I was just reading this analysis of costs and profits of the iPhone, and it’s rather dismaying. It’s largely about how the costs are distributed: the iPhone is assembled in China, and contributes to our trade imbalance, but it’s not because China has a technological edge — all the components are made in Japan, Korea, Germany, and the US, and just shipped to China for the final assembly by the cheap labor there.
The total component cost of an iPhone in 2009 was $172.46. Workers in China assemble the iPhone, but because their wages are low the assembly cost per phone (labeled manufacturing costs in the table below) is quite small, only $6.50 a phone. The total production cost per phone is $178.96.
Apple has a 64% profit margin on the iPhone! That’s not a surprise, though — I’m used to tech companies charging a premium price for the fancy toys, and Apple has never had a reputation as a budget brand. This is what surprised me:
For the sake of discussion, they assumed that assembly line wages in the U.S. are ten times higher than in China. Given that Chinese production workers earn roughly $1 an hour, that is not an unreasonable assumption. The higher wages would mean that the total assembly cost per phone would rise to $65 and the total manufacturing cost would approach $238. If Apple continued to sell the iPhone for $500, the company would still earn a very respectable 50% profit margin.
There is admittedly a very large difference between 64% and 50%, and I can understand why a company would balk at cutting profits by 14%, and it would be an irrational business decision to shift assembly to the US for reasons of national altruism. But still…50% seems obscene enough.
I hope Apple is at least paying respectable taxes on that profit. The article doesn’t say; I don’t have expectations that they are.
(Also on Sb)
Glen Davidson says
Start up in a garage, and grow to become a global exploiter.
It’s the American dream.
To quote a wise mollusc: You’re bad, and you should feel bad.
OK, this is why those in Science academia should not get into business discussions. Sales price minus material cost does not equal profit. There are a lot of other costs, like R&D, like sales, like corporate overhead. The profit margin is nowhere NEAR 64%. It is still high, but not at all that high. When you change the manufacturing cost base on a much lower number, you can begin to see why Apple made the decision as well as thousands of other companies. The real question to ask is why the labor cost is so different between these two countries. And spare me the “it’s because they treat their workers like slaves” argument. The cost of living is way lower in China as well (in the areas where this takes place) so the differential is not what it seems. Yes, they could use much better labor practices, but even with a “fair” wage it would be much different in China from the US based on cost of living.
'Tis Himself, pour encourager les autres says
There are various loopholes, such as not bringing profits made outside of the US into the US, which can cut tax liabilities. This article discusses Apple’s profits and taxes.
You’ve made a common math error. A reduction of 64% to 50% is a 14 point difference, but it is not a 14% cut, because you are not going from 100 to 86. You are actually talking about 14/64, which is actually a 21% reduction. And if you were increasing profits from 50% of the price to 64%, you would not be increasing profits by 14% or 21%, but by 28%.
Apple is missing out on a great option–a tacky, red-white-and-blue iPhone, guaranteed completely made in the USofA, and sold at a premium to account for the difference in labor costs.
Duth Olec says
Ha! I don’t have an iPhone!
Or an iAnything!
Pfft obviously you forgot to factor in the cost of shipping and/or handling.
Robert Synnott says
This is, of course, only true if one assumes that the device costs nothing to develop, and that it uses no licensed software intellectual property. In reality, this sort of apparent profit margin (if all of those things are excluded) is pretty much industry standard for high-end smartphones; Apple isn’t special here.
Tom Clark says
How dare you wish higher taxes on that poor, innocent, multi-billion-dollar corporation?
it would be an irrational business decision to shift assembly to the US for reasons of national altruism.
It’s also wrong to take jobs from willing Chinese workers with few other options to give jobs to the relatively well-off American workers.
This is where I would crow about having an Android phone, but really it’s probably just the same story with a different brand name.
Not only shipping (containers, energy, etc), but also tooling, infrastructure, packaging, etc.
Apple no doubt makes a profit, or we can assume they wouldn’t do it. But profits aren’t “production cost minus retail price!”
I think this has a lot to do with the way China manages its currency. Because they don’t float the yuan on the currency market, the exchange rate remains favorable and labor costs remain low for foreign countries like the US. Of course the cost would probably be low even with a properly managed yuan, since the cost of living in China is also low, but t would go a little way toward reducing the trade imbalance.
China obviously doesn’t have a problem with our trade imbalance, however the longer-term cost of what they’re doing is excessive inflation in China. Right now it’s at 6.5 percent and rising (compare this with a rate of about 3.6 percent in the US).
Personally, though I benefit from what China does because I own a smartphone and other nifty gadgets, I don’t think we should trade with China as freely as we do without changes to the way they treat the yuan.
(Note that the spotlight on Apple in this article is a little unfair: they’re merely a good example of this business practice, and the same can be said about other gadget manufacturers, in the US and elsewhere. I say this as an Android-using non-Apple-fanboy.)
Sure. Right. The ones who don’t have jobs and whose hourly wage is…zero. Official US unemployment is 9.2% and the real unemployment is more like 18%.
One hedge fund manager has proposed just abolishing the minimum wage. His reasoning is that we live in a flattened global economy and the USA is going to compete with Chinese, Indian, and Mauritanian workers whether we like it or not.
