How expensive would US-made iPhones be? | Business| Economy and finance news from a German perspective | DW | 23.11.2016
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How expensive would US-made iPhones be?

President-elect Donald Trump has said he will see to it that Apple makes its iPhones at home in the US, and not in China. We take a look at what this would mean in terms of production costs and corporate profits.

Apple develops its iPhones and other products at its headquarters in Cupertino, California. This is where a large part of its 116,000 full-time employees work, among them engineers, designers, programmers and marketing experts. In addition, there are 268 Apple Shops across the US which also employ a lot of people.

However, iPhones are produced in China, just like smartphones from any of Apple's competitors. Production is done in huge factories on the mainland, most of which are owned by two companies headquartered in Taiwan: Hon Hai Precision Industry, also known as Foxconn, and Pegatron. These two firms together produce some 200 million iPhones per year.

On the campaign trail, President-elect Donald Trump had said he would see to it that Apple produces its computers and iPhones at home and not in China, arguing that this would create a lot of new jobs in the US and would help to "make the country great again."

The bill, please!

"Apple asked both Foxconn and Pegatron, the two iPhone assemblers, in June to look into making iPhones in the US," a source had told the Asia Nikkei Review. "Foxconn complied, while Pegatron declined to formulate such a plan due to cost concerns."

"Making iPhones in the US means the cost would more than double," the same source concluded.

An iPhone 7 with 32 gigabites of memory currently costs $649 (616 euros) at Apple stores. According to IHS Markit, manufacturing costs amount to $225 apiece, including some $5 in labor costs.

But Foxconn, as the main producer of the iPhone in China, has made enormous investments in production capacity there. For that reason, it may not be an objective source when it comes to estimating the costs of making the smartphones in the US instead. Jason Dedrick from Syracuse University offers different calculations.

Who bears the costs?

"If the iPhone were assembled in the US (with the parts brought in from outside the US), it would add $30-40 to the cost of manufacturing. Some of this is labor costs, and some of it would be the extra logistics costs involved," Dedrick told DW. "If the parts/components were made in the US, as well as final assembly, it would add at least $80-90 to the cost. This extra cost could be passed entirely on to consumers through a higher price, or Apple might absorb some of the cost and earn a lower profit margin."

Dedrick doesn't believe a complete relocation of production would make sense.

"It would be impossible in the short- to medium run to replicate the infrastructure necessary to make the hundreds of millions of iPhones that Apple sells every year. It might be possible to move assembly of some products to the US, but not the high volume production," he argued.

Advantage China

Dedrick said there were production-base cluster effects in China, because most of the smartphone companies have located their manufacturing there, sharing the same supply chain, including the rare earths required to make key components phones - which are supplied from Chinese mines.

Steve Jobs, Apple iPhone (picture alliance/dpa/J. G. Mabanglo)

Speaking to his biographer Walter Isaacson in 2010, Apple co-founder Steve Jobs claimed that there wouldn't be enough skilled workers available in the US to produce his company's smartphones at home

Moreover, "a company like Foxconn has the equipment, knowledge and experience to ramp up production from zero to millions with the short lead times required for Apple to compete," Dedrick said.

"I really don't know what the costs [of relocating production to the USA] would be. The factories, infrastructure and skills that exist in China have taken a couple of decades and an extraordinary amount of investment by thousands of companies. Replicating it in the US would cost much more," he said.

More robots

Also, it's questionable whether moving production to the US would really create that many new jobs, given that US-based manufacturing would likely be more automated. Even now, with wages in China still low, but rising, there are plans to have robots play bigger roles in the assembly process.

Dedrick is convinced that moving production would not be good for the US. "The biggest winners would be Apple's competitors, who would have a significant cost advantage by staying in China. If Apple loses sales, a lot of well-paying US jobs could disappear, in research & development, engineering, management, marketing, and other fields."

As president, Donald Trump will not be able to force Apple and other companies to produce in the US anyway. But in the election campaign, he toyed with the idea of imposing punitive tariffs of up to 45 percent on China imports.

An NBC journalist said in June such punitive tariffs would run afoul of WTO rules, only to trigger this response from Donald Trump: "It doesn't matter. Then we are going to renegotiate, or we are going to pull out. The World Trade Organisation is a disaster."

As early as the 1980s, then US President Ronald Reagan tried to protect selected US industries from Japanese rivals by imposing drastic import tariffs. But David Fath, an economics professor at North Carolina State University, says that all in all the US had stuck to the rules of a free and open trade policy.

"A US policy of withdrawal from or abrogation of international treaties and commitments in itself would be more troubling and damaging to world economic welfare than any increase in US trade barriers," Flath said. "If international agreements [that include] the US become impossible, the world will become less open and more dangerous. US isolation is a pipe dream of ignoramuses, not an achievable goal."


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