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What the iPod Tells Us About the World Economy
Hugh Pickens writes "Edmund Conway has an interesting article in the Telegraph where he analyzes where the money goes when you buy a complex electronic device marked 'Made in China,' and why a developed economy doesn't need a trade surplus in order to survive. For his example, Conway chooses a 30GB video iPod 'manufactured' in China in 2006. Each iPod, sold in the US for $299, provides China with an export value of about $150, but as it turns out, Chinese producers really only 'earned' around $4 on each unit. 'China, you see, is really just the place where most of the other components that go inside the iPod are shipped and assembled.' Conway says that when you work out the overall US balance of payments, it shows that most of the cash for high tech inventions has flowed back to the United States as a direct result of the intellectual property companies own in their products. 'While the iPod is manufactured offshore and has a global roster of suppliers, the greatest benefits from this innovation go to Apple, an American company, with predominantly American employees and stockholders who reap the benefits,' writes Conway. 'As long as the US market remains dynamic, with innovative firms and risk-taking entrepreneurs, global innovation should continue to create value for American investors and well-paid jobs for knowledge workers. But if those companies get complacent or lose focus, there are plenty of foreign competitors ready to take their places.'"
Maybe the author of TFA could also analyze who makes th eprofits off the many counterfeit iPhones mfg'd in China:
"Illicit phones comprise a staggering 40% of Chinese firms' production, and 13% of the world's, according to iSuppli, a research firm. It reckons China will produce 145m of them this year, up by almost half since 2008. This has hit sales of legal phones."
I refuse to believe that imaginary property is an acceptable replacement for real manufacturing capacity.
TFA suggests that this means the financial hit of off-shoring manufacturing is actually small. Whether or not the article is correct on money making its way back to the US, there is an important factor. The money is making its way right back into the pockets of the company owners and rights holders. The people who would normally make their living in these manufacturing jobs are still stuffed. I don't think that any "trickle down" effect from returned profits is going to make up for that.
Aide-toi, le Ciel t'aidera - Jeanne D'Arc.
The differences in salary relative to cost of living ought to be taken into account. The average daily salary of a Chinese person is was around USD14.1 last year..
Secondly, it's not just about revenue but longer term industrial dependency. Were China to suddenly refuse (due to political embargo, for instance) to produce such items Apple would suffer a considerable economic loss, if only while they secured an alternative manufacturer. Chinese and Taiwanese companies are in a good position to steer the market in their favour, eventually producing (if not already) competing products for their own market - the world's biggest in many sectors - and others abroad.
The mistake any article like this makes is it assumes that the people providing the cheap manufacturing labour are content to continue doing so indefinitely - even when the factory owners can easily find out precisely how much their product is making in the country it's sold in and compare it with the amount they get to see.
History has shown that this is frequently not the case - I refer you to the UK's former motor industry.
No matter how much money is made in America from items assembled in China, everyone can't work at Wal-Mart and Burger King and be able to afford said items. Don't get me wrong, those are real jobs and I even worked at a Wal-Mart many years ago, but in the past, service jobs were not the base of the economy. If everybody is making minimum wage with no benefits whatsoever, who can afford services? Thus a service-based economy isn't sustainable in the long run. Yeah, we will survive and life goes on, but we shouldn't just count the beans and proclaim everything is alright. We need to take into account several things:
How citizens are treated by the governments of our trading partners, for instance.
What happens to our economy when nothing left but service jobs is another one.
When the trading partners are using the profit from us to build up armies to come back over here and kill us, should make the list as well.
Doctors destroy health, lawyers destroy justice, universities destroy knowledge, religion destroys spirituality
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I have doubts about the article's numbers. If that was true, how could China have a huge trade surplus? If the article was correct, all of the export gains would be spent on IP fees to non-Chinese companies, and would reduce their trade surplus. That's not what we observe.
So, while it's important to have a sound R&D and to have plenty of licenses ready to sell for lots of product, this does not replace a good manufacturing basis.
Fantasy: http://ferrisfantasy.blogspot.com/
The article is a complete piece of crap. Because it never dives INTO the money flows. It doesn't show what that 150 dollars the chinese get MEANS. For instance the idiot who wrote this never touches on the most basic point. That 150 dollars to china is a LOT more then 150 dollars to the US. The average wages are completly different, based on a quick google it seems to be about 100 dollar vs 2000 dollars. So 1 iPod sales generates enough money to pay for 1 months work in china but only a ... few days in the US.
