Turn over your iPhone and you'll see that it's "assembled in China." But that doesn’t mean that most of the profits or revenue go there. In fact, only about $6.54 (a little more than than 1%) of the full $600 retail price of an iPhone goes to China and more than 60% goes directly to Apple (AAPL) and other American companies and then indirectly to American workers (see chart above), according to a recent "teardown report" by iSuppli that was featured in a New York Times article yesterday.
If you follow the supply chain for the Apple iPhone 4, you'll find that it was:
"...designed by Apple engineers in the United States, sourced with high-tech components from around the world and assembled in China. Shipped back to the United States, the iPhone is priced at $600, though the cost to consumers is less, subsidized by AT&T in exchange for service contracts.
“China makes very little money on these things,” said Jason Dedrick, a professor at Syracuse University and an author of several studies of Apple’s supply chain. Much of the value in high-end products is captured at the beginning and end of the process, by the brand and the distributors and retailers. According to the latest teardown report compiled by iSuppli, a market research firm in El Segundo, Calif., the bulk of what Apple pays for the iPhone 4’s parts goes to its chip suppliers, like Samsung and Broadcom, which supply crucial components, like processors and the device’s flash-memory chip. The total bill of materials on a $600 iPhone — the supplies that go into final assembly — is $187.50, according to iSuppli (see chart above).
The least expensive part of the process is manufacturing and assembly. And that often takes place here in southern China, where workers are paid less than a dollar an hour to solder, assemble and package products for the world’s best-known brands.
There are several important points here:
1. We often assume that "assembled in China" means that 100% of the product's content and value is produced or "captured" in China, when in this case only 1% of the iPhone's value is produced by China, and more than 60% of the iPhone's retail value is produced by American engineers, designers, and other IT professionals at Apple, and also at other U.S. companies like Intel (INTC) and Texas Instruments (TXN) that provide some of the components.
2. Assuming the U.S. government counts an iPhone as a $600 import from China (or some lower wholesale value) and increases the trade deficit with China by $600 - even though China contributes only about 1% to the final value - our $227 billion trade deficit with China could be significantly overstated.
3. The article also points out that labor costs are starting to rise in China's "dominant electronics manufacturing center in Shenzhen toward lower-cost regions farther west, even deep in China’s mountainous interior." In other words, China's workers are receiving significant benefits from globalization and trade with the United States - "buy an iPhone in the U.S. and you're helping a worker China get higher wages or a bonus." I thought trade, globalization and capitalism were supposed to produce bad outcomes for workers, who get exploited by greedy employers?
4. At least in the case of the iPhone, a strengthening Chinese currency or rising inflation or wages in China wouldn't have much effect on the retail price here, since the cost of assembly is so insignificant to start with - $6.54 per $600 unit. Further, production will shift towards lower-cost regions of China as the article mentions, or production will shift out of China to Vietnam and other markets with lower wages.
5. To paraphrase what economist Hal Varian wrote in 2007 about the iPod:
The real value of the iPhone doesn't lie in its parts or even in putting those parts together. The bulk of the iPhone's value is in the conception and design of the iPhone. That is why Apple gets $360 for each of these iPhones it sells, which is by far the largest piece of value added in the entire supply chain. Those clever folks at Apple figured out how to combine hundreds of mostly generic parts into a valuable product. They may not make the iPhone, but they created it. In the end, that's what really matters.
This is what the NY Times meant when it said that "Much of the value in high-end products is captured at the beginning and end of the process," in this case by Apple and its distributors and retailers.