of Apple rather than competition that pushes Apple to have all iPhones assembled in the PRC."

Mono: there have been plenty of strikes in China.

[Valmy]

So wait a corporation's behavior is motivated by a desire to maximize profits? 

[mongers]

The article (like many others) ignores a major dynamic of what is going on. Corporate taxes in the US are 35% plus state and local. Taxes in China vary, but are much less. The huge cash reserves Apple (and many other US companies have) are a result of this. They attribute their income to tax advantaged overseas locales where they have sourced production and can pay low rates, but then can't repatriate the money to the US without paying a surcharge on their tax savings. So they keep their money overseas where it shows as a huge cash reserve. Then they wait for any overseas investment opportunity, or wait out the next repatriation tax holiday in the US.

So Apple really works for the Chinese Communist Party, makes sense what with the agitprop, devoted idealogical followers and icons of veneration. 

[Viking]

Guardian thinks that for profit companies should be run for the benefit of the employees, Film at 23.

[Monoriu]

Mono: there have been plenty of strikes in China.

True.  But at least there are...effective ways to end one 

[CountDeMoney]

They can't disrupt production. 

Sure they do, after they collapse from dehydration and exhaustion from six 18 hour days a week.

[Admiral Yi]

True.  But at least there are...effective ways to end one 

There are very effective ways to end strikes against state-owned enterprises like coal mines.  Strikes against foreign manufacturers, not so much.

[Zanza]

The benefits of manufacturing in China are more than just costs.  Chinese workers can't strike, for example.  They can't disrupt production.  Also good luck in finding that many US workers for these jobs.  If you employ so many people, you'll drive wages up, increasing the differential with China.

There is a big labor-related problem in China too: worker retention. Skilled employees leave companies en masse to look for better jobs, which makes it very hard to build an organisation.

[Martinus]

So wait a corporation's behavior is motivated by a desire to maximize profits? 

Preposterous!

[Martinus]

Next in Guardian: "Company hires an excellent specialist in the field even though they could hire my friend who would do worse, but still somewhat decent job, for more money."