{"id":39067,"date":"2011-12-29T12:00:37","date_gmt":"2011-12-29T17:00:37","guid":{"rendered":"http:\/\/media.lclark.edu\/content\/hart-landsberg\/2011\/08\/31\/the-innovation-trap\/"},"modified":"2011-12-05T01:48:28","modified_gmt":"2011-12-05T06:48:28","slug":"the-innovation-trap-how-the-iphone-isnt-saving-america","status":"publish","type":"post","link":"https:\/\/thesocietypages.org\/socimages\/2011\/12\/29\/the-innovation-trap-how-the-iphone-isnt-saving-america\/","title":{"rendered":"The Innovation Trap: How the iPhone Isn’t Saving America"},"content":{"rendered":"

For the last week of December, we\u2019re re-posting some of our favorite posts from 2011.<\/em><\/p>\n

\u2014\u2014\u2014\u2014\u2014\u2014\u2014\u2014<\/p>\n

The US economy faces a number of challenges\u2014among them a lack of job creation and an ever-growing trade deficit. Many policy-makers believe that encouraging business innovation is the best response to these particular challenges. Sounds plausible but experience suggests otherwise.<\/p>\n

The best example of why simply encouraging business innovation is not the answer for our employment and trade problems is Apple and its iPhone.<\/p>\n

The iPhone was introduced in 2007 and has been incredible successful.\u00a0 U.S. sales soared from 3 million units in 2007 to over 11 million in 2009.\u00a0 Global sales topped\u00a025 million in 2009.<\/p>\n

While the iPhone is\u00a0designed and\u00a0marketed by Apple,\u00a0almost all the phone\u2019s\u00a0components\u00a0are produced by foreign companies operating outside the United States.\u00a0 These components are then shipped to China where Foxconn, a Taiwanese company, oversees their assembly and\u00a0their export to the United\u00a0States and other countries.\u00a0 As a result,\u00a0the iPhone generates few jobs in the United States.<\/p>\n

Two economists, in an Asian Development Bank working paper<\/a>,\u00a0examined\u00a0the iPhone 3G production process in some detail.\u00a0 The table below, taken from their study,\u00a0highlights the main suppliers and the costs of the components\u00a0they produce for a single phone.\u00a0 Most of the components are\u00a0supplied by Japanese, South Korean and German firms, although there are\u00a0also some U.S. suppliers (although who knows where they actually produce their compnents).<\/p>\n

The total component cost\u00a0of an iPhone in 2009 was $172.46.\u00a0\u00a0\u00a0 Workers in China\u00a0assemble the iPhone,\u00a0but because their wages are\u00a0low the assembly cost per phone (labeled manufacturing costs in the table below) is\u00a0quite small,\u00a0only $6.50 a phone.\u00a0 The total production cost per phone is $178.96.<\/p>\n

\"costs.jpg\"<\/a><\/p>\n

Because the iPhone is assembled in China\u00a0all sales in the U.S. mean\u00a0an increase in Chinese exports (even though the phone is largely composed of inputs produced outside of China) and an increase in U.S. imports.\u00a0 In 2009, China exported more than $2 billion worth of iPhones to the United States.\u00a0 Thus, the iPhone, because of the Apple\u2019s production strategy, also adds to the U.S. trade deficit.<\/p>\n

Apple is not alone in embracing China as its production base.\u00a0 China is now the world\u2019s largest exporter of manufactured goods. And, as the chart below<\/a> shows, the share of Chinese exports that are labled high technology is\u00a0growing.\u00a0\u00a0This trend has encouraged many analysts to claim that the U.S. is now locked in\u00a0fierce economic competition with China.<\/p>\n

<\/a><\/a>\"hitech.jpg\"<\/a><\/p>\n

However,\u00a0as we see next<\/a>, more than\u00a080% of\u00a0China\u2019s\u00a0high technology exports are actually produced by foreign companies operating in\u00a0China.\u00a0 Moreover, these foreign companies have significantly increased their control over this production.\u00a0 In 2002\u00a0foreign owned firms that were 100% foreign owned (which means that they had no Chinese partner)\u00a0accounted for only 55% of Chinese\u00a0high technology exports.\u00a0 In 2009 they accounted for 68%.<\/p>\n

<\/a><\/a><\/a><\/a>\"foreign-owned.jpg\"<\/p>\n

Why do so many transnational corporations choose to locate production in China?\u00a0 The answer is obvious: profits. Apple again serves as a good example.\u00a0 The table below, taken from the Asian Development Bank working paper cited above,\u00a0shows Apple\u2019s profit-margin on the iPhone.\u00a0 In 2009 it was a whopping big 64%.<\/p>\n

<\/a>\"profits.jpg\"<\/a><\/p>\n

Struck by the size of Apple\u2019s\u00a0profit-margin, the authors of the Asian Development working paper considered whether the iPhone could reasonably be made in the United States.\u00a0 As they note:<\/p>\n

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.<\/p><\/blockquote>\n

For the sake of discussion, they assumed that\u00a0assembly line wages in the U.S. are\u00a0ten times higher than\u00a0in China.\u00a0\u00a0 Given that Chinese production workers earn roughly $1 an hour, that is not an unreasonable assumption.\u00a0 The higher wages would mean that the total assembly cost per phone would rsie to $65 and the total manufacturing cost would approach $238.\u00a0 If Apple continued to sell the iPhone for $500, the company would still earn a very respectable 50% profit margin.<\/p>\n

Moreover, as the authors point out:<\/p>\n

In this hypothetical scenario, iPhones, the high-tech product invented by the U.S. company, would contribute to U.S. exports and the reduction of the U.S. trade deficit, not only with the PRC, but also with the rest of world. More importantly, Apple created jobs for U.S. 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 U.S. workers by Apple would be a more effective way [than depreciation of the exchange rate] to reduce the U.S. trade deficit and create jobs in the United States.<\/p><\/blockquote>\n

Of course, shifting production to the United States would mean that Apple would earn less money and there is little reason to believe that the company is prepared to\u00a0sacrifice its profits for the good of the country.\u00a0 If we want to tackle our employment and trade problems were are going to have to do more than promote more attractive conditions for business.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

The US economy faces a number of challenges\u2014among them a lack of job creation and an ever-growing trade deficit. Many policy-makers believe that encouraging business innovation is the best response to these particular challenges. Sounds plausible but experience suggests otherwise.
\nThe best example of why simply encouraging business innovation is not the answer for our employment […]<\/p>\n","protected":false},"author":1853,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[36,64,1772,3920,290],"class_list":["post-39067","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-economics","tag-globalization","tag-nation-china","tag-nation-united-states","tag-sciencetechnology"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/posts\/39067","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/users\/1853"}],"replies":[{"embeddable":true,"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/comments?post=39067"}],"version-history":[{"count":7,"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/posts\/39067\/revisions"}],"predecessor-version":[{"id":42730,"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/posts\/39067\/revisions\/42730"}],"wp:attachment":[{"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/media?parent=39067"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/categories?post=39067"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thesocietypages.org\/socimages\/wp-json\/wp\/v2\/tags?post=39067"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}