Doesn’t sound too appealing but who knows, maybe it makes sense. It would be more appealing to have a solution that doesn’t involve a race to the bottom but I can’t see one right now. In theory we could just develop cheap and competent robots.
But then, companies would still employ humans because they are cheaper than robots. Self repairing (sort of), self reproducing, no expensive power cables or electricity, flexible, trainable.
They don’t give a source for the parts costs and Apple doesn’t release them. I’m guessing they came from iSuppli. Those numbers are pretty unreliable as they don’t take into account any discounts Apple would get for being a volume buyer (and at their volumes they most likely get huge discounts.) This would make Apple’s profit margin larger.
As someone mentioned they don’t take into account any factors like marketing, R&D (apple spends a low % of it’s revenues on R&D, it’s just their profits are so huge the R&D number is gigantic)
I’m not sure anyone in the US could, at this point in time, start building iPhones. We were so dumb moving manufacturing there that what is left can’t do the high-tech high-volume assembly the iPhone requires. Apple would have to finance a company willing to invest in a huge factory in the US with the only guarantee being they’ll make less money per phone. Not a smart move for a company in a capitalistic society.
There are no phones being built in the US. Would switching to another phone, perhaps one where workers are worse off, be better? Apple is the only company that releases regular reports on their expected conduct of suppliers and audits its suppliers.
Since that is an Apple report it would be nice to see verification but what other company even bothers to go that far?
The artificially low price of oil makes this enormously inefficient system of resource extraction, shipping, refining, shipping, manufacturing, shipping, assembling, shipping, and selling possible. If you look at the system from the vantage point of total calories expended, it becomes clear that in this case, market forces are not finding the most efficient way to get iPhones from the design board into the hands of consumers. The negative externalities here are of the greatest concern to me, because this is exactly why AGW looms as a global disaster.
Way to miss the point! The shit you are saying is only relevant if apple is hurting for money, but they fucking aren’t. Their CEOs are as rich as any other CEOs of major US corporations, and they could certainly pay a living wage for their phones to get assembled instead of buying a new yacht. THAT is the problem, not that PZ didn’t factor in every single cost associated with a product.
Do you think it is wrong to pay chinese people 1$ an hour while the owners of the company pull in millions a year? THAT is the question that matters.
Given Apple’s little spat with Samsung, fewer of the components in future iPhones will be made in Korea, and even more will be manufactured in China.
China will not need western expertise to design these things forever. Their government is actively working to cultivate the necessary expertise from their own population, and sooner or later, they will have the infrastructure to design, as well as manufacture, all these doodads we currently have them build.
I wonder how the western ‘knowledge-based economy’ can survive when this happens.
Shame on you. Zoidberg is a crustacean.
Do the relative differences in cost of living matter? Or is the argument just “CEOs get paid too much!”. I agree CEOs do get paid to much (especially banksters). Just for giggles though, Jobs’ salary for years has been $1, his being compensated mostly in stock options.
Actually, since there are significant costs above and beyond manufacturing, that means that the differential costs of labor between China and the U.S. are even smaller in proportion to total costs, giving them less proportional influence on profit margins.
This strengthens PZs point, rather than weakening it.
Rey Fox says
Oh come on. He exhibits properties of pretty much every oceanic phylum that the writers are aware of. Rule of Funny.
(and no, I’m not warning on that link, you know danged well what you’re getting into)
(Pardon the spectacular grammar fail above.)
I think Sally’s point is probably the most important thus far. I think ‘Tis was talking about what it would take to get a manufacturing zone in the U.S. that could compete with China’s even with our well-payed labor; it’s not just a matter of deciding to use “our factories”. We don’t even have “our factories” anymore. We don’t produce any of the components needed for smartphones domestically. (We’ve been so committed to off-shoring manufacturing we might not even make the components needed for smartphone-component-factories domestically.)
Not doubting for a second that Apple makes a hefty profit out of its iphone, but there are a few issues with your numbers:
* $178 is the (estimated) BOM. Apple has more costs than that: transport, stocking, R&D, support (those genius bar things don’t pay for themselves, and Apple’s support is generally considered very good with “no questions asked” wholesale phone replacement stories common enough)
* Apple subcontracts the assembly (in fact, Apple subcontracts pretty much everything, they got rid of all their manufacturing when Jobs came back) to Foxconn. There is nobody who can do this assembly (tooling-wise and production-capacity-wise) stateside (and it’s not like the US would make more intrinsic sense than Japan or Germany). Pretty much all assembly of modern electronic devices is done in China.
* Another one for the production place, it’s not like the iPhone is still clearly dominant in the US, or even that the US is the iPhone’s main market. Apple has been selling more units out of the US than stateside at least since the 3GS.
According to marketwatch, in 2010 out of $65bn operating revenue they extracted $18bn of operating profits, leading to $4bn in income taxes and a final $14bn net income.
Occam's Blunt Instrument says
Apple offshores a tremendous amount of its most profitable stuff – mostly by moving its patents to countries like Ireland that don’t tax patent royalties; then it pays its subsidiary for its use of its own intellectual property. Last year Apple claims that it only made 14% of its income from within the USA. That’s some weapons-grade accounting. But unlike Exxon-Mobil and Boeing (both of which have seen record profits) Apple does actually pay some taxes.
