An old rule states that you are a mere six degrees of separation away from anyone else on the planet. For some people, however, the world is even smaller. So let me propose an amendment: You are only one relative, friend or acquaintance away from one of the late Steve Jobs’ creations.
You may be browsing this on a new iPad, one of the 30 million Apple sold last year. Or perhaps you are viewing it on an iPhone screen. Maybe your children are reluctantly putting away their iPods, of which Apple sells 5 million worldwide every three months (a remarkable figure, but half the 10 million Jobs and his colleagues were shifting each quarter in 2008 and 2009).
And if you have really never done any of those things, rest assured the British prime minister has.
“The cool thing is that I now control my iMac from the iPad, to play out through the speaker,” British Prime Minister David Cameron boasted a few months after moving into Downing Street. It was one of those canny-to-the-point-of-irritating references he used to specialize in; a flash of his real-world accreditation.
As Cameron knows, Apple is a byword of everyday sleekness. Yet there is another way of viewing the company. Focus instead on the way it does business, and all those iPhones, iPods and iPads are not just exemplars of design and user-friendliness: They are devices that destroy Western jobs. And they do so needlessly, because if the California-based giant manufactured its goods in the US rather than China, it could still make profits that would be the envy of every other US business.
This is, I know, an unorthodox position. When journalists or politicians discuss the way that Western companies make goods in China, or anywhere else in Asia, they almost always start from the premise that this is how business is done nowadays. This is the commonly accepted logic of globalization, which enables companies to keep their costs down, which allows the ordinary Westerner to spend less money shopping, and which also offers poorer nations in the east to develop their economies. Expensive shirts might still be made in Italy, high-end kitchens might be assembled in Germany — but the future of mass production inevitably lies in China.
Apple has both made and benefited from that argument. In January, the New York Times ran a lengthy investigation of the technology firm’s manufacturing processes, which began by disclosing a conversation last year between Jobs and US President Barack Obama. The president asked why Apple products could not be made in the US. The most admired man in Silicon Valley was reportedly blunt: “Those jobs aren’t coming back.”
Very few people argued with that assessment. In other ways excellent, the New York Times’ piece had an elegiac tone, conveyed by the headline How the US Lost Out on iPhone Work. And the following commentary went on in this it’s-not-you-it’s-me vein. It was not Apple’s fault it did not hire Americans to make its goods: It was the US’. US workers weren’t skilled enough; not enough of them were trained in engineering.
Such national self-abasement has the merit of at least feeling like a policy, but it is debatable whether on its own it really will pull in big employers. Apple, after all, used to base its manufacturing in the US. Jobs used to boast about how the Mac was “a machine that is made in America.” And according to new research by the Center for Research on Socio-Cultural Change (CRESC), it is clear that it would not only be affordable for Apple still to make its goods in the US, it would remain hugely profitable.
Using a mix of Apple’s own filings and industry data, the academics broke down the cost of making one product in particular: the wildly popular 4G iPhone. Assembled in China, the total cost of putting together just one phone was US$178.45. Compare that with a sale price (including downloads) of US$630 and Apple makes US$452 on each phone: a gross margin of 72 percent.
Chinese labor accounts for a tiny proportion of the company’s costs: US$7.10 for each phone, which accounts for about eight hours of assembly. So what would it cost to make the same iPhone in the US? The CRESC team took the average wage in the US electronics industry of US$21 per hour and calculated that the total production cost would increase to US$337.01. That is a big jump — but it still leaves Apple with a gross margin of 46.5 percent on each iPhone — a level that CRESC’s Sukhdev Johal estimates would probably still make it the most profitable phone in the world.
So: two models of making one of Apple’s most popular products, and two models for distributing the profits. The made-in-the-US model still leaves the California giant with a profit margin that most companies can only dream of, but would create hundreds of thousands of manufacturing jobs in the US to boot. That may strike you as laughably naive, but it is more akin to enlightened self-interest: Just think of the way Henry Ford raised wages so Ford workers could buy his cars.
The made-in-China model, on the other hand, has carried no such social benefits, either in Apple’s home country or in China. Last year, Apple built up cash reserves of US$100 billion — more than the US government. Indeed, it was so much money that the company was stumped how to dispose of it. Tim Cook, who is now Apple’s chief executive, announced a few weeks ago that the company would begin buying back shares and paying dividends to investors. Among other people who benefited from this arrangement was Cook himself, who was awarded US$376.3 million in Apple stock when he took over last year. That pile of shares is now valued at around US$634 million. The people who win from the made-in-China model are big investors and top executives.
In the case of Apple, outsourcing manufacturing is not about keeping costs to customers down — they are still paying huge prices for the latest handset or tablet computer. Nor is it about the company’s survival: It would still do tremendously well were it to bring those factories back home. No, in the case of Apple, moving jobs offshore has become a way of directing ever more money to those at the top of US society.
This is not just my conclusion, or that of the CRESC team; it is backed up by the Asian Development Bank (ADB). In a 2010 study of an earlier model of the iPhone, ADB researchers concluded: “It is the profit maximization behavior of Apple rather than competition that pushes Apple to have all iPhones assembled in China.”
This division of labor has certainly not helped China very much. Foxconn, which makes those iPhones, has to work to an incredibly tough contract with Apple that forces it to keep all costs to a minimum.
This surely helps account for why Foxconn, whose client list is almost a Who’s Who of the smartphone sector, has had repeated troubles with its workforce, including at least 18 suicide attempts by workers in 2010 alone. After that, and the terrible publicity that followed, Apple put pressure on its subcontractor to raise workers’ pay and improve conditions. However, it did not take the most obvious route of doing so, which would be: Pay more to Foxconn, and direct it to use that surplus to increase wages.
The reason for concentrating on Apple in this fashion is not because it is a terrible company, but because it is an exemplary one. It has become the business success story of our age: the firm others want to emulate, and prime ministers want to name check. And yet there is a paradox here. For all the stylishness and sleekness of its products, the Apple business model is an unattractive and, over the long term, possibly an unsustainable one. It subcontracts work that offers the Chinese little prospect of economic development, while at the same time selling to Americans and others products they want but increasingly do not have the jobs or incomes to buy so readily.
Apple’s rise to primus inter pares in the business world has coincided with a wider social trend: a general anxiety about the decline of the West. Some of the reasons for why the US, Britain and others are on the slide are large and abstract, but some of the factors are smaller and closer to hand, like the iPhone in your pocket or the Mac waiting for you at home.
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