This is to say nothing about the effect on the workforce, in China, the jobs are spread out. You both need directors to run the factories and janitors to clean the toilets. In the US, far fewer people are involved. Especially in that section of the economy were the most people fit, the blue-color laborers, the factory workers. So a few designers and Steve Jobs are swimming in it, doesn't help the millions of unemployed, doesn't breath live into ghosts towns were the only jobs are handing out unemployment stamps. And where do these people who longer can find a job get the money to buy an iPod? They don't, they buy a cheapo MP3 designed in China, build in China.
Thank you Mr Idiot from the guardian, we KNOW how the economy works, the exact same idiotic posts were made about Japan. Don't worry, Japan will only take a tiny bit of cash at the bottom, all the real money will be earned by the west. Yeah, this worked SO well, that Japan is now conveniently lumped with the west. He happily lists that core components with lots of IP come from Japan so that those pesky chinese won't make a penny of it. Eheh, so what is China to stop from doing to Japan what Japan has done to the west? If his theory about IP holds up, then those IP could never have become possible in Japan.
If the iPhone was made in the US, the US economy would be richer by 150 dollars as well.
FLAWS:
If you want to see the effect of the global economy, look around. I life in Utrecht, and that has an industrial park called "Lage weide". There is a LOT of distrubution activity, lots of shifting around of good but almost no production. One produces big metal thingies and the building looks ready to collapse and that is about it. Everything else is warehouses, with the contents, "produced in China". And warehouses are easy to automate. Hema (dutch retailer) has opened one of the most advanced warehouses in the world recently, yet fewer people working and the work there requires no skill (and therefor no pay and no security).
Look around, why do you think the economy is in the crapper? Because nothing is being produced anymore. The factory towns may not be glamorous but it is where the core of a country makes its living. Not the rich who rule the country, not the super poor, but the average worker who pays the taxes that allow the government to function, who deliver the soldiers for the army.
Empires collapsed before, the western empire will get a rude suprise sooner or later when China changes its tune. And no, I don't mean in an evil plot kinda way, I mean when China does what Japan did ages ago. Become an economic power with its own IP. Quick check, how many high-tech gadgets in your house are produced in cheap labor country Japan? PS3, Wii, Sony-Ericson phone and countless others where you might not even think they came from Japan? Ask your daddy what the China of their day was (or maybe your granddad if you aren't as old as me).
MMO Quests are like orgasms:
You may solo them, I prefer them in a group.
Well, I came for some insight, and instead there are eleven posts above me trashing the United States. So here's some actual thinking instead of the usual Two Minutes Hate.
China does indeed make very little from its manufacturing. The Chinese bemoan the fact that they're making so much for the world and getting so little in return. The reason is lack of brands - Chinese people just don't see brands as being important. They don't trust anything that they can't hold in their hands, and you wouldn't either if you had just emerged from fifty years of enforced poverty under a radical leftist government. Another problem is the rampant theft of IP and cutthroat domestic competition. Foreign brands have much of the high end, and Chinese companies are forced to viciously compete on price at the low end. And hey, if you do invest in R&D, Chinese IP laws are so weak that you'll get ripped off - why make money for someone else?
Suppose there was a phone that did everything the iPhone did, but didn't have the Apple logo on the outside. It wouldn't be nearly as popular, because there are plenty of people willing to pay $$$ for anything with that logo on it. Indeed, American companies come to China to make money, and make it they do. Apple is making money hand over fist with the iPhone. The Chinese get the scraps. Companies like KFC and Nike are kicking ass in China's domestic market.
The part about innovation is spot-on: the Chinese simply don't have that culture of "fixin' things" like we do. The usual attitude is to wait around for the government to do something. I've had my product copied so many times when it would have just been easier (and more educational) for the company to make its own damn product. Who knows, they might have made a better one instead of an inferior copy. But they'll never know because they just can't see past the end of their noses.
Here's an interesting link on branding if you want further reading, and here is another.
Shutting down free speech with violence isn't fighting fascism. It IS fascism!
"....with predominantly American employees and stockholders.."
Seriously, I would say that 70-80% of the employees I have seen at various tech companies...at least on the west coast are foreign nationals.
Yes I have. It is a much smaller percentage there. And, most foreign nationals in high-tech either already have or eventually get a green card and stay in the US. Some even become citizens. In any case, it is still money going to the US, and spend in the US.
The author is quite blissful! He completely forget that what he is saying is true, but only half of the truth. In the end, we still need $4.00 of exports TO china to make it all balance out.
When we import any thing, some number of dollars leave this nation. If a corresponding number of exports be it in commodities such as grain or coal, or brain share such as banking services or designs (or legal fees), is not made, we end up owing the nation from which we imported the good from.