Now, isn’t some libertarian supposed to show up and explain how Apple creates jobs and improves the Chinese, uh, US economy? And taxing Apple would be really unfair to Apple shareholders, who have watched the stock go from $5 to $300+/share since 2000. When they pay capital gains on all that profit, then the treasury will benefit greatly. If they weren’t smart enough to tax-shelter it, that is.
John calvin said it best,
if a man is rich it is because God likes him.
If a man has nothing it is because God doesnt like him.
There is nothing a man can do to make God like him.
The wealthy have 95% of everything because God like them.
Murphy’s Law says,
Paying taxes shall be left to the man that can least afford it.
Like Kurt Vonnegut made note of, It ain’t no disgrace to be poor–but it might as well be!
They don’t treat them very well though:
(remove the space in “h ttp” and cut and paste the URL to see the video)
uncle frogy says
well apple is just one example of what has been going on for some time now. the difference is that they still do a lot of the development here. IBM completely got out of the PC business when they sold the business to Lenovo and HP is talking about the doing the same thing and they are not the only companies or businesses that are heading that way.
It is very clear that we are going through another transition period the question is what are we transitioning to because I do not think we will be able to stop it at this point. I read a very interesting series of articles recently that are about this subject
does not look like there are any simple answers for this either.
Porco Dio says
PZ you are naive in so many ways.
First, Apple has report to its investors that will want the cheapest assembly cost.
Second, you are talking about component cost and assembly cost only. What about R&D etc?
Finally, and most important, those slitty-eyed chinks have as much “right to compete” for those jobs as you yanks do… they also need to, ya know, clothe and feed and educate their kids.
What the USA should be doing is educating and training the work for for a higher tier of jobs than simple little manufacturing jobs and thereby compete in markets where you can compete because obviously the manufacturing branch is not a place you want to be.
Stick to religion bashing and biology and steer clear of things like economics that you clearly know nothing about.
Matthew F. says
I often wonder how the trade balance is calculated. I suspect the trade balance tallies the full value of finished goods – i.e. an iPhone would contribute $600 or $700 (or who knows) to the trade deficit, when in reality only $6.50 is being sent to China.
Sorry, can’t agree here. I’m as far left as they come — I’m not a capitalist by any means. I’m waiting for the days when we no longer consume to enhance economic performance, nor value growth to the extent that we do. And it is inevitable — there are finite resources, and we’re using them too fast for them to replenish.
However, while capitalism is alive and well, this is the reality under an economic globalization. I am a standard bearer for free trade, but free trade for all disciplines (professional and laborious…which is why I usually oppose free-trade agreements, as they are protectionist for our doctors and lawyers). In that regard, I am not just for “spreading the wealth around” in America, but worldwide. I don’t know why people value American workers more than Chinese workers. It is for them to rise up and form their own trade unions and to demand better wages. And these jobs are better than what they’d have without them (heh, in that regard I sound like a capitalist pig).
On the taxes issue…yes, they should be taxed until their eyes bleed.
Ed Darrell says
Gee, P.Z. Wait till you hear where and how they get the coltan ore to make the components for the phone.
After reading this post I’m a little embarrassed to be a subscriber to this blog.
Richard C says
Apple is not making a 64% profit on each iPhone. What those reports leave out are the R&D and testing costs, which are substantial and all take place in California at American engineer rates, and the cost of writing the software which Apple also does entirely in-house in America at great internal cost. These breakdowns pretend that everything other than assembling the physical widget is free.
Apple does make a healthy profit on each iPhone, but not 64%.
(By the way, I would be happy to pay a smallish premium on top of the cost of today’s iPhone to get one assembled entirely in the US. Unfortunately, I don’t think most people pay attention to such things when they shop for phones on the market. If they did, the Made In USA campaign would have been more successful.
Bingo. The real evil in trade agreements isn’t that they allow *gasp* non-Americans to benefit from trade. The evil is that they are insufficiently free and the exceptions are always dictated by politically connected firms (and like you said, professionals too). Trade is not a zero-sum game. But even if it were, why is the wealth and welfare of Americans more important than that of those in other countries? Oh right, it’s not. Republicans fear losing their jobs to immigrants. Democrats fear losing their jobs to foreigners.
What’s my political party if I fear losing my job to buff a bankster’s yearly bonus?!
“Trade is not a zero-sum game. But even if it were, why is the wealth and welfare of Americans more important than that of those in other countries? Oh right, it’s not. Republicans fear losing their jobs to immigrants. Democrats fear losing their jobs to foreigners.”
This is simplistic and inaccurate. Of course Americans should be put first by American lawmakers and diplomatic negotiators, just like the Chinese or Mexican or Martian lawmakers and negotiators should put the interests of their own people first. To do otherwise is not only treasonous but stupid. The problem is that corruption and greed and multinational corporations rig the system so that only a few benefit at the expense of many.
This Democrat dosen’t care if someone in China is making my computer: I do care that it’s not made by some child in unsafe working conditions in extreme hours for starvation wages.
