Archive for the 'Specialization' Category

Feb 27 2012

A closer look at Apple’s iPad and iPhone – “made in America”?

I have two  interesting stories on Apple and the iPad to reflect on today.

First, ABC’s Nightline recently became the first Western journalists actually welcomed into an Apple assembly plant in China. The show recently aired a 15 minute feature on working conditions inside Apple’s Foxconn factory in Shenzhen, China last week. Watch the video and then scroll down for what may be some additional surprising news about Apple’s operations in China.

Next, the story that has gone unreported lately is a University of California study titled “Capturing Value in Global Networks: Apple’s iPad and iPhone”. The study’s most interesting finding, in my opinion, is the tiny percentage of the total value of Apple’s iPhone and iPad that actually goes to the Chinese manufacturers of the products. The charts below, from the study, show how the value is divided among the various groups involved it their production and sales:

The Economist provides the analysis:

The chart shows a geographical breakdown of the retail price of an iPad. The main rewards go to American shareholders and workers. Apple’s profit amounts to about 30% of the sales price. Product design, software development and marketing are based in America. Add in the profits and wages of American suppliers, and distribution and retail costs, and America retains about half the total value of an iPad sold there. The next biggest gainers are South Korean firms like Samsung and LG, which provide the display and memory chips, whose profits account for 7% of an iPad’s value. The main financial benefit to China is wages paid to workers for assembling the product and for manufacturing some inputs—equivalent to only 2% of the retail price.

A student today asked why Apple doesn’t produce its products in the United States, where an economic downturn has left 14 million American out of work for the last three or four years. If iPads and iPhones were just made in America, jobs could be created, households would have more income to spend on Apples products, and both the country and the economy would benefit.

The data in the UC study indicates that in fact, more than half the value of an iPad or iPhone does end up in the hands of Americans. But Apple could never achieve the low costs and high profits that it does by assembling its products in the US. After watching the Nightline video above, it should be clear that the type of production involved in Apple factories’ is very low-skilled and labor-intensive. Using American labor, with its unions, minimum wages and 40 hour work weeks, would require Apple to employ such large numbers of workers and raise the company’s variable cost to such a level that the firm’s profits would be reduced significantly and its sales would fall dramatically. Apple would lose out to foreign producers of smart phones and tablet computers, such as LG, Samsung, Sony and others, which would continue assembling their goods with Chinese labor.

Ultimately, any gain to the low-skilled American workers (presuming Apple could even find enough to do the work of the 400,000 Chinese employed in the production of Apple products in China), would be offset by a loss of profits enjoyed by the millions of Americans who hold shares in Apple Computer and the thousands of American who are employed engineering and designing its products, as the firm’s sales would slip in the face of lower-cost competitors.

So this student’s question identifies an interesting paradox: America, with its large pool of unemployed workers, will never be attractive as a place to produce labor-intensive products such as phones and tablet computers, due to the vast wage differential between the US and China. And even if one firm did decide to produce its products in America, the gains to low-skilled workers who may find minimum wage work in the new assembly plants would be off-set by losses to the firms’ shareholders and the high-skilled workers whose jobs would be lost as sales decline due to the lower prices offered by lower-cost competitors.

The lesson here is two-fold: First, Apple and other American technology companies should continue using Chinese labor to assemble their products, and second, America is better off for it: lower costs mean cheaper products and higher sales, thus greater employment in the high-skilled sectors of the US economy, and more profits and returns on the investments of shareholders in American corporations. Americans are richer and enjoy a higher standard of living thanks to the millions of Chinese working in factories assembling the goods we consume.

Keep in mind, this analysis did not even consider the effect on the Chinese economy and the millions of Chinese workers (whose lives are much harder than the typical American) should companies like Apple shut down their Chinese manufacturing plants. That’s a whole other blog post!

One response so far

Oct 30 2008

“Self-sufficiency is the road to poverty”

Shop Talk – Buying local, good idea?

