Pogue Misses on Cheap Gadgets and Foreign Labor

The cost difference between China and the U.S. is less than he imagines

David Pogue of The New York Times looks at the “Dilemma of Cheap Electronics” raised by the paper’s recent, outstanding series on Apple’s manufacturing policies. But it’s less of a dilemma than he makes out.

Pogue reports that building iPhones in the U.S. would raise the price of a $200 machine to $350. If that sounds a little steep to you, it should.

Bringing workplace standards and pay in Chinese factories up to American levels would, of course, raise the price of our electronics. How much is hard to say, but a financial analyst for an outsourcing company figures a $200 iPhone might cost $350 if it were built here.

Using those numbers makes it look like it would cost nearly twice as much to make the iPhone here than it would in China, which makes the case for building here look bleaker than it really is.

An iPhone doesn’t really cost $200 retail. That’s just the portion of the retail price consumers pay to buy (the 16GB) one. Wireless companies pay Apple about $450 per iPhone to sell the phone with two-year wireless contracts. Want a 16GB iPhone without a contract? You’ll pay the full, unsubsidized cost: $649. So building it here, assuming Pogue’s $150 additional cost is correct, would cost 23 percent more than in China, not 75 percent.

That’s a big difference made even bigger by the fact that China has been manipulating trade policies for years, keeping its currency artificially weak. That makes Chinese products up to 40 percent cheaper to sell to us, while making our products 40 percent more expensive to sell to the Chinese.

But even that $150 is suspect. For one, iPhones have super-high profit margins. A teardown analysis by IHS iSuppli pegs the cost of that $649 iPhone at $188, giving Apple stunning gross margins of more than 71 percent. Making the phone here would presumably force Apple to transfer much of the increased cost to shareholders, rather than boosting prices for consumers. Put another way, even accepting this $150 figure, Apple would still have gross margins on the iPhone of about 50 percent without raising the price one penny. Which would reverse somewhat the flow of money from the middle and working classes to the capital holders concentrated in the top 1 percent.

There are a couple of other reasons to question the $150 figure, though. For one, and I know Pogue claims he’s not a journalist (though he is), the sourcing here is problematic. You’re trying to find out how much it would cost to make a phone here in the states, and you go ask a “financial analyst for an outsourcing company”? I don’t think so—not without asking others, anyway.

For another, there’s better reporting on what it might cost already available in the iEconomy story Pogue is riffing on, which after all ran in his own paper:

However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense.

Who’re you gonna go with? Your colleagues, or a firm whose business is based on making stuff outside the states?

That would add a mere 10 percent to the cost of an iPhone, leaving Apple with 61 percent profit margins if it didn’t raise prices. Now Charles Duhigg and Keith Bradsher’s stories showed the non-monetary benefits to companies like Apple of using Chinese labor. Your mad genius CEO can demand a major product change at the last minute and you can rouse your quasi-captive labor force from their company barracks in the middle of the night, give them tea and a biscuit and put them to work in factories that go boom, wiping out a few immediately replaceable workers here or there.

Harder to do that here, yes.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum. Tags: , , , ,