I’m much more a fan of open trade or fair trade than free trade: it does not bother me that companies outside the US cam compete in the US market. My problem is that the system that allows the corporations to make products in an area where the wage is a fraction of local wages, but then sell the product at a cost only supportable by local wages.
My belief is that we should support an open trae system which sets consistant tariffs based on the federal minimum wage: Imports from abroad would still be allowed to compete in the market, but it would reduce the economic incentives for multinational corporations to a) outsource labor and pocket the profit difference, and b) interfere with the local politics to oppress workers. It would also allow domestic manufacturing to compete, and allow the government blunt the effect of economic shifts caused by the standard play of the market.
I saw that article earlier today. It’s an interesting one, though of course those who are pointing out that Apple does not make 64 cents on the dollar selling each iPhone is correct; they are still making a nice margin, though. My wild-ass guess is that the margin on the iPhone is around 30%, simply because Apple has a habit of running every business they’re in at a profit, and that’s commensurate with the overall corporate profit margin. That’s still hefty, but that’s also probably why Apple is the biggest success story in American business today.
I think the most relevant point in the article is that encouraging innovation by American companies may not have the expected effects if you think, for example, that the problem the United States has is that we don’t have enough manufacturing. Of course, that’s not our problem – the U.S. is STILL the number one manufacturer in the world by the size of that sector. China will take over soon enough, though. And manufacturing is not a big driver in our economy.
This kind of hurts the other point of the article, which is that it would probably be better for the American economy if they manufactured the iPhone here. That’s not really clear. iPhones are not cars. They are sophisticated, well-designed, well-built premium electronic devices, but the assembly is not where the value of the product lies, and the cost reflects that. They are designed in such a way that it does not take lots of skill to build them (that’s not meant to disrespect the people that do it, they’re just designed to require small amounts of training, like all consumer gadgets ever), and if there is a defect, no one’s life is on the line. Whether this is good in general, well, I don’t know. The economics of these things are confusing and unsettling. I have to hope that Apple is true to its word and monitors the working conditions of its manufacturing partners closely.
And it’s worth mentioning that there is no real choice in this market – with every builder, you face the same issues.
And for full disclosure – I love my Apple products, but of course I think that Apple should be taxed up to its eyeballs on everything it makes. They play the same games any corporations do; liking the shit they make doesn’t mean that they’re my buddies.
I thought the embarrassment of owning an iPhone was, well, the part about owning an iPhone. Get an Android ;)
Yeah, “free” trade only works when everyone is on equal footing. “Fair” trade would involve not starving your own people, just because someone else can sell the product. What the hell do you do when you reach the point where the people that used to buy all this shit can’t afford it any more (like 18% of the US right now), tax cats somehow, to subsidize social programs to buy out of work people cell phones? You can’t keep shifting all your money out to some place else, or to a small number, then expect that things won’t go badly as a result. Its called “bleeding to death”. You can afford to give up **some** to the wounded, or to save someone else, but when you arrange things so that some rich guy has a huge tube running to them, and 50 other people have smaller ones, such that the patient is being drained of all of it, what the hell do you think the result is?
I don’t give a damn that something is made someplace else. I do give a damn that a) if I could afford to fly there, I could probably pick most of the shit I would like up at half the cost some place else, b) but not from any Western country, and c) I am working at a shitty, barely more than minimum wage, job, because the closest thing to manufacturing we have in this country is some places making plastic tubs, or fake fingernails, for Walmart, and I basically **missed the window**, for various reasons, for finding a shitty job at data entry, which *might* have eventually landed me in a shitty (but slightly better paying) job writing insecure, buggy, business apps, for some asshole making 500 times what I do.
Well, maybe I could have, somehow, managed to get together with someone and become one of the like 0.001% of the nation writing computer games for a living, but.. Or, maybe I should just move to Iceland, and get a job with CCP (Eve online’s creator). lol In any case, like 90% of the jobs in the US are either sales, or pencil pushing. So, where the hell do people think the money going to the actual making of those products ends up, and how the hell does anyone imagine its going to keep working? At this rate, we won’t need to worry about someone invading the US (though we might need to worry about some loony deciding to invade someone else again), they will simply *buy* us, acre by acre, with our own damn money.
Heck, there is some rumor about one of the states never ratifying their inclusion as an official state. I say China hopes on over and offers up the state government a few billion for it, since the US doesn’t “officially” own it. Right? :p
There is no such thing as “too obscene” a profit. People have this silly notion that having a good ongoing business is not good enough and that profits need to grow no matter what. Hewlett-Packard is dumping the computer business, not because it is not profitable but because it is deemed “not profitable enough”. (I predict that HP will go the way of DEC and others.)
American workers/consumers didn’t care at all about salaries and working conditions of foreign workers as long as they could buy lots of things they produced cheap in Wal-Mart and Best Buy. Now that living with those salaries and work conditions start to look as a real possibility for them, all of the sudden they are against them. It seems it all depends of what side of the deal they’re getting. Whenever other countries’ workers insure better salaries and working conditions for themselves, American companies go away (I should know. I live in Mexico and have witnessed the maquiladora crash) because of Wal-Mart and Best Buy’s costumers’ demands for low prices.
