Donald Trump, the iPhone, and creating value in technology manufacturing

The US president’s desire for Apple to build iPhones in the US misses the point – in an international sector such as tech, the real value is not in manufacturing finished goods

Donald Trump has announced – and is hugging himself at the prospect – that Apple will be building three new manufacturing plants in the US.

It’s not just whether this will happen or not – it’s rather, well, why would anyone be excited in the slightest about this happening or even desire it? The truth being that to all intents and purposes, iPhones are already manufactured in the US – most certainly they’re not being made in the economic sense in those Foxconn and other factories in China.

As many have noted, the economist looks at the world with more than a slight squint. Words too often have finely different meanings in this field. The production of something – the manufacturing of it if you like – is seen as taking place where the value is added, not the more widespread meaning of where something is bolted together.

This makes sense internally in economic thought, as something like gross domestic product (GDP) is also defined in the same manner. GDP is the value added in an economy in a period of time – it’s not the turnover.

Gross national product (GNP), the close relative, is the value that accrues to the nationals of that economy over time. We also state that income is really the value of what can be consumed. Value is the thing, and we even define economic growth as being the adding of more value.

Made in the USA

If we look at the value-add in an iPhone, we would be saying that it probably should be regarded as being manufactured in the US. Apple’s famed gross margins have fallen a bit recently but they’re still at around 40%.

Its net margins, even after paying for the Cupertino headquarters and the overheads, are 20%. In our economic jargon, it’s that gross margin which is important.

Out of the pieces that make up the actual iKit, Samsung is still making at least some of the processors in Austin, Texas; ARM is getting a basic chip royalty for work in Cambridge, UK; the screens are coming out of Japan and or Taiwan; and that’s much, even most, of the cost of the hardware right there.

Qualcomm is getting something and China isn’t getting much of it at all. The usual estimation is that those sheds in Shenzen are adding $8 in value in bolting everything together – that’s what they’re getting paid at least, and that is a useful estimation of value add.

Yes, economists are squinting, but this view tells us that wherever the manufacturing is taking place it’s not China because that’s not where the value-add is. We should go further too, for the people who add the value are going to be the people who are getting paid hefty incomes. That’s just the way it works – which brings us to another point about GDP.

All value added in production is equal to all the value that is and can be consumed and each and both will be equal to all the incomes in an economy. This is a definition, and not something we can argue about – the only reason it doesn’t quite work this way out there is because people lie about their incomes for tax purposes.

Romantic notions

GDP, the economy itself, isn’t everything of course – the value of a mother’s smile at her baby is not something measured nor to be equalled by becoming better at making smartphones.

However, we do generally think that economic growth is a good thing as it means people can enjoy higher incomes, which is why we argue about where Apple is doing its “manufacturing” because we’d like the high incomes to go to us or, if not, at least to ours.

Yet where something is being made is really defined by where the value is being added. At which point, why would we want to be doing the low-value bolting things together, even if we do have romantic notions of a past in which men did manly things on factory floors? The reality is that our world doesn’t work that way any more.

Apple is making vast margins from the brand – a piece of Hoodoo that not everyone can copy – but even when we look under that, the vast majority of the value is in producing the componentry, not at all what we historically have thought of as that manufacturing plant where it all comes together.

It’s as if Ford’s assembly line is adding $4 to the value of a Model T (they were going for some $400 when Detroit was at full tilt making them) and the real added value was off with the people elsewhere making the tyres and the grommet holes.

Sticking bits together

It gets worse than this too. Doing that assembly work in the US would make that country poorer – absurd though it sounds, it would.

Median wage in the US is some $25 an hour at present. Recall the above about added value – more of it is good, what people get paid is closely allied to the value they add, thus jobs which will make America richer are jobs which pay more than that median wage.

What we don’t want to do is increase the number of people making less than the median wage. Electronics assembly currently pays around $13 or $14 an hour.

If those sheds moved to Savannah then that wage would rise, but given near full employment we would still be moving labour from higher wage, and higher value-added, jobs to lower. We would be making the workers and the economy as a whole poorer, which is not known as a useful aim of economic policy.

What’s really underlying this desire for more manufacturing is people harking back to an older world, quite possibly to one 50 years ago or even 80 or more.

Back to when the people who wrote the economics textbooks the current decision-makers studied in their youth were learning their own economics.

Back to when it really was manufacturing things which added much of the value in an economy. Sticking bits together just isn’t a high value occupation these days, therefore we don’t want to be doing it. Even if Apple CEO Tim Cook has promised the US president three sheds in which to do it.

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