Pursuant to a discussion that has been going on in the comments of one of my posts of yesterday, I decided to research the costs of manufacture and labor as a proportion of costs of an iPhone 4. As it turns out that’s fairly easy to come by.
I presume you’re aware that the iPhone 4 is manufactured in China by Foxconn, a Taiwanese company with manufacturing facilities on the mainland. Foxconn, like many Taiwanese companies, is a a private label manufacturer. It makes products that are sold by Apple, Dell, and HP. The iPod, iPhone, and iPad are all made by Foxconn in their Shenzhen facility. I’ve heard estimates of everything from 300,000 to 1 million workers at that facility alone.
Based on teardowns, the parts for an iPhone 4 cost $188. If you’d like a complete analysis of an iPhone 4 teardown, there’s a good one here, replete with pictures.
The labor cost is for a single iPhone is estimated to be $6.54.
So, in total, what Apple pays for an iPhone is about $200, a third of its retail cost. Pretty good.
A number of things struck me about those figures. First, labor costs can’t be chaffered down much. Even if Hon Hai moves out to the provinces where labor costs are purportedly 20 to 30% lower (!) the effect on Apple’s margins will be minimal.
Second, I wonder what the labor costs of manufacturing them here would be? Ten times more? Twenty times more? I honestly have no idea. Even at twenty times more (which seems incredible to me given the experience in other industries) that still shouldn’t make the difference between a product that’s profitable and one that isn’t. It might make a difference between a product that’s profitable and one that’s obscenely profitable.
And obscene is precisely the right word. China doesn’t have social insurance, modern healthcare is only available in the big cities, it’s polluting its air, water, and soil at a ferocious rate, and the working conditions in that Shenzhen plant are wretched—the suicide rate there made worldwide news only recently. Business as usual with China really should not continue.
China is sitting on well over a trillion in foreign reserves. It should be spending some of that on its people and IMO it’s worth rocking the boat over. The status quo means that a relative handful in China become fabulously wealthy while conditions for the poor continue to deteriorate.
We really need to get on the backs not just of the Wal-Marts but on the Apples, Dells, and HPs as well. If U. S. companies are going to sell products in the U. S. that are made in China, shouldn’t we be insisting that those products be made under humane conditions and that the workers who make them be paid a decent wage?
I don’t think you priced the real ecosystem.
Consider what happens if that iPhone is sold retail, at an Apple flagship store. You may have, as I did (2 years ago, with my iphone 3g) three shop people helping you. There, in 15 minutes, you just exceeded that Chinese labor cost.
Re. getting on China, that came up here, and I made the same comment I have here. Reducing it down, to rich, fat, and lazy countries really have a right to tell poor countries not to work so hard?
I’m not blaming the Chinese people for working hard; I’m blaming their leaders for allowing the country to be run into the ground and us for tolerating it.
We have the same right we have to tell the ousted president of Sierra Leone to leave or the Sudanese government to stop exterminating their own people. If decent people don’t speak out then the bad guys don’t just win, they win easily.
As for the rich being the ones doing the lecturing, that’s usually how social improvements start — good people with the time and the means to take on an issue. If we leave it to the workers it tends to come in the form of explosive riots or strikes that are dealt with brutally.
Besides: we are so intertwined with China that we have an interest in their stability. We need them to make a transition to a more stable government and economic system.
I’ve been reading posts here and elsewhere that have come up in the past few days (I’m behind in my reading), and while not wholly on topic for this post, I wonder if the only thing that can “fix” the US economy is a significant rise in transportation costs.
I don’t know if the attribution is accurate, but supposedly Henry Ford (the first one) said that he paid his workers well because there needed to be *someone* who could afford to buy the cars he made. Now, with low transportation costs, there is no need to pay workers well enough so they can afford to buy the products they make because you ship the products to where people have money to buy them, but eventually, if enough jobs are lost in the currently affluent nations, then no one will be able to buy mass marketed products.
I wonder sometimes if historians 100 years from now will say that the decline of the US economy was in a large part due to the rise of the container ship.
Dave,
$6.54 is the labor cost for assembly of an iphone, it’s not the labor cost for an iphone. To get the total labor cost, you’d need to know the labor costs for: each part, the resources than went into each part, the labor transport costs, etc. It would be interesting to see what the cost would be if everything was sources from the US.
On top of all that, $200 is not the total cost to Apple as they had to pay for the design and engineering, the software, plus all the usual business expenses like advertising, packaging, sales and marketing, etc. I paid $399 for my Iphone 4 (a 32GB version) – No doubt they make a nice profit, but it’s probably less than the $200 difference between the manufacturing costs and what I actually paid.
Andy:
That’s not how the labor costs of a product are generally calculated. The labor cost of the components are bundled into the cost that is paid for the components. Assembly costs are the important thing—if the product were assembled in the U. S., they’d pay no more for the labor costs of the components.
And all of those other costs of sales aren’t usually added into the cost of the item when calculating its cost, either.
Dave,
Maybe that’s not how labor costs are generally calculated, but the labor portion of each component will nevertheless impact the total cost. How many of those components are made in the US? How much more expensive would the phone be if everything was manufactured in the US?
Wait, I have heard a few people declaring the Chinese growth unsustainable, but they are in the minority.
Are you saying that their standards of “reasonable labor” aren’t buying them huge growth?
On the whole, I’m going to say anyone using iPhones or similar as a model for what’s wrong are barking up the wrong tree.
The iPhone is right. It generates huge revenues and jobs within this country. Take a lot at your phone bill.
No, the problem is that as “iconic” as the iPhone has become to this discussion, it is not part of the “missing jobs” problem. For that look at things that have less stateside footprint. Look for something without high commission retail sales, secondary software markets, and huge service contracts.
Look at the boring junk at WalMart: toasters, mops, decorative items.
I think it might be worth considering James Fallows’ argument that the Chinese comparative advantages is not measured in labor cost, but in speed and flexibility. In China you can create a new assembly line in a weeks, if not days. The U.S. may not be able to “machinize” our way to comprable labor costs, unless the machines can be modified quickly and significant changes don’t trigger regulatory oversight.
You guys know there’s always a “China,” right? Just in my lifetime “China” was the USSR, OPEC, Japan and the EU.
There’s always some super-villain out there that’s going to outwit us, buy our crown jewels, outwork us and so on. In retrospect it’s always obvious that it wasn’t going to happen. Obviously the USSR was backward and under the thumb of a genuinely asinine political regime, obviously OPEC would eventually crumble, obviously Japan was a small, culturally isolated country with an aging population, obviously the EU was never going to be as smoothly integrated as they hoped.
Here’s what I think is obvious about China. They are poor. Dirt poor. There’s money in Shanghai and Hong Kong, but most of China might as well be Kazakhstan. They suffer from an imbalance between rural and urban that makes Nebraska and Manhattan look like identical twins. They are poisoning their rivers and air. They offer no freedom of expression or democratic political recourse while at the same time the poor out in the provinces can see Chinese billionaires and free Americans and South Koreans and understand for the first time just how screwed they are. They have one hope for continuing stability: an endless upward growth rate that is never, ever going to happen because as we’ve learned from our own real estate market, nothing goes up forever.
They have potential trouble on every border: Vietnam, North Korea, Russia, the Stans, India. And then there’s history. Show me where and when China was ever a dominant power in the world at large. It’s been a long, long time. And it’s been a long time because China is a barely-governable mess and has been for centuries. It is still a barely-governable mess.
I’m not saying we shouldn’t react, just that we shouldn’t freak out.
Always a china in a different sense – the place to be in this decase
Decade, stupid phone