How Much Would it Cost to Make an iPhone in The World

How much do you think it would cost to makea smartphone like this one here in the United States? How much do you think a manufacturer wouldend up selling this American made phone for? And most importantly how much extra wouldyou be willing to pay for your next iPhone, Android or Nokia brick to have it made inAmerica. You don’t need to answer just yet, but theseare some very important questions that have equally serious implications to consumers,companies and some of the most powerful economies in the world. If you have ever looked into this issue, oreven actually tried to purchase a locally manufactured phone you have no doubt seena dizzying array of numbers that claim anything from an American made iPhone would cost tenthousand dollars all the way down to an American made iPhone would only be a tiny bit moreexpensive than a Chinese made iPhone So which prediction is right? Weirdly… both… But with trade and political tensions at all-timehighs we might find ourselves in a situation where we need workable answers to this problemsooner rather than later. So it’s time to learn How Money Works…. … Consumer electronics are just one of manyindustries which have been lost in western developed nations over the past 40 years. Prior to the 1970’s most durable goods consumedin America or Europe were produced right there in that country because that was the easiestand cheapest way to get things done. Import taxes and quotas meant that foreigngoods were real luxuries which commanded a steep premium over their domestically producedcompetitors. That’s not to say that locally made goodswere cheap though. An average television set could easily costthe average households entire monthly income and the same was true of stereo’s, fridges,cameras and a variety of other household items that we almost treat as disposable today. But this started to change when countrieslike Japan, South Korea, and ultimately China built out industrial centers of their ownwhich could manufacture and deliver items to western markets for cheap. howeverit is really important to understandthat this would not have been possible with just cheap labor alone. It was actually the increase in trade dealsthat made it possible for foreign factories to compete with domestic factories. This had a few major benefits for the worldeconomy. The first was that it let poor countries gaina foothold in the world economy. The salaries in these electronics factoriesmay have been low but they were still far better than what these workers would havemade working on a substance farm. The other big thing it did was make thingsa lot cheaper. An average TV today sells for about 400 bucks,and you would need to get a seriously impressive model for it to come anywhere close to matchingthe average household income even despite stagnant wage growth. Imports have become the cheaper alternative…or really the only alternative. So why are these goods so much cheaper? It’s because we can exploit the cheaperlabor in these developing countries, right? Wrong! The cost breakdown of an iPhone looks somethinglike this. There are the fixed costs of researching adeveloping a new phone model that need to be paid off before the first unit even hitsthe production line, that get broken down and shared amongst all the phones that areproduced with that design, which goes on until a new model needs to be designed to keep upwith the competition. On top of R&D there is the actual components,the camera, the battery, the processor, which are provided by other companies that justspecialize in making these small parts. Then there is the labor costs. An article by the New York Times reportedthat a Foxconn factory in Zhengzhou could produce 500,000 iPhone a day and employedan astronomical 350,000 workers. This means on average it takes roughly 17-manhours to manufacture a completed iPhone from raw materials and components. This report is from 2016, so things couldhave changed since then with newer models and more automation on assembly lines, butthe companies involved are naturally pretty tight lipped about that kind of stuff so fornow let’s assume this is the industry standard. The next cost is the profit component of themanufacturer. No major phone companies actually producetheir own phones, they instead outsource manufacturing to companies like Foxconn, Celestica and TDK. These companies will mark up the phones thatbeyond their raw manufacturing costs in order to make a profit themselves, after all theyaren’t a charity, they want to make money for their shareholders. There is also shipping, taxes, and the profitthat the companies themselves will make for selling each individual phone. Once all of these are added up we are leftwith the price that you pay as a consumer. If we think of all of these cost factors individuallyit makes it a lot easier to asses the impact of moving manufacturing on shore. If we assume that all other variables staythe same then we simply need to change this variable here. It takes the average worker 17 hour to producea phone, so if we multiply 17 by the average wage of a production line worker at a Foxconnfactory in China, we find that labor accounts for $42 of