Hal Varian: Who makes the iPod?

How do you determine where the iPod is made and who is responsible for its production?:

An iPod Has Global Value. Ask the (Many) Countries That Make It., by Hal R. Varian, Economic Scene, NY Times: Who makes the Apple iPod? ... It is not Apple. The company outsources the entire manufacture of the device to a number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn.

But this list of companies isn’t a satisfactory answer...: They only do final assembly. What about the 451 parts that go into the iPod? Where are they made and by whom?

Three researchers at the University of California, Irvine — Greg Linden, Kenneth L. Kraemer and Jason Dedrick — applied some investigative cost accounting to this question...

To answer this question, let us look at the production process as a sequence of steps... At each step, inputs like computer chips and a bare circuit board are converted into outputs like an assembled circuit board. The difference between the cost of the inputs and the value of the outputs is the “value added” at that step, which can then be attributed to the country where that value was added.

The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value of the iPod. More specialized parts, like the hard drives and controller chips, have much higher value added.

According to the authors’ estimates, the $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs. This $19 is attributed to Japan since Toshiba is a Japanese company.

Continuing in this way, the researchers ... tried to calculate the value added at different stages of the production process and then assigned that value added to the country where the value was created. This isn’t ... easy ..., but ... it is quite clear that the largest share ... goes to ... the United States, particularly for units sold here.

The researchers estimated that $163 of the iPod’s $299 retail value ... was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. Japan contributed about $26 to the value added (mostly via the Toshiba disk drive), while Korea contributed less than $1.

The unaccounted-for parts and labor costs involved in making the iPod came to about $110. The authors hope to assign those labor costs to the appropriate countries, but ... that’s not so easy to do.

This ... illustrates the futility of summarizing such a complex manufacturing process by using conventional trade statistics. Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese.

Ultimately, there is no simple answer to who makes the iPod or where it is made. ... The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.

Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.

Comments

[ilsm]

"According to the authors’ estimates, the $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs."

The "value" could be considered "rent" for Toshiba assembly processes, software and integration that take those components and put them together and meet Apple's functioning definition of the drive.

Similarly, Apple collects rents putting it all together.

As substitutes for the iPod arrive on the market the rents decline.

[Idaho_Spud]

It's nice to have a feel for which countries produce the value tht goes into an iPod.

Does the value' that each country adds to the iPod also mean that each country profits by that much?

Notice which country doesn't manage to net any jobs associated with the ongoing manufacture of these clever devices? You have the small clever group of people who invented them, an army of service sector jobs to sell them.

[Meh]

Idaho Spud points to a key problem in our societal evolution. "High paying knowledge economy jobs" in things like industrial design, etc. are thin on the ground. You don't need that many good designers, or even that many good advertising creatives to create the iPod ad campaigns.

Apple may be making a serious share of the iPod money for the US, but that suggests employment for others is to be found in serving the employees of Apple and those who invest in Apple. The problem is that doesn't begin to equal the number of jobs that existed (for example) serving the needs of the employees of a large old manufacturing plant.

The richer someone gets, the more they spend on services, but it's not a straight line graph. The richest people on earth don't actually generate as much demand as the how ever many thousand of middle class workers it takes to add up to the same income level. This fact may not be permanent, but even if it isn't we need to study it to understand the now and work out what any transition is going to look like.

[Bruce Wilder]

"The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value."

Notice the reasoning above focuses on market structure, while the reasoning below is about virtue.

"The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.

"Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters."

The tendency of economists in the dubious tradition of Dr. Pangloss to confirm the virtue of the winners only serves to obscure the truth. It is the economic equivalent of the watchmaker hypothesis and praising the "perfection" of nature.

Apple sunk cost investments in product development, reputation, advertising and marketing are quite substantial, and can only be recovered in circumstances in which it exercises considerable market power. A reward for virtue plays no part.

Apple did a nice job with the iPod series, but far from a perfect job. They stole significant intellectual property from Creative Labs, which also developed some great players, but was not as successful in the marketplace of trendy. And, the iPod had some significant downsides to its design for consumers, like a battery that could not be replaced, and a proprietary music format that tied the device to the iTunes store.