Finally, and most important, those slitty-eyed chinks have as much “right to compete” for those jobs as you yanks do… they also need to, ya know, clothe and feed and educate their kids.
They have the right to compete for those jobs.
They don’t have the right to do it that results in lower standards for everyone, just because their governments treat people like garbage and they’re willing to sell out their own citizens to suck up to the greedy and powerful.
If you’d read Mao, you know that he urged the Chinese to do whatever it took to destabilize the West. He predicted it would be easy to lead them right into a trap because the capitalist pigs running those nations would cut their own throats in the pursuit of every more riches for themselves.
And America stupidly and gleefully plays right into their hands.
As someone with both a biomedical education and an MBA in finance and startup experience, I find that people from science and engineering backgrounds can have highly intelligent discussions of business.
There is a strong ideological desire, on the part of many American members of the management elite, to reduce the living standards of American employees to the lowest common global denominator. This desire is actually non-rational and purely emotional. It is a subjective question whether this would be “better” or not, but most people would not find the results “better”. It is important to recall that all people who wish Chinese working standards of their fellow Americans would be unwilling, and probably physically unable, to tolerate them for themselves.
It is true (but this is not why right wingers want to pound US job holders) that the average American lifestyle is unsustainable in terms of energy consumption, and in many cases, in terms of wastage of water. However, there are better ways to address those than by trying to reduce people to third world status.
It is very important to understand this. There are probably people in China who sincerely want to improve the lives of Chinese workers. What the American right wing wants, implicitly or, in many cases explicitly, is to make the lives of ordinary people as brutal as possible, in China or the US.
NO, not necessarily, and here’s why.
This term creates the false impression that in China, one enjoys the same advantages as in the US, but at a lower cost.
Perhaps that silly impression is fueled by the fact that within the US, the advantages of higher cost of living areas are non-concrete – greater economic and cultural opportunities, better public education, and so on.
It takes just as much input of water, fertilizer, labor/energy to raise a pound of grain in China as in the US. It takes just as much energy to heat houses,
Why can’t people in the US live on $1/hour, or $1/day? For a variety of reasons – here are some that are often overlooked –
Because we have for decades now had things like housing codes, public health systems, transportation and planning that assumes at least ability to afford a bus or train ride if not a car, etc. We also have regulations that protect workers from the most eggregious workplace risks and the most eggregious pollution of the common environment. We have publicly subsidized clean water and sewers. While these systems are not perfectly efficient, they will be sorely missed when they are gone.
You probably COULD live on $1/day, if the law permitted that you live in an unheated shack, draw your water in a bucket from a local body of water, cook over a makeshift stove, walk to work, own only minimal, minimally washed clothing (be allowed to do dangerous work in bare feet or flip-flips and so on), use an open ditch as a sewer because you lack running water, not have electricity wired to the structure you live in, walk along the freeway to your place of work, etc. You could then afford, if you were healthy enough to get them and they were avaiable, $1 worth of the cheapest food stuffs, like split peas, white rice, industrial lard, maybe an occasional potato or carrot, and not starve to death.
This IS how people live on $1/day, to a large degree. They don’t live in some strange world where prime cuts of beef cost one cent a pound. Some local produce may be cheap in season (because it has to be consumed in season), but overall, that’s about it. Oil costs what oil costs. Rice more or less costs what rice costs. Copper wire costs what copper wire costs. “But blah-blah-blah labor costs are lower!” They are lower at least partly because they can be because people are not contributing to the cost of required indoor plumbing, required sewage treatment, required electricity, strong emergency response system, public health system, etc. In fact, many foods are cheaper in the US than in places where people live on $1/day.
Of course, China people live on $1/hour, not $1/day. I used the lower example to make the point more clear.
Cost of living is not some magic thing. Even within the US, the cost of living lower in South Dakota than in South Beach because more people are willing to spend more to live in South Beach, because there are perceived advantages. Those advantages may be abstract. But between South Dakota and Chad, the reasons that cost of living is higher (for now) in South Dakota are not entirely abstract.
By the way, in Mexico, with a per capita income of one sixth that of the USA, American brand high tech products and cars are 50 to 100% more expensive than in the USA. One of the very few exceptions is Apple, whose products sell for almost exactly the same in Mexico as in the USA. I will be the last person to speak bad of Apple.
The only problem being, it took longer than he expected…
Porco Dio says
These are the words of a true bigot. You live in a fantasy world, you really have absolutely no idea what you are talking about. This is what happens to people when they are white and paranoid.
Has China really “sold out” its own citizens? If you could manage, for a second, to ignore the immense stupidity that has curdled between your ears, you might just be able to understand that millions of Chinese people can afford a better lifestyle than they could ever have imagined under Mao.
If you think that people having jobs and educating their kids for cumulative global improvement is some sort of conspiracy then I’ll have to take back my words. You are not stupid. You are insane.
The fact that America is suffering now is not because the Chinese are smart, it’s because the Americans are stupid.
feralboy12, der Ken-Puppe Sie außerhalb in 1983 verlassen says
You’re holding it wrong.
