Apr 252012

One of the most popular categories of Apple bashing is based on the theme that Apple has too much cash. From the ample cash on hand that Apple enjoys (currently over $110 billion), we get the evergreen “what Apple should do with all that cash” positioning by pundits (buy TiVo) and the more humanitarian cries from misguided groups like SomeOfUs.org that Apple must show us that it’s not a greedy megacorp and invest in its supply chain. My response to all the grousing has always been straightforward:

Engage coping skills on my mark

It’s refreshing to see some people put some actual work into Apple’s embarrassment of riches. In a recent paper, three academic authors from the UK’s Centre for Research on Socio-Cultural Change attempt to put Apple’s use of the Chinese leg of its supply chain in the larger context of global “financialization”. The paper is titled “Apple Business Model: Financialization across the Pacific”. What is financialization, you ask? Aside from being a word my spell check refuses to acknowledge, the term can have a bunch of meanings. The most generic is the movement from a market dominated by people making things to a market dominated by financial institutions. What does this have to do with Apple? Aside from the attention guaranteed by putting the most successful company on the planet in the title, not much. The paper takes an early turn and equates the pressure of financialization with a company’s desire to increase shareholder value by all means at their disposal. In Apple’s case, it means outsourcing the bulk of their kit assembly to China. This is bad because it takes jobs from the U.S. economy and exports them to countries where labor is cheap and prone to exploitation while the company using the practice enriches itself. For purposes of the paper, financialization is a force that causes abuse of foreign supply chains. Financialization bad.

The paper is actually pretty well written, mostly well-cited and dense with context. The point at which the wheels fall off the cart comes when the authors jump on the Apple brand and use it as the poster child for supply chain abuse, a model designed to enrich corporate America with little domestic upside. Then the cart starts on fire and explodes when the authors suggest that Apple could just transplant its supply chain to the U.S. and still achieve awesome margins. I could pick on a bunch of factually incorrect statements leading up to the piece’s money shot, such as the statement “Microsoft the utility software provider directly employs 90,000 globally which is more or less exactly twice the 46,000 employed by Apple whose hardware plus software offering is inherently more labour intensive.” (their business is 90% software and their hardware is assembled in China), but I want to focus on the ridiculous setup for the “domesticating the supply chain” scenario.

I could use the note on 2 of the figures used in the paper, “Figures 5 and 6 are based on industry tear down analysis by iSuppli of the Apple iPhone 4G (sic).”, and stop there, leaving readers to laugh their asses off at the folly of the authors, but I want to be thorough here. So let’s see how our academic friends break out the cost of building the iPhone 4:

I’m sure Apple would be thrilled to be getting 72% margins from their phones; unfortunately they don’t. People who put thought into their work know that the iPhone’s margin is closer to 45% . Where’s the missing 27%? Probably lining the greasy pockets of Apple’s executives. Or it could be the delta between a shitty model and actual research – one of the two. There’s also the issue of how long it takes to make an iPhone. The paper says it’s 8 hours. Citation needed. Then there’s the issue of how much 8 hours costs in labor – as of 2010 it was $14.65, or twice what the paper claims. According to Marketplace reporter Rob Schmitz’s exclusive tour of Foxconn, that price doubles again, as wages double “after a couple of years”. So from the outset, we have a margin calculation that’s over 20% off and the labor component of the paper’s equation is off by a factor of 2-3. Let’s not let egregious math errors cloud the point of this exercise.

So how would Apple’s grossly unnecessary margins look if we plugged in a domestic labor rate?

Not bad, right? Sure, if they took into account anything but the basic wage rate of $21/hour. This number is cited as “the average wage in the US electronics industry” by the paper. No citation. Doing a little digging, you can find that jobs with descriptions like “manufacturing process engineer” typical land in the $28/hour range. And what doesn’t this rate include? I’d bet that it doesn’t include benefits that have to be paid by the employer – be they Apple or the mythical domestic manufacturer. This can add anywhere from 20-30% on top of the base salary. And then there’s the infrastructure costs of moving your entire manufacturing operation to the U.S. If Apple were to move its assembly stateside, I’m sure there’d be plenty of manufacturers willing to partner with them, but it won’t be free. We’ll also have to assume that Apple will have to pay more to have the parts made in China shipped to the U.S. location. Plugging in an “average wage” and using that as the basis of your non-material costs is obscenely irresponsible. Academics.

And what about the jobs leaving China? Manufacturing assembly is a way for agrarian workers in China to significantly improve their lives. What will replace that? I’d wager that the Chinese workers at Foxconn prefer making $14 – $28 a day over pushing dirt with sticks. You’d think the Original Imperialists in the UK would understand some of the upsides to “exploitation”.

Exploiting foreign supply chains is bad. This is the strawman that anyone with an axe to grind against Apple – or aspiring academics looking to gain some notoriety -prop up. Apple is not innocent on all counts, but their commitment to their workers abroad is documented in the numerous audits it conducts and the pay raises it continues to subsidize. The global marketplace is complex and a lot of the messages contained in “Apple Business Model: Financialization across the Pacific” are thoughtful. The point is lost entirely when the authors choose to use an iSuppli breakdown of manufacturing costs and compound the error with incorrect assumptions about wages. The extra step of transposing these costs domestically without consideration for what it would take to support a quarter million new manufacturing jobs in the U.S. takes the work from embarrassingly inaccurate to absurd. If you’re going to bang the Apple drum, at least sharpen your fucking pencils.

Maybe we should call this trend of poorly-substantiated screed against Apple’s supply chain the “financialization of good research”.

  2 Responses to “Now the Academics Are Looking to Cash in on Apple’s Brand”

  1. >>Original Imperialists<<

    LOL! That'd be the Chinese wouldn't it?

    Them or the Egyptians.

  2. My citizenship bias rears its ugly head.

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