In other words, if we import $200,000,000 in a year and only export $150,000,000, we end up owing $50,000,000. Sooner or later those dollars WILL have to make it back to us, whether it is from the other nation buying buildings, gold or politicians (us: china please be kind to your people. china: mind your own business or we will collect on your debt!).
Of course the numbers I quoted are quite small compared to reality. Scale them accordingly.
-- Many men would appreciate a woman's mind more if they could fondle it
It does not, however, get into the U.S. economy at large. There are the local retail sales people and the like, but the big money goes into the people with big pockets and pretty much stays there. One only has to look at the current figures for distribution of wealth to show that there is nearly no middle class left in the U.S. Further, all the money is being made through imaginary property ownership. Some say the roman empire fell because their economy shifted to an economy based economy... the same with the british empire. The global empire is in trouble for similar reasons.
We need our manufacturing back. We need our agriculture back in the hands of individual farmers. Some things are just better when people are working.
While Chinese producers may only have made $4 net profit (at least, according to the figures of some right wing reporter, from one of the UK's most ideologically right wing 'papers'), there was still a significant net capital outflow from the US economy in exhange for material goods.
Remember that this profit still exists after paying workers wages to make these goods, which still has far more significant benefits for the economic security of a country that 'net profit' to one company.
The Right Wing nuts always choose ignore this fact, because they are predominately the rich individuals who have some stakeholding in the profits of corporations, but for the rest of us, a huge trade deficit is a reflection of an economy that is failing for the vast majority of the general population, as jobs are offshored, and real world wages decline.
'Intellectual Property' huckersterism may look like it offers good returns currently, but if you look at the actual components in the iPhone, many were not actually designed in the West, and China is most certainly developing an indigenous design capability that has already surpassed that is the United States, and UK in many areas. This model will also fail for the rich, ultimately.
Manufacturing has always had small margins, particularly when run domestically - but that doesn't mean that we shouldn't manufacture domestically. In fact, to do so is a matter of national economic security.
It is precisely this kind of Right Wing extremist nonsense that infuriates me, and insults my intelligence. The Telegraph truly is voice of Right Wing greed (and of course, stupidity - its readers).
No a developed country can't run a trade deficit forever - thus it does in fact need a trade surplus (well dead even is fine too) to survive.
The US gets away with it simply because the US dollar is used as the reserve currency and trade currency for most commodities. Other nations get away with it due to China's games with the US dollar knocking on to their currencies.
What should happen is that the relative value of the currency of the country running a deficit will fall until it is no longer running a deficit. It's simple mathematics.
The rest of the world keeps printing money and buying US treasuries to stop this inevitable re-balancing, but it will happen at some point - it gets more and more unstable the longer the current situation is propped up. Of course humans can keep unstable situation balancing for much much longer than it seems possible (witness US real estate prices - a bubble that "should" have popped in 2003 but lasted much longer, and staill hasn't fully deflated)...
The article conveniently leaves out that by giving control of manufacturing to China, the US loses out in the long run. American jobs go overseas and our technical prowess diminishes. Strong economies produce, export, and sell. Service economies are weak and founded on shale. We have seen the effects of a service-based economy in two recessions: dot-com bomb and the housing bust. Manufacturing economies breed technological innovation, encourage higher education, and engage in heavy research and development. Not to mention, a manufacturing economy gives way to strong national security. Being dependent upon China and others leaves the US in a weaker position.
And the rich get richer, and slave-driving gets different names - currently: outsourcing.
You are solely responsible if you are one.
Something stinks in the state of World.
OPEC won't gain wealth unless they actually sell some oil, they do have an incentive to restrict supplies but if they do so too much then alternative energy supplies become more economically viable.
1. Eye contact and conversation with people nearby are becoming too frightening for people.
2. Most of the music being produced formally is crap.
3. The Musical Idolatry Complex is no longer capable of concealing Point 2.
4. Cocaine use is dropping because of Point 3.
5. Wall Street has not been affected by Point 4.
6. DRM is dead.
7. Most people think "more bass" is a substitute for a crappy bitrate, but Point 2 makes this fact moot.
8. "Zune" is a crappy name for a product.
9. Consumers and sheep are not disturbed by the suffering of others.
10. Point 9 is as true for international relations and the slaughterhouse as it is for my ears on the bus in the morning.
Rich And Stupid is not so bad as Working For Rich And Stupid.
I am enjoying the way you are deconstructing people's definitions.
Aide-toi, le Ciel t'aidera - Jeanne D'Arc.