In writing about the the whole incident a while back regarding Apple’s factory workers in China, Dave Pinson makes the following point:
I can see how it might be tough for a company like Dell to manufacture low-margin laptops in the U.S., but doesn’t Apple have high enough profit margins that in can afford to manufacture some of its gadgets here? If New Balance can make some of its high-end sneakers here, why can’t Apple make some iPads and iPhones here? It can’t be for a lack of workers — Apple’s home state of California has a 12.9%. unemployment rate. Maybe it would mean lower profit margins — or maybe Apple could pass on the higher labor costs to its cult-like customers — but it still seems worth trying.
I’d actually be really curious to know what the markup would be if they made in in California. Or, for that matter, South Carolina. You would think that if anyone could afford to absorb some of the costs, it would be Apple. They remain an American company, though, and presumably do the vast majority of their design and R&D work here. My phone is an HTC, which is full-on Taiwanese, though they also do work in the US and are hiring from Washington to North Carolina. HTC actually used to be an English acronym High Tech Computers.
Incidentally, I got a couple new watches over the last couple of months. One I wrote about here. The other is a brown watch from the US Polo Association (though as near as I can tell, the watch doesn’t have anything to do with polo, and is not exactly the fine watch one might expect from our polo-playing elite, nor is it a sportsish watch). It has a little American flag on it. Want to guess where it wasn’t made? The watch was really cheap, so I wouldn’t expect them to make it here. But it was made in… Japan. That I don’t get. It can’t be that much cheaper to make them in Japan than to make them here, can it? I understand that with Made in China or Made in Thailand, there are tradeoffs. Maybe good tradeoffs, maybe bad ones. But it saves them money and so presumably it saves you at least a little bit. But… Japan?
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I touched on some of these issues in a Seeking Alpha article more recently (“What David Brooks doesn’t get about unemployment”), where I quoted former Intel chief Andy Grove on the importance of keeping more electronic manufacturing in the U.S. Grove noted that some of what gets dismissed as “commodity” manufacturing forms the basis for new industries.
Re Apple specifically, I just checked my girlfriend’s iPod Touch and it says “Designed in California. Assembled in China”. The more I think about it, the more sure I am they could profitably manufacture some stuff here. An interesting meta-point about Apple is how they are immune from criticisms other companies would face if they acted the same way. Imagine the uproar if Ford announced it would continue to design cars in the US, but outsource all of its manufacturing?
You would think that if anyone could afford to absorb some of the costs, it would be Apple.
One could argue that Apple needs the high markups in order to avoid becoming barely profitable like the rest of the industry, and to ensure that the company remains sexy to shareholders. I suspect that the bad old days before the return of Jobs has scared the company somewhat and has probably left a legacy in which management wants to have high profits and a large pool of cash. The theory that Apple can pass on higher prices at the time of purchase is a bit dubious especially when there are complaints of a so-called Apple tax, and Apple fans routinely complain about the pricing, especially those overseas.
The more I think about it, the more sure I am they could profitably manufacture some stuff here.
I suspect the problem is that they like the hand-off approach that they can take to manufacturing. They can design a product, spec the parts necessary and basically hand it off to the lowest bidder to deal with. In contrast, in the US, you’d have to actually own a plant, employ the workers directly, and pay for their fringe benefits, while meeting basic environmental standards.
In theory, Apple can, but there’s little to no incentive to them to do so, and arguably, it’s a disincentive. One could make an argument that in American capitalism, one needs big profits to be remotely attractive to shareholders in order to push the stock price upward. Otherwise, holding stocks is useless especially without dividends.
Different company (GM), but I guess that was Michael Moore’s point in “Roger and Me.”
“As he returns, General Motors announces the layoffs of thousands of Flint auto workers, the jobs of whom will go to cheaper labor in Mexico. GM makes this announcement even though the company is experiencing record profits.”
http://en.wikipedia.org/wiki/Roger_%26_Me
I’m not sure I understand why asking other people to throw away money is so widely regarded as a reasonable thing to do.
“I suspect the problem is that they like the hand-off approach that they can take to manufacturing. They can design a product, spec the parts necessary and basically hand it off to the lowest bidder to deal with.”
That’s not the way Apple works at all. They have extremely high standards (which means it’s impressive that Foxconn has been able to meet them). I’m sure they could find cheaper bidders than Foxconn in poorer countries than China, but cost isn’t the only issue.
“Different company (GM), but I guess that was Michael Moore’s point in “Roger and Me.””
GM still had plenty of manufacturing in the US at that time though. Apple has none.
“I’m not sure I understand why asking other people to throw away money is so widely regarded as a reasonable thing to do.”
Who’s asking anyone to throw money away?
“[D]oesn’t Apple have high enough profit margins that in can afford to manufacture some of its gadgets here?…Maybe it would mean lower profit margins — or maybe Apple could pass on the higher labor costs to its cult-like customers — but it still seems worth trying.”
That would be asking them to throw money away, would it not?
“As he returns, General Motors announces the layoffs of thousands of Flint auto workers, the jobs of whom will go to cheaper labor in Mexico. GM makes this announcement even though the company is experiencing record profits.”
The intended takeaway here is that GM should throw money away.
To clarify, I don’t mean “throw money away” in the sense of literally running an operating loss. But if you give up the opportunity to make a lot of money and instead make a little money, that’s throwing money away.
Assuming that you get nothing in return, of course. Obviously if you quit your 100-hour-a-week job for a nine-to-five job that pays less, you’re trading money for leisure, not throwing money away.
“That would be asking them to throw money away, would it not?”