I live two lives. In one, I’m an international school teacher who has lived and taught in three countries, travels around the world for work and play and flies 50,000 miles a year to and from the US, Europe and Asia. In my other life, I am a small town guy, who enjoys working in his yard in his mountain cabin tucked back in the woods of remote Northern Idaho, which is not so much a state as a “state of mind”, as the locals like to say.

When I’m in my “other” life as a small town homeowner, i.e. during my long summer breaks, I like to slow things down and reflect on the state of the world around me. I start to notice things about the local economy that seem so minute in the world of international travel that occupies 10 months of my year. I notice that twice a week farmers come to my small town of Sandpoint, Idaho, to sell their produce, bread, honey, arts and crafts, eggs and even meat. I notice that the buffalo, elk and cattle roaming the valley below my mountain cabin can be bought ready to grill and eat from the local butcher shop. I notice the local brewery, Laughing Dog, where I can buy my home town brew. I notice the natural foods market, where my wife and I do all of our shopping, and where many of the items for sale were grown locally or in the greater Pacific Northwest region.

I notice that, if one so wished to do so, one could sustain oneself almost entirely on locally or regionally grown food items. Compared to the lives of so many Americans, whose foods are so heavily processed, often times shipped from around the country or even the world, the choices available to those who chose to “buy local” seem so simple and straightforward, the benefits so obvious.

So the question is, why don’t more people eat locally? According to economist Russell Roberts, the reason we don’t all survive entirely on locally grown food is that, simply stated, the cost of doing so is too high.

In the article below, a Vermont magazine discusses he “buy-local” movement going on in communities across America today with Russ Roberts, whose enthusiasm for buying local is tempered by his economic rationale rooted in the basic economic principles of opportunity cost, specialization, and the gains from trade.

SEVEN DAYS: You’ve said that the buy-local movement has a “superficial appeal.”

RUSSELL ROBERTS: The emotional, nonmonetary appeal of “buy local” is very clear. It’s nice to buy things from people you know, and often that interaction of shopping and trading with people you know enhances the quality of life.

But there’s a cost to it, and when we say, “Let’s buy the local apples rather than the apples from New Zealand,” the cost is hidden, because apples are only a very small part of our economic life. If we tried to replicate that strategy over a wide range of products, the cost would be much more apparent.

SD: Environmentalists like Bill McKibben say the cost of some products doesn’t reflect their true environmental cost -

RR: And I think that’s true, by the way -

SD: But a lot of people would say the idea of “true environmental cost” is diametrically opposed to your idea about true cost.

RR: It’s a good observation. Rather than saying the true cost, it would have been better for me to say the full cost. Right now, if you buy local produce instead of produce that comes from across the country or across the ocean, the cost is pretty clear: It’s a little more expensive, usually. Sometimes the quality is higher, so you say, “Well, I think it’s a bargain after all.” Sometimes it’s not, so you say, “Well, it’s worth it, ’cause it’s local.”

I don’t know if people think through how those costs would add up if you tried to buy more locally than just food . . . I think it’s a question of magnitudes. There’s no doubt that when you make economic decisions based just on price, you’re not getting the full picture, which is the environmental critique. But I think it’s also true that when you purchase one item or category of items, such as food, locally, you don’t think about what the full cost would be if you did that more aggressively across a wider range of products.

SD: You’ve said self-sufficiency is the “road to poverty.” Does that relate to this discussion?

RR: Absolutely. That’s a quote from my first book, The Choice: A Fable of Free Trade and Protectionism . . . I think the word self-sufficiency has an emotionally attractive ring to it: We don’t want to depend on others; we want to be self-sufficient; we certainly want our children at some point to grow up and become self-sufficient, rather than depending on us as parents. So self-sufficiency is generally seen as a goal, but in economic activity and in trade generally, no one really has self-sufficiency as a goal.

Discussion Questions:

  1. Why does self-sufficiency lead to poverty?
  2. What is the “true environmental cost” of buying certain products, namely cheap, imported food and consumer goods?
  3. What is the opportunity cost of “buying local”, whether it be food or other consumer items?