the price of an iPhone. If we change this to reflect the average salaryof an unskilled production line worker in the United States this number would grow to$263. So if both Apple and their manufacturing partnerswanted to maintain their profit margins then an iPhone would cost the end consumer an extra$221. This actually doesn’t sound so bad. The average smartphone is much more expensivetoday than the early models that came out a decade ago. Ironically the prestige of having an Americanmade phone might actually be enough to attract certain buyers, which is almost the oppositeof consumer behavior 40 years ago when foreign imports were the status symbol. Foxconn actually did invest heavily into manufacturingin the US, but these projects have since mostly been abandoned. Whether that was because of the pandemic orwhether it was because of economics that just didn’t make sense is quite hard to say. But let me re-raise the question I asked atthe beginning of the video, how much extra would you be willing to pay to have an Americanmade phone? I don’t think many of you would actuallybe willing to part with this extra money. I am personally about as pro local industryas they come, and I honestly don’t think I would pay the extra if given the choice. But as you might have expected it only getsworse from here. So far we have only changed one variable,the labor costs. But moving manufacturing to the States doesmuch more than just that. Tim Cook has said that the biggest hurdleto domestic manufacturing is not labor costs, it’s the skills and infrastructure. The iPhone is made of dozens of componentswhich are made in countries like Taiwan, Vietnam, India or China itself. Importing individual electronic componentsinto America is much less efficient than importing completed products, so the shipping and handlingcosts would increase drastically. These increased costs might be offset slightlyby the reduced cost of transport for the finished product within America, but iPhones are soldall over the world. One of the biggest markets for the phone ISChina, a market with consumers who are poorer and therefore more price sensitive. Due to higher sales taxes an Iphone actuallycosts more in China than it does here in the states, needing to ship components from Asia,across the pacific and then back again would only expand this price imbalance against thecountry that can least afford it. So, what if American iPhone were made in America,and iPhones for the rest of the world were made in their own local hubs. This actually happens quiet a lot in the automobileindustry. Some of BMW’s largest plants are not actuallyin Germany, but rather South Carolina. This is primarily done to avoid the costsof shipping in import duties, but it costs much more to ship a 4,000-pound car overseasthan it does to ship a comparatively tiny iPhone. This reduction in domestic shipping costswould be dwarfed by the increased costs of needing to retool and retrain a dozen factoriesrather than just one factory every time a new phone is released. Anyway, this doesn’t really solve the mainissue, an iPhone assembled in America from parts made in Asia doesn’t mean we are anyless reliant on fragile global supply chains or any more immune from the actions of potentiallyhostile governments. So, let’s go from the feet up and asseswhat would happen if we moved everything onshore just like the good old days. Well, this is where the prices get out ofcontrol very quickly. Let’s start off with the good news, shippingwould cost less, but everything else would cost a lot more. Finding enough people in America to just workin the assembly plants might be a major challenge right now. When you throw in the need to manufactureall these components locally as well, then it would be almost impossible, especiallyconsidering that component manufacturing often involves skill sets that just aren’t trainedin America anymore. Of course, money can solve everything so withenough research, development and training it is possible, but it’s going to be expensive. A company would need to train an entirelynew workforce AND pay them enough to tempt them to leave their current jobs. These components are going to cost a lot morebecause they themselves are influenced by the labor costs that go into putting themtogether. In the very long term these costs may be broughtdown once infrastructure is established, and training in micro component manufacturingis something that people do themselves to get a job (rather than have training givento them as a requirement to gain the necessary manpower). But In the short term an iPhone would be justthe same as a TV 40 years ago, ridiculously expensive. Unfortunately, most established businessesreally can’t make huge, risky bets that only have the potential to break even decadesinto the future. They have stakeholders to keep happy, andthe status quo is great at achieving that. Now obviously wages have been a major variablethroughout all of these calculations, but if the headlines are to be believed then allof that might be about to change. Go and watch my video on the real reason why40% of people are about to quit their jobs to find out. As always,

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