Sunday, September 4, 2011

Profits Vs Everything Else

A couple of researchers with the Asian Development Bank Institute studied up on how the iPhone increases the trade deficit with China (PDF). The paper was published last December and updated last May.

In the study they hypothesize the effect of moving the assembly of the iPhone to the US.

An interesting hypothetical scenario is one where Apple had all iPhones assembled in the US. Assuming that the wages of US workers are ten times as high as those of their PRC 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. Selling iPhones assembled by US workers at US$500 per unit would still leave a 50% profit margin for Apple. As iPhone sales increase globally, that profit margin would also increase. In this hypothetical scenario, iPhones, the high-tech product invented by the US company, would contribute to US exports and the reduction of the US trade deficit, not only with the PRC, but also with the rest of world. More importantly, Apple created jobs for US low skilled workers; those who could not be the software engineers needed by Apple. Giving up a small portion of profits and sharing them with low skilled US workers by Apple would be a more effective way to reduce the US trade deficit and create jobs in the US.

And their conclusion in part.

PRC workers added a merely $6.50 to the entire US$179 manufacturing cost of an iPhone and the appreciation of the yuan would only affect the assembling cost. Therefore, the appreciation of the yuan would have very little impact on the total manufacturing cost as well as the retail price of iPhones. It is unrealistic to expect the appreciation would lower the demand for iPhones in the US. In other words, the appreciation of the yuan would not help mitigate the US deficit due to iPhone trade. If US high-tech companies, such as Apple, were willing to share their profits with low skilled US workers by keeping assembly jobs in the US, it would be a more effective way to reduce the US trade deficit than by targeting the exchange rate policy of the PRC.

It may also help reduce China's suicide rate.

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