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Should Apple Build the iPhone in the US?

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Economists and journalists debate the merits and risks of this never-going-to-happen-anyway thought experiment!

Is the iPhone bad for the US economy?

Of course not…really…we’re pretty sure. But a recent study by Yuqing Xing and Neal Detert out of the Asian Development Bank makes an interesting case for why the iPhone—and by extension any high-tech gizmo that’s manufactured abroad—can have a detrimental impact on the US economy.

Michael Schuman offers some analysis.

Conventional economics tells us that since the U.S. has a clear technological advantage in designing a product like the iPhone over the still-developing Chinese economy, the U.S. should be exporting iPhones to China. That's the kind of theory you learn in Econ 101. But, as the ADBI study shows, that's not what's actually happening in the new world economic order – because Apple has outsourced the manufacturing of what it has designed.

The ADBI study says that iPhone parts come from nine different companies spread across the world -- China, South Korea, Japan, Taiwan and the U.S. -- which are all brought together for final assembly to factories located in the Chinese industrial enclave of Shenzhen. From there, the iPhones are exported around the world, including back to the U.S. The end result is a country (China) exporting a product that it couldn't possibly have the know-how to design at its level of development, and adding to the U.S. trade deficit with China.

And then there’s the whole “what if Apple actually used US factories” problem. Of course, if Apple actually made its products domestically that would create jobs. But would it cripple Apple’s bottom line? Xing and Detert don’t think so.

If iPhones were assembled in the US the total assembly cost would rise to US$68 and total manufacturing cost would be pushed to approximately US$240. Selling iPhones assembled by US workers at US$500 per unit would still leave a 50% profit margin for Apple...In this hypothetical scenario, iPhones, the high-tech product invented by the US company, would contribute to US exports and the reduction of the US trade deficit, not only with the PRC, but also with the rest of world. More importantly, Apple created jobs for US low skilled workers; those who could not be the software engineers needed by Apple. Giving up a small portion of profits and sharing them with low skilled US workers by Apple would be a more effective way to reduce the US trade deficit and create jobs in the US.

But fixing the US trade deficit and economy isn’t, of course, Apple’s job (although I have a feeling they’d find a way to do that, too). Plus, as Schuman points out, the study misses something big:

What the study fails to point out as well is that by manufacturing in China, Apple can gain higher profits on the iPhone, profits that then can be reinvested to develop new cutting-edge products the world wants to buy, helping the U.S. keep its technological edge over China. So from this perspective, the globalized manufacturing system is working.

Look, folks, I won’t pretend to “understand” the complex ins-and-outs of global manufacturing and the myriad of economic considerations that come into play when thinking about this stuff. But what I will say is this: I just bought a Droid. And you know what? It’s pretty incredible.
POSITION:  No positions in stocks mentioned.