23 responses so far

Apr 24 2008

Dominican Republic struggles to find its “comparative advantage” as it faces new competition from Asia

FT.com / World / Americas – US economy threatens Dominican Republic

Trade based on comparative advantage… the theory originally articulated by Adam Smith, later fine-tuned by David Ricardo, the theory that suggests that if each nation specializes its economic activity on the products for which it faces the lowest opportunity cost, then trades with its neighbors, total world output and efficiency can be maximized: today this theory represents the philosophical underpinning of all free trade agreements signed between and among the nations of the world.

Through trade, countries can exchange their extra output with other nations for the goods specialized in by others, enabling all nations to enjoy a level of consumption beyond what they’d be able to achieve if they tried to produce all goods domestically.

For many developing countries, with their abundance of either land or labor, comparative advantages tend to lie in either agricultural goods or low-skilled manufactured goods. Since global prices for food are highly unstable and dependency on healthy harvests, good weather, and stable rainfall are all highly risky endeavors for a poor country, developing nations prefer to foster the growth of manufacturing sectors in their path towards economic development.

Strategies for economic growth available to developing nations include export-oriented and inward-oriented growth. A country like the Dominican Republic, the largest economy in the Caribbean, has pursued a predominantly export-oriented growth strategy, promoting through “free zones” the growth of a textile industry aimed at producing goods for consumers in developed countries, primarily the US.

To the Domincans, producing textiles for export to America has successfully given the people of this poor nation a grip on a rung of the ladder towards economic development. The import of capital has taken previously unproductive workers out of agriculture and put them into an industry where productivity, thus income, has risen, leading to improvements in living standards. Export-led growth, however, runs some serious risks of its own, as is being realized by the people of the Dominican Republic today.

It had been clear for some time that Luis Caraballo’s textile factory, in one of the Dominican Republic’s largest “free zones”, was struggling.

Finally, last December, he closed the factory gates for the last time: cut-throat competition from China and Vietnam, a weakening US dollar and unsustainable costs had become too much.

Once a hot destination for American companies looking for a cheap place to “off-shore” production of labor intensive textiles, the Dominican Republic today faces new competition, and is finding its comparative advantage slip slowly away from textiles…

The Dominican Republic depends heavily on the US, which is the destination of more than 85 per cent of exports. But textile exports – these days accounting for less than a third of total exports – fell by 32 per cent over 2007.

Although other countries in the Caribbean are also suffering from Asian competition – with Chinese textile exports to the US tripling between 2000 and 2005, while Vietnam’s multiplied almost 117 times – the Dominican Republic has been worst hit.

Here’s the thing: a nation’s comparative advantage may shift over time (from land to labor to capital intensive goods) as the structure of the global economy evolves. Once an economy like the Dominican Republic’s has undergone a period of structural adjustment, away from agriculture and towards industry, the flow of low wage workers from farm to factory begins to slow to a trickle, leading to rising wages and increased competition from countries with more abundant supplies of cheap labor.

The challenge for policy makers is to manage the structural changes as they come, minimizing the deleterious impact such global shifts of productive resources has on the citizens of a country like the D.R. Clearly, it is in the country’s interest to prepare its citizens for a “new economy”, one in which skilled labor will play a larger role. The problem is, this requires a solid education system, which the D.R., it turns out, does not yet have:

There is widespread acceptance of the need to develop a better-educated workforce, but so far education spending has been inadequate.

“The government simply doesn’t have enough resources,” said Mr Montás. About 40 per cent of its budget goes on debt obligations and another 15 per cent is dished out through subsidies. Just 1.5 per cent goes towards education.

It also turns out that this is a balance of payments story:

Mr Montás calculated that for every percentage point the US economy contracted, the Dominican Republic’s GDP would shrink by 0.4 per cent.

Not only will exporters be hit, but also the huge tourism sector and remittance flows…

One possible result of the decline in exports and flows of remittances from the US will be a depreciation of the D.R. peso, as demand for pesos by Americans falls. A weaker peso might make the country’s exports attractive once again, assuming the exchange rate is allowed to adjust on foreign exchange markets. A weaker peso should help slow the decline in the D.R.’s exports to the US, at least until new competition emerges, perhaps elsewhere in Asia, maybe even from Africa or other Latin American countries.