Thanks for the explication, not sure who you were referring to there. Let me answer your question with a couple of questions: When Henry Ford decided to pay his assembly line workers the then-above market wage of $5 per day, was he throwing money away? Or did he make more money in the long run by expanding the market for his products?
David, as Dave points out, Apple’s “style” actually lends itself to American production. As does their business model, which is high margins on (historically) lower sales. So while Dell would take a huge hit (low margins on high sales), it would be lesser with Apple. If any company could afford it and remain insanely profitable, it’s Apple.
Brandon, people ask me to throw money away all the time! For this charity hospital or that political candidate. Applying pressure (even if weak tut-tuts) to do “the right thing” seems hardly out of bounds.
A couple other things. Steve Jobs is big on a tax holiday on the idea that it would “provide jobs.” Advocating such a policy makes looking at where the jobs are allocated relevant. Is providing American jobs a priority? Or are dividends?
Second, hometown loyalty. I’m not nearly on “Buy American!” as are other people, but it is something that I am willing to pay some of a premium for. If HTC had a completely American-based competitor that offered me the same sorts of phones for a marginal mark-up, I’d consider it.
There are limits, of course. Which is why it does matter how much production in America would increase costs. If the answer is enough, I can pretty easily shrug off the notion and move on.
Dave:
The first quote was from Dave Pinson in the excerpt at the beginning of the post, and the second was from Michael Moore in Kirk’s comment.
The idea that Henry Ford succeeded by paying his workers enough to buy the cars they made doesn’t pass the mathematical laugh test. If he increased workers’ wages by, say, $1000 a year, and each worker went out and spent that $1000 on a car, Ford would get the $1000 back, but he’d lose money on the parts and capital cost. And that’s assuming that every worker actually goes out and buys a car, which is unlikely.
Paying higher wages paid off for Ford because it allowed him to hire and retain the best workers, not because it was some sort of economic perpetual motion machine.
And it’s not necessarily the case that Apple could do the same thing by moving manufacturing to the US. In a given labor market, paying higher wages will allow you to select higher-quality workers, but moving from a low-wage market to a high-wage market doesn’t necessarily mean that you’ll get higher-quality labor. In fact, you may get lower-quality labor, since the best workers in China are much cheaper than average workers in the US.
Will:
Fair enough. But taking jobs away from poor Chinese people to give them to relatively well-off Americans is a strange charity indeed.
Brandon,
“The idea that Henry Ford succeeded by paying his workers enough to buy the cars they made doesn’t pass the mathematical laugh test. If he increased workers’ wages by, say, $1000 a year, and each worker went out and spent that $1000 on a car, Ford would get the $1000 back, but he’d lose money on the parts and capital cost. And that’s assuming that every worker actually goes out and buys a car, which is unlikely.”
You’re neglecting the knock-on effects of Ford’s high wages (the effects it had on other manufacturing wages, the additional jobs created by the spending of Ford employees, etc.). His strategy was to build a car the masses could afford to buy, and paying his workers a higher salary was part of that strategy. It resulted in lower profit margins per car initially, but higher revenues and profits overall for Ford.
You’re right that there might not be similar benefits to Apple manufacturing in the US today.
There is something of a collective action problem here, in that if there were more high-paying manufacturing jobs in the U.S., there would be more domestic demand for products made by U.S. companies, supporting more jobs here, etc., but individual companies are generally going to try to minimize their labor costs, including by offshoring manufacturing. For that reason, in the article I alluded to above, Andy Grove suggested levying a tax on the product of offshored labor, and using that to help fund business expansion in the US.
Dave:
His strategy was to build a car the masses could afford to buy, and paying his workers a higher salary was part of that strategy.
Two different things entirely. Creating a mass-market version of a product which had previously been a niche luxury product is a perfect valid business strategy.
You’re neglecting the knock-on effects of Ford’s high wages (the effects it had on other manufacturing wages, the additional jobs created by the spending of Ford employees, etc.).
I’m not neglecting them, it’s just that they either don’t exist or are so small as not to be relevant. Ford employed about 12,000 workers at the time. An extra $2.50 a day would amount to about $9 million per year. This with a GNP of over $40 billion. That would be like a $3 billion economic stimulus program today.
And Ford wasn’t actually adding money to the economy. Additional money he paid in wages, initially, at least, would have come straight out of his pockets and his investors’. For his workers to have more money to spend, he’d have to have less.
Look at it another way: There’s nothing about these knock-on effects that’s contingent on the extra money going to Ford’s workers specifically, is there? I mean, if Ford had just walked around Detroit every weekend and handed out $1,000 each to 180 random people, do you think that would have worked just as well?
There is something of a collective action problem here, in that if there were more high-paying manufacturing jobs in the U.S., there would be more domestic demand for products made by U.S. companies….
You have a more plausible argument there, but I still don’t think it’s right. Trying to mount a one-man stimulus program is just spitting into the wind. There’s no way you’re going to get more than a tiny fraction of your original investment back. But even if you get the whole industry in on it, it’s still mostly just a variation on the broken window fallacy. You see the extra money in the hands of the American workers, but you don’t see that most of it is coming straight out of the pockets of American investors.
Moving more manufacturing capability stateside may specifically benefit manufacturing workers, but it hurts consumers who aren’t manufacturing workers, and it won’t expand the market for the company’s products.
Incidentally, it turns out I was wrong about Ford. He used a manufacturing process that didn’t depend on high-quality labor, and he specifically stated that he was not interested in hiring more skilled workers. It was actually done to address severe problems with turnover, absenteeism, and morale, and productivity increased dramatically as a result. There’s a paper by Larry Summers on the topic here.