On June 29th, Samsung upped the stakes in their patent dispute with Apple Computer by filing a complaint with the US International Trade Commission. The proposed relief sought in the complaint would be to ban Apple from importing the iPhone, iPad, or iPod Touch into the U.S. The battle between Apple and Samsung began when Apple accused Samsung of ‘essentially copying’ its products when making their Galaxy line of phones and tablet devices. It is a charge that they have also leveled at other smartphone makers such as HTC. Samsung retaliated by accusing Apple of violating five of Samsung’s patents.
Part of the surrealist landscape of the high tech world is that at the very same time that these companies are slapping each other with lawsuits that could threaten their entire means of doing business, they are shaking hands as strategic partners. Samsung is Apple’s sole supplier of the A4 and A5 microprocessors that are the computing core of the very products that they want to restrict! So be assured that the last thing that Samsung wants is to actually cause Apple to build fewer iThings.
Still it is interesting to imagine the consequences of Apple being forced to again have manufacturing inside the U.S. Apple’s U.S. manufacturing ended in 2004 when their Elk Grove plant switched to be a distribution and repair/refurbish center of items made overseas. Currently, almost all of Apple’s manufacturing is performed by Foxconn in China. The question that immediately follows is: How much would an iPad or iPhone have to cost if they used U.S. labor?
The answer, depending on how you approach it, is either not that much more or not at all more.
The first step is to deduce an estimate of how much of the price of an MacBook, iPod, iPad, or iPhone is represented by labor. If the answer is not much, then even quadrupling labor cost would not be a huge impact. According to Apples Q1 and Q2 quarterly reports (covering from Oct 2010 to April 2011), Apple sold an average of 13.5 million of these four products per month, The most common estimate is that Foxconn has 250 thousand employees engaged in assembling Apple products. That means that their factories produce 54 iThings per month per employee. And that is presuming that ALL of Apple’s manufacturing is done at Foxconn, when in fact only the majority is.
I was surprised at low how that number was, Assuming that not every employee is an assembly worker, and that some are involved in testing, maintenance, supervision etc., the amount is still lower than I would have initially guessed. To increase the curiosity, the iPhone, iPad, and iPod have only a handful of components for final assembly. A rate of 54 per employee per month hardly seems like a lean manufacturing operation when you consider that Toyota’s five North American assembly plants have only 22.35 labor-hours per vehicle for an entire car or truck. The difference of course is where labor costs are low, the decision point on when to spend on productivity technology versus just hire more workers changes.
Thanks to a recent raise, Foxconn assembly workers now make $300 dollars per month after a probationary period. That would make the labor cost component of an average iDevice to be about $5.55 on items with an average retail price in the hundreds of dollars.
So the first thing to understand is that any new U.S. Apple assembly plant would look very different on the inside. Pictures of a Foxconn plant shows rows of young workers in clean suits sitting at benches. A U.S. plant would likely be one person at a control console monitoring a bank of robots and requiring only a few minutes of human labor per device at a cost of oh, say, $5.55?
Of course, robotics are not cheap and their cost would need to be recovered in the price of the product. But the presumption that the quantity of labor in a product is an unchangeable property is false. Even if the labor magnitude is less than people presume, if U.S. manufacturing was more economical, Apple (and everybody else) would have never left.
But would it change the price or the profitability? Or put it another way, would the change be of concern to the customer? Does the entry level iPad cost $499 because somebody in the accounting department did a careful cost accounting spreadsheet that happened to reach exactly $499 at the bottom of the sheet, or did somebody in marketing say ‘it needs to be under $500″. I’m inclined to believe the latter. Consequently, if the labor change was not of a magnitude that it couldn’t still cost under $500, the marketing person is still going to say that it needs to be under $500.