Pierce R. Butler says
Bostonian @ # 13: … inflation … about 3.6 percent in the US…
I just happened to read a (somewhat) recent edition of Harper’s Index, claiming:
IOW, sprinkle inflation figures with the same salt applied to unemployment numbers.
First Approximation says
If you worry about this then you’re a xenophobe. A true friend to foreigners wants them to be exploited ruthlessly.
Exactly. Such a pathetically simple cost analysis completely leaves out R&D, which is all done in the U.S. at Apple headquarters in Cupertino, as well as all the testing of devices and the development of software. Remember the whole “Antennagate” thing last year? One response of Apple was to show its antenna test facility. Building a facility like that ain’t cheap.
In any case, the vast majority of the heavy duty intellectual work and product development Apple does is done in the U.S. Apple outsources the assembly of its products, which is really the simplest part of the prices, because it is cheaper. Personally, I don’t have much of a problem with that. It’s high paid, skilled, creative work.
Paul D. says
These “analyses” are guesses that leave out Apple’s enormous R&D and administrative costs, as noted by other commenters.
If it really were so cheap to produce an iPhone, why aren’t there dozens of companies making better products for significantly cheaper? Same goes for the iPad — no one else can come close to its specs and price without losing money on each unit sold.
Wow PZ, you sure have the Apple fan contingent pissed. Good for them for defending this poor corporate citizen.
“I hope Apple is at least paying respectable taxes on that profit.”
Spiny Norman says
“If it really were so cheap to produce an iPhone, why aren’t there dozens of companies making better products for significantly cheaper?”
That was irony, right?
Ken Cope says
Isn’t the real obscenity that Steve Jobs’s replacement was given, for taking over the responsibility of Steve Jobs’s previous job at Apple, a single lump sum payment of $335 million, i.e. one third of a billion dollars, before he does a bloody thing for it, before he even completes his first double click on the “profit” button to start collecting his regular grotesquely obscene pay check.
I heard a suggestion that a corporation’s tax liability should be based on the proportion between the cost of paying the lowest paid 60% of its workers, and its most highly paid CEO.
You know, it just seems a little bit bizarre to me that this sort of statement can be made so casually, without really anyone questioning the basis for it. I mean, what is a rational business decision? Based upon this statement, and what I think a lot of people would believe are the principles of capitalism, rational business decisions are defined as those which increase corporate profit. And so for a company, profit is wonderful. Because that’s what corporations do.
But why is it that we are under this belief that what is good for corporations is also good for society? And if we don’t believe this, then why the hell aren’t we more than embarrassed about this kind of stuff? Shouldn’t we be angry, shouldn’t we be furious? These are the corporations which supposedly make America great, and yet despite making billions of dollars in excess every month, they choose to hire people from China because it’s cheaper. And so Americans are buying iPhones, and then the profits from these iPhones, rather than trickling down to the company’s American employees, are simply building up into a massive agglomeration at the top of the pyramid.
Who doesn’t love this world?
Isn’t the real obscenity that Steve Jobs’s replacement was given, for taking over the responsibility of Steve Jobs’s previous job at Apple, a single lump sum payment of $335 million”
It was $384 million in shares (1 million of them), that vest over 10 years. And this is going to a guy who was already paid $59 million in 2010 alone. Jobs was given a similar deal 11 years ago, except he got $600 million. But these are just details. Who was it in this thread that mentioned that Jobs was paid $1 a year, as if this is some sort of point?
Are we really to believe that these two hominids are worth more than, say, covering the salaries of 2400 teachers for 10 years?
History has already taught us that this lunacy only ends one way. Badly.
Because most Americans (and Britons, Australians, etc.) are too busy doing themselves out of jobs by buying Chinese made products at Kmart and Target because they’re cheaper than home made products.
@33 Yeah to me that’s more of an issue than the cost vs profit debate.
Tantalum refined from coltan is used in the production of electrolytic capacitors that are in nearly all electronic devices. A lot of the world’s coltan comes from the Democratic Republic of the Congo. Conflicts in the region have made the extraction of this ore difficult and resulted in a great deal of illegal smuggling of the ore out of the country. The profits of such smuggling operations is thought to fund the local militias and allows the prolonged military occupation of the region. Its not dissimilar to the ethical concerns around African conflict diamonds.
Question: what’s the average wage for a factory worker in china and does apple pay competitively? Would Chinese regulations allow apple to pay significantly more? At what point is the Chinese government forced to pay doctors and teachers more to balance professions which society holds at the highest esteem to match what foreign companies are paying? Do factory workers in china earn enough to live a fairly comfortable life where they can take care of their basic needs?
Also, you didn’t mention how much of that 65 percent profit goes to pay American designers, software engineers, managers, and marketing. Or how much goes into stocks which allow other American workers to retire?
I suppose you anti corporate types think it all goes into a giant swimming pool where JP Morgan and Steve Jobs and Scrooge McDuck do the backstroke and roll their own with bills.
If we want to compare the salary of an American CEO with an American worker, or the owner of Foxxcom with a Chinese factory worker and cry about how unfair that is, go ahead. It is unfair. It’s an atrocity. Even giving due credit to the importance and responsibility of the CEOs position, it doesn’t excuse the income disparity.
