Could the iPhone be Assembled in the US?

Besides exchange rates, we consider a hypothetical alternative solution for reducing the US trade deficit with the PRC due to iPhone trade, namely to have all iPhones assembled in the US.

The role of the PRC in the production chain of iPhones is primarily the assembly of all parts and components into the final product for re-shipment abroad. The skills and equipment required for the assembly are very basic and there is no doubt that American workers and firms are capable of assembling iPhones in the US. If all iPhones were assembled in the US, the US$1.9 billion trade deficit in iPhone trade with PRC would not exist. Moreover, 11.4 million units of iPhone sold in the non-US market in 2009 would add US$5.7 billion to US exports.

There are two possible reasons for Apple to use the PRC as the assembly center for iPhones. The first could be because of fierce competition in the smart phone sector that forces Apple to find a low-cost assembly location. In such a situation, Apple would be faced with either a profit margin that is too low to be sustainable, or price-setting such that it would not be able to find buyers. The other possible reason would simply be the profit maximization behavior of Apple and the demands of Apple's shareholders.⁵

As shown in Table 3, the gross profit margin of iPhone was 62% when the phone was launched in 2007, before rising to 64% in 2009 due to reductions in manufacturing costs. If the market were fiercely competitive, the expected profit margin would be much lower and close to zero in the case of perfect competition. Surging sales and the high profit margin suggest that the intensity of competition is fairly low in the smart phone market, and Apple maintains a relative monopoly position. Therefore, the hypothesis that competition drives iPhones' assembly into the PRC does not hold. It is the profit maximization behavior of Apple rather than competition that pushes Apple to have all iPhones assembled in the PRC. The unprecedented globalization and well developed production networks make it possible for Apple to utilize a much cheaper location outside the US to maximize its profits on iPhones.

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.

In a market economy, there is nothing wrong with a firm pursuing profit maximization. Governments should not restrict such behavior in any way. However, corporate social responsibility (CSR) has been adopted as a part of corporate values by many multinational companies, including Apple. It may be an effective policy option to practice CSR by creating jobs for low skilled workers, such as using US workers to assemble iPhones.

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Comment(s)

There are [4] comment(s) for this entry. Post a comment.

1. Dan Lieberman
   (posted 30 June 2011 / 08:39:11 PM)
   
   Commentators indicate that, although IPhone parts and assembly are mostly from foreign manufacture, the IPhone sales, which is profit plus added value, don't degrade the US trade balance. If all sales were from the domestic office to foreign importers, this would be true, but aren't they also from foreign subsidiaries?
   Shouldn't we also consider that the IPhone sales only help Apple's profits and not the US economy? By purchasing IPhones, US workers, who earn little from Apple's manufacture, steer purchasing power from domestic products to a foreign product, making the Apple corporation rich and US workers with increasingly lesser jobs.
2. Jianmang Li
   (posted 25 January 2011 / 12:11:02 AM)
   
   There are two important issues that authors of this research did not take into account.
   
   1. It is not enough to list only the trade data of two countries. The IPhone is export from US to all countries in the world. One interesting example is that it also export to China. Yes US import the IPhone at cost but it export to China at whole sale price.
   
   2. Multinational such as Apple, the internal transfer pricing is of great important. For example, the IPhone are shipped from China to US at production costs. This indeed is trade deficit for US. But if Apple invoice IPhone distributors from US, then this is US export (although in real live the product never leave China) to China which is in much higher price. In this why, the US might well be in trade surplus against China, and the IPhone will also helps US trade in surplus against all countries that import IPhone.
   
   Take all these issues into consideration. The IPhone definitely help US to close the trade deficit against all countries. Depending how many unit are sold and Apple company internal transfer pricing, it well could be the even the trade against China is in surplus. i.e. #Unit sold in China X export price > #Unit shipped from China X cost price. If that is the case, then the conclusion of this work is all wrong. So this work should be redo.
3. Alfred
   (posted 05 January 2011 / 09:21:25 AM)
   
   Yes, we must look at international trade in this new way, in order to keep up with globalization --- the international supply chain and the big geographical footprints of large companies (spanning many nations). We can't just look at simple data on sovereign states anymore, otherwise our thinking will be distorted. Frustrated country policymakers are still using old dials, gauges, and measurements geared towards sovereign states, hence failing to capture the true supply chain picture.
   
   Furthermore, globalization has also given rise to the large corporates as they become more efficient and developed and influential to global economics. It seems large corporates and large industries are now actually driving economies (and hence global trade). Sovereign states are diminishing in stature to just business addresses for the corporates. This excellent paper would also suggest to us that analysis of the global trade should also include the corporate dimension. The sovereign state dimension alone is an outdated way to see the world.
   
4. Thoo Lee Ming
   (posted 17 December 2010 / 12:51:41 PM)
   
   The author presented a very interesting angle to the entire trade deficit issue. Although I am agreeable that profit maximization is critical for the siting of assembly of iPhones to done out in China, I believe there are other critical factors to be considered.
   
   The author has shown that most of the components are manufactured out in North Asia. Hence apart from labour cost, the author should relook into the cost of supply chain; logistics required to move the components across the world, indirectly impacting the time and cost.