Thursday, February 2, 2012

$25 billion isn't enough?

American corporations send jobs abroad to create a cheaper product (because they care about the consumer?). Apple, for example, employs labor in China at around $17 a day to build our iPhones, iPads, and Macbooks. Their factory employees work 12 hour days, 6 days a week, and live on the premises, making it easy to have them work any time of day (what corporate executives like to call "labor flexibility"). The result – an iPhone that sells in the US for $199. Because this price is relatively cheap, Americans won’t complain about the exploitative labor practices used in producing it – we seem to believe that products would surely be more expensive had they been produced in the US. But, would they really? Let’s compare the labor costs of making an iPhone in China vs. the US:  

Here is the most important figure in this chart: 177,557 – the number of jobs that could’ve been added to the US labor force just for building the iPhone domestically. Not a small number, but again – how would this affect the final price of the product? Using the labor costs above, here is the total cost breakdown (per iPhone):

Based on these calculations, US labor would increase the cost of producing each iPhone by about $150. The question is – does this drive up the price consumers pay for the phone? The simple answer – it doesn't have to, and here’s why:

Apple's profit margin on the iPhone is 71.15%. This means that the company makes $462.49 per iPhone, resulting in $37 billion in profit for Apple. Switch to US labor, and the profit margin drops to 47% and a profit of only $24.6 billion...

So, if Apple can produce iPhones in the US, create thousands of jobs in our labor market, make the consumer happy by charging $199 per phone, and still make a profit of close to 25 billion – why don’t they?

I used various sites that calculated the cost of iPhone components, daily wages of Chinese workers at the Foxconn plants (an electrical manufacturing company used by Apple for production), etc. Links to all the source data are below. Bureau of Labor Statistics calculates hourly compensation of US workers, which comes to about $34.74 (with $23 of it coming in hourly wages and the rest in benefits and employer social security contributions). The units per year calculation comes from Apple's most recent (2011 Q3) earnings report (I use 20 million units over 4 quarters which is a reasonable estimate).

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