Thursday, September 8, 2011

Economics and the iPhone

Posting has been a bit light the last couple of weeks, what with preparing for my CCIE written exam tomorrow.  But I came across this article which gives a breakdown of the cost of the iPhone.  Apple makes a 64% profit on each unit.  All of the components come from Korea, Japan and Germany, and are shipped to China where workers are paid around $1 per hour to assemble.  Think about that for a minute.  Assuming a 40-hour work week (a big assumption, as working conditions in China leave a lot to be desired), at the US retail price of around $500, the average Chinese worker assembling an iPhone would have to work for over 3 months to afford the product they are assembling.  And that is if they had no other living expenses.

As the article points out, if Apple was to pay their workers ten times the rate they pay these Chinese workers, Apple would still make 50% profit per unit.  Plus the people who actually assemble them would be more able to afford them.  But Apple won't take a hit to its per-unit profit.  No company these days will.

This was the whole principle behind the business philosophy of people like Henry Ford (although a raving anti-semite and pro-Nazi, to be sure) who paid his workers well; a little less profit per unit but more unit sales makes for a sustainable business.  It it this process that builds the middle class, growing market size - a rising tide that lifted all boats.

These days, corporations, being amoral entities with the sole goal of squeezing maximum profit out of each unit have forgotten these lessons.  And so labour is a pure cost.  A cost that can be reduced by paying people as little as possible in countries where those people are desperate for any kind of work.  But the middle class will not be built in those places, because as soon as wages begin to rise, the corporation will look around for somewhere else cheaper, leaving those low-paid workers once again unemployed.  In the US, suffering high unemployment, the median household income has been falling.  Jobs that are being created are low-paid and menial.  Well-paying middle-class jobs are disappearing, and this increases the gap between rich and poor.

This is a vicious cycle.  People are paid less, the market shrinks, demand goes down.  Corporations then look to cut wages and conditions to be "more competitive", by which they mean "maintain profit levels and share price".   That is if they don't just lay people off and move their factories elsewhere.

A race to the bottom helps nobody.  Good wages and conditions in manufacturing helps society and the economy as a whole.  Demand drives the economy, but the voodoo Reaganomics of "supply side" or "trickle down" economics seems to still have the right wing in its grip.  In the US, the term for the wealthy and the corporate class in Republican politics is "job creators" and the theory is that if you give them tax breaks, they will hire more people.  Bull.  If I am in business, I am not going to hire unless people want to buy my goods and services.  And by paying people less and less, rejecting government stimulus or unemployment benefits - putting money in the pockets of people who will spend it - these people are crapping in their own nest.

I can't see why this is so hard.  Pay people well, they will buy your stuff.  Pay people poorly, they will only buy at Wal-Mart, and in the end, the only jobs left will be at Wal-Mart, at Wal-Mart wages.  But I know this is not going to happen.  Profit is the only measure that counts.  Profit drives share prices, and share prices and profit determine executive remuneration.  Say farewell to the middle class, and welcome back to the 19th Century of the working poor and the mega-rich.

1 comment:

  1. What can I say? I hope you are wrong... but I fear you are right.