How much Apple is making on iPad/iPhone?-Wake up China!

Steve Jobs once said "iPhone jobs won’t be coming back to America not because of cheap labour, but because Asian factories produce fast, really FAST, and at a much LARGER scale and FLEXIBILITY.” Is it?

Recently I read up an article titled “Capturing value in global networks”. When Apple used to sell the basic version of iPhone for $200 nearly $116 of that goes to Apple alone. Supply chain management is a long and arduous process with players being involved from across the globe. But with China emerging as a low-cost destination for much of the American producers, I was imagining that a reasonable shift in value chain was happening in favor of China to a large extent and India to a lesser extent. But I was wrong!

Take a look at the charts. While iPhone is assembled in China, Chinese labor makes only about $3.5 in the $200 pie. Japan is even worse at just under a $1 in the $200 value chain of producing and selling iPhone. After Apple, the next biggest beneficiaries happen to be Koreans (LG and Samsung) that provides the display and memory chips. Even here their gross profits of the sale price of iPhone is just 5%.

According to the study, there are no known Chinese suppliers to the iPhone or iPad. The iPhone and iPad are assembled in mainland China factories owned by Foxconn, a Taiwan-based firm. This is true for most of the name-brand products from US firms.

In short, Apple’s success does tremendously benefit its shareholders, workers and the US economy in general than China or Korea . It is clear that in the global innovation network, advanced economies capture significant value compared to developing countries. Being lead firms, they have total domination over global suppliers in the global value chain. (Intel is a rare exception!). This is due to very high levels of investment in the research and development for a sustained long period. Asian economies focus and emphasis on low-cost prevents them from committing substantial amount in research and development. Investors will invest in “value creators” than “value assemblers”. China and India should look to encourage creation of lead firms that can afford to keep product design, software development, product management, marketing and other high-wage function within its shores (like Apple) in a rapidly globalized economy. This cannot be a miracle and it is a long journey that they should start sooner than later. If they start today, they can create one in the next ten years but it is worth the effort.

If not, they will remain as players that just pick up the nickels.


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