In all likelihood, given the increased competition from Asian textile manufacturers, continued economic growth in the Dominican Republic will depend on the country’s ability to educate and train its workforce to adapt to a more capital, technology and information-based economy, which, if successful, will eventually lead to rising incomes and higher standards of living for the people of the this rising Caribbean nation.

Comparative advantages evolve with the emergence of new competition among developing and developed countries. The negative impacts this evolution has on a particular economy can be managed if wise policy actions are taken to assure a country’s workforce is educated and trained to participate in tomorrow’s economy, rather than yesterday’s or today’s.

30 responses so far

Aug 29 2007

Comparative advantage, plain and simple

Managing Globalization » Business Blog » International Herald Tribune » Blog Archive » Employment versus the environment?http://www.bsria.co.uk/graphics/catalogue/thumb/Low%20energy%20light%20bulb.jpg

This article represents the perfect example of comparative advantage. Almost a textbook version of the concept of countries producing the types of products for which they have a lower relative opportunity cost than other countries. Read this very short article and discuss below how this illustrates the basic concept of comparative advantage, specialization and trade. What decision should the European Commission make and why should they make it?

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15 responses so far

Jun 26 2007

Artisanal economics: alive and well in Bali

One of the joys of summer for teachers is that we get to forget about stacks of student work and read whatever we want. One of the books I read during my Bali trip was one about food called The Omnivore’s Dilemma, by Michael Pollan (the other was the classic and utterly cheesy mystery in which a Harvard professor uses economic theory to solve crimes, Murder at the Margins).

While The Omnivore’s Dilemma warrants several blog posts itself, one section stood out to me as relevant to what I was seeing in Bali firsthand. In discussing the different food chains humans participate in, Pollan discusses a concept called “artisinal economics”, which he describes as a system in which “the competitive strategy is based on selling something special rather than being the least-cost producer of a commodity.” Pollan goes on to point out that “this artisinal model works only so long as it doesn’t attempt to imitate the industrial model in any respect. It must not try to replace
skilled labor with capital; it shouldn’t invest capital to reach national markets but rather should focus on local markets, relying on reputation and word of mouth rather than on advertising…”Wood carving

Touring around Bali, one cannot help but be awed by the seemingly endless selection of arts and crafts available not only to tourists but to Balinese for their houses, businesses and temples. Around the town of Ubud (famous as a center of artisanship),wood and stone carving workshops and painters studios stretch for kilometers in which truly talented artists can be observed creating unique (and some not so unique) pieces of traditional art (and some not so traditional, such as the Thai Buddhist monk paintings I’ve seen on sale in places like Bangkok and Phuket). It would seem that a large percentage of the island’s population is involved in the art business, and although I did see some African patterns such as giraffes and of course the Thai monk paintings, the majority of the art appeared to be in traditional Balinese styles and for the local market.

The market for art and crafts seems to fit Pollan’s description of an “artisanal economy” where quality and individuality are the goal of the economy’s output, as opposed to maximizing output and minimizing costs. To see young men and women working with their own hands and tools that haven’t changed in centuries was refreshing, representing a hope that I and I would guess many of you share regarding the desire to hold on to something from our society’s past even as the modern economy pushes us ever forward into a world of homogenization, increased output, increased mechanization and inevitably less and less beauty and quality defining and differentiating unique cultures from one another.

Discussion Questions:

  1. Why do firms in developed and developing countries tend to replace workers with machines as their economies grow?
  2. If the craftsmanship and artisanship of Bali belongs to an “artisanal economy”, what kind of economy do the factories, superhighways and giant container ships of the rich world belong to?
  3. Do you think the artistic, labor intensive industries that employ so many Balinese will survive in the modern economy, or can artists be replaced by machines as easily as seamstresses and auto workers were in
    the 20th century?
  4. Based on Pollan’s description of “artisinal economics” quoted above, what chances do you think exist that such an economy will reemerge and thrive sometime in the 21st century? What would it take for such an economy to thrive today?

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