The end of “Made in China”?

Apple is planning to move the assembly of some of its computers back from China to the US. In fact, it’s probably happened already: the new generation of iMacs, being shipped right now, have labels suggesting they were made in the States.

This might well raise a few eyebrows out there: after all, Apple has been synonymous with the manufacturing of tech products in China. It is perhaps the biggest brand to have its products put together in the Foxconn manufacturing megaplant in China.

And we all know how much cheaper workers are to employ in China than in the US – around 10 times cheaper, on a conservative basis. So, you might well ask, isn’t this decision likely to be a financial disaster? Can Apple really afford a ten-fold increase in costs? What on earth is Tim Cook doing?

The answer might take you by surprise. For the reality is that Apple’s products have never really been “Made in China” in the first place. Take the iPhone. The vast majority of the parts that make up an iPhone (or to be specific the iPhone 3G) come not from China but from, in descending order, Japan, Germany, Korea and the US. Most of these parts – the memory, the display, the processor – are shipped in to Foxconn from elsewhere.

All that really happens in China is the assembly of those bits and pieces into that finished product. As you can see, that manufacturing component is a tiny sliver of the actual value that goes into the manufacture cost (note, of course, that the bulk of the value for Apple still comes in the retail margins it can charge customers after all these manufacturing costs have been taken into account).

What are the consequences of this? Well, first, it’s far cheaper for Apple to manufacture in the US, or indeed anywhere else in the world, than might at first seem to be the case.* According to a paper from Yuqing Xing and Neal Detert Apple could assemble all of its iPhones in the US and even if you assumed a tenfold increase in its costs, bringing the total assembly cost to $68 per unit, the company would still be making a 50% profit margin, given that it would bring the total manufacture cost to $240, compared with the (then) retail price of $500.

Which raises the question of why it hasn’t happened sooner. The answer undoubtedly owes something to the price savings, and perhaps also something to the fact that it’s questionable as to whether the US would have the capacity in the near-term to create the kind of assembly juggernaut you see at Foxconn.

But given the controversy surrounding Foxconn in recent years, and its negative effect on the Apple brand, it’s more than feasible that the company might decide that sacrificing a few extra percentage points of margin is worth it if it prevents a customer backlash and lasting damage to its brand. I suspect it could move the assembly for most of its products back to the US, turning the conventional wisdom about globalisation on its head.

After all, just think how many positive PR points it would generate to be able to say you’re bringing back manufacturing jobs to Main Street America!

There’s another upshot which is of interest to economists. The way today’s balance of payments statistics work may result in the misattribution of trade to certain countries.

Trade figures basically attribute the full value of an export to the country which assembles it and sends it off on its merry way. Which, in the case of Apple products is, of course, China. The upshot is that the iPhone is responsible for billions of dollars worth of the official US trade deficit with China. However, if you were strictly only counting the added value created by each country along the way, the iPhone should, according to Xing and Detart, count as a net positive for the US trade account.

It highlights an ongoing problem with the international trade figures: that they do not necessarily tell the whole story about international trade. It may well be that the US doesn’t have as big a trade deficit (and hence current account deficit) as is widely thought. And, given that the UK makes some of the components that go into Apple products, the same might well apply to Britain.

* This does of course assume that the components in Apple’s other products come from a similarly wide range of countries as in the iPhone. This seems a pretty reasonable assumption, though you might like to look at the iFixit website for the most recent teardowns of their products.

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