But I’ve said it many times. Evil corporations provide the means to put dinner on the table, send kids to college and take care of grandparents, here and in china. So when you’re carping about the man, please be specific about whether the man is an unfair system or your neighbor’s dad.
I suppose you anti corporate types think it all goes into a giant swimming pool where JP Morgan and Steve Jobs and Scrooge McDuck do the backstroke and roll their own with bills.
Yeah, what would we do without corporate shills like you to remind us that we owe our all to the corporation. All those corporations who pulled themselves up by their bootstraps. Do you really believe this shit?
Evil corporations provide the means to put dinner on the table, send kids to college and take care of grandparents, here and in china.
How cute that you invoke images of dinner, kids and grandparents in your defense of the likes of JP Morgan. You should produce political TV ads. I had a tear in my eye, I really did.
Like many other people here, I also can’t agree with PZ this time.
First, a company’s profit margin should be significantly higher than the inflation rate, otherwise the business is worthless for its owners. No one really knows what the profit margin of an iphone is, and as most people in business will tell you, it is hard to even trace all the cost that go to make a product line. There are even different methodologies for calculating how much of the shared fixed costs should be calculated towards a given product.
Now how many costs are there for a corporation besides those for materials? There is R&D and testing as many people above already mentioned. There are accountants and auditors everywhere the company operates, there is operational/support/cleaning/safety staff at every facility, that increases as the capacity of an office/factory increases (neither pure fixed nor pure variable cost). There are also logistics, packaging, operations, and manufacturing, all of which require planning by a lot of people, designing, testing, prototyping, and many many more. So it really is a complicated process for every business. Now include apple’s own rather unique expenses – thousands of people reviewing software for the app store, all the software engineers that fix bugs and develop new features for the software that is now more and more sophisticated and interoperable (icloud and stuff). Not an apple fanboy here, I do admire how they do business (I also think their accessories are overpriced several times, but as far as their gadgets are concerned the quality is unmatched).
As a person who was raised in a family where dad went to work for the man, and the man put me through college, I am proud to be a shill. :)
I’m also thankful that I grew up in a country that provides public education, which I used, unemployment, which I’ll probably get a chance to use at some point, and basic infrastructure which I use every day and which I’ve noticed is aging. I think we all owe a debt to this society which is paid in taxes, and I think corporations should be proud to contribute funding in the form of taxes to the substrate which has allowed them to thrive.
And there’s this and this. It’s OK though, Foxconn has plans to fix everything.
Well, it’s pretty unlikely now, since the new guy in charge is the one who developed this production strategy.
Lots of capitalists, cheap labor supporters, free trade, and anti-environmentalists on this board when Apple is the subject under attack. Funny stuff, hehe.
Steve Jobs knows that the way to sell product is to start a religion (and make things shiny and glossy).
Full Disclosure: I typed this on an iPad.
Spinoza B says
Look at Apple’s actual financial statements, rather than speculation. For the latest quarter, Apple’s gross margins are 41.7%, not 64%. Add R&D, and SG&A expenses, and their Operating Profit is 33%. Healthy, very healthy, but not obscene.
On that, they paid taxes of about 23.5% (of profits, not of sales), resulting in a net profit margin of about 25.5%. Again, healthy, not obscene.
Reading this post and many of the comments below made me feel like I do when reading and anti-AGW or anti-evolution site. Perhaps we’ve got to face it, the right doesn’t have a monopoly on stupidity.
(ObDisclosure: Not an American, do not own a single Apple product or share)
Matt Penfold says
Apple produce more than just iPhones. The figures you cite do not breakdown the profit, so your claim the profit on iPhones is only 41.7% is false. Why the lack of honesty ?
I assume they refine it from the endoskeletons of T-800s.
Bernard Bumner says
A very subjective judgement.
I would say that any profit is obscene if it relies on maintaining poor standards of living and exploitative working practices.
Now PZ, I think your being a little unfair to apple here… look at all the patent lawyers who would be starving in the streets without apple’s generous contributions to litigation competition!
Argh!!! *you’re not your !!!(Mutters ‘preview is your friend, preview is your friend…’)
And why are they doing that? Because wages have been flat since the 1970s and nobody can afford to do any more than that.
Ah well, I’ll say my part, and be done with it.
Free Market Fundamentalism has made profitable choices the sole moral calculus of business. Corporate structure has ensured short-term profits are more desirable than long-term sustainability.
It’s a sick joke to be forced to calculate morality when comparing products to buy, an even sicker joke when moral choices are priced out of availability.
We have to stop treating the market as some jungle that exists for it’s own purposes. We need to re-engage in creating consistent rules that allow sustainable and moral systems, rather than forcing individual consumers to put wage destruction and environmental destruction on the same level as features and quality.
wow, $6.50 a phone and you want to take that away from the men and women working in China factories? wow. I guess there is a little redneck in all of us.
Why not take away the parts made in japan, korea and germany instead? each get more then $6.50. Why did you single out the chinese?
I’m surprised PZ said this. we are all one race living on a rock spinning around in space. I don’t see the point of pointing at a group of people and yelling “they are eating some of our cake!”
I’m happy to pay the $6.50, Heck, I’m an Aussie and none of it is made here. hell, PZ isn’t Australian, maybe i should demand he move over here and become an Aussie before i read his blog again?
Try buying electronics parts from the US. As a Canadian, half the US suppliers won’t sell outside of the lower 48th. Asking politely for Int shipping gets you scornful responses or insults.
then, you buy parts online from China, they bend over backwards for your business, it arrives quicker than USPS and is 50% cheaper.
this is probably slightly OT, sorry
Thoreau would puke.
Looks like manufacturing costs could go even cheaper with robots doing the work instead of people.
Cost of living also has ups and downs: It’s more expensive to eat in New York not just because lots of people live there, but because so much of the food needs to be imported further. People in New York don’t have the option of organic avocados grown down the street like I do… Which means even though I live in an extraordinarily high cost of living area (SF Bay) my food costs are tiny compared to someone living in NYC or the Dakotas; but they’d balk at my cost to commute, cost of drinking water, rent, etc.
And their new CEO got paid about $60m in 2009, while Jobs was only getting stock options the new guy got only primarily stock options with a $800K salary too.
Personally, I think it’s best for companies to be paying their CEOs primarily in stock options – that means their compensation is bigger if they do better over the long term and lesser if they do worse in the long term… Which is better than the signing and bonuses that the banksters tend towards.
I wonder what the average portion of profit vs CEO pay is, anyhow? For this example, it’s about 0.4% but other companies I’ve glanced at are in the teens – but I’m not sure how much that is including VPs.
(Actually, I just did buy parts from China and the same part from the US; the US parts came with some errors but on time and the Chinese parts, which they’d worried had gotten caught up in a container in Hong Kong were a week early and with no noticed manufacture errors.)
Brain Hertz says
Coming to this a little late (been away for the weekend)…
The cost analysis cited doesn’t tell the whole picture, by any means. Many people have brought up the non-recurrent costs such as R&D and so on, but there’s a whole bunch of other per unit costs that have barely been mentioned here, if at all.
Net: as a general rule of thumb, generally expect that the step between BOM cost (bill of materials, ie the complete cost of all unassembled parts) and the retail price is a 3x.
The exact number varies by sub-industry; some markets survive on much thinner margins than others, and some have additional costs, but on the face of it, there’s nothing out of the ordinary about Apple’s costs and I seriously doubt that you’d see much different from any other successful phone manufacturer.
A few points:
1) retailing is very expensive. Warehousing & distribution, leasing store space in an upscale mall, paying retail staff, heating, lighting all cost money. People buying iPhones is what pays for building indoor malls in the first place. If you’re concerned about Chinese workers being exploited, think about it every single time you step inside a mall. That building was built with the product margins made possible by the cheap labor used to manufacture products on sale there.
2) Tech support is expensive. This seems like a detail, but badly written instructions have been known to kill a product. If more than a very small percentage of buyers call the hotline for setup assistance, the margins evaporate and the product is dead (I’ve seen this happen). In any case, providing post-sales support is a cost item you won’t see listed in the BOM.
3) Not every product manufactured gets sold for a profit. Some of the devices fail final test and have to be reworked or scrapped. Some devices get returned (and have to be sent back to the factory and later sold as refurbished). You can’t just take the BOM cost and directly calculate gross margin.
4) Phones are an oddity, in that patent royalties have to be added to the cost, and the linked report doesn’t show this. I know some numbers (but I can’t disclose them, and I don’t specifically know the iPhone numbers) but this is a pretty substantial cost you have to include too.
Bottom line, again: what you see for the iPhone is not at all out of whack. Apple probably has better margins than other high volume manufacturers, because of their perceived value, but there’s nothing in the numbers here that is outside what you should expect for this kind of product.
One more thing: if somebody like Apple wanted to manufacture in the US, who would they get to do it? Good luck finding a contract manufacturer that actually has a facility in the US and is capable of doing a product like this. Why would anybody try to make a business out of that? There’s no money in it any more… as should be obvious from the component costs shown in the linked report, the reason US companies spend their time designing chips, software and hardware is because that’s where all the money is.
Lots of capitalists, cheap labor supporters, free trade, and anti-environmentalists on this board when Apple is the subject under attack. Funny stuff, hehe
Nah, they defend oil companies and businesses like GE with just as much vigor.
Brain Hertz says
That’s a truly awesome spam FAIL…
randolph lopez says
I deeply admire you and your blog. However, you seem illiterate when it comes to economics.
First of all, an apple product carries more than the cost of parts and labor. Where do you leave research, advertising, regulation, patents, infrastructure and all of the many other costs that are involved in developing and manufacturing a product?
Second, why does every liberal/hardcore democrat left-wing idealist always think that corporation or individuals must contrain themselves from making the highest possible profit? They won’t. If Apple could hire 2 year olds to make their iphones, without starting a PR nightmare, I am sure they would. If they didn’t, someone else would and drive them out of the smartphone race. That is the reason why we have taxes and laws so we are not left expecting good will leftovers from giant -or small- corporations.
For the record, I vote democrat.
iPhone App Creator says
I do not even know the way I finished up here, but I assumed this publish was good. I do not recognize who you’re but definitely you are going to a well-known blogger should you are not already ;) Cheers!