Some surprises (for me) here...if the analysis is correct. M -----Original Message----- From: [email protected] [mailto:[email protected]] On Behalf Of [email protected] Sent: Sunday, November 29, 2009 5:47 AM To: TOC Subject: [TriumphOfContent] What the iPod tells us about Britain's economic future
>From the Telegraph... a rather interesting piece: What the iPod tells us about Britain's economic future By Edmund <http://blogs.telegraph.co.uk/finance/author/edmundconway/> Conway Economics <http://blogs.telegraph.co.uk/finance/category/economics/> Last updated: November 26th, 2009 55 <http://blogs.telegraph.co.uk/finance/edmundconway/100002310/what-the-ipod-t ells-us-about-britains-economic-future/#comments> Comments Comment <http://blogs.telegraph.co.uk/finance/edmundconway/100002310/what-the-ipod-t ells-us-about-britains-economic-future/#postComment> on this article In my column this morning on manufacturing (Shock <http://www.telegraph.co.uk/finance/comment/edmundconway/6658672/Shock-news- --Britain-still-makes-things.html> news - Britain still makes things) I didn't have space to mention one other important misconception about manufacturing: that just because something is "made in China" or somewhere else in the emerging world doesn't necessarily mean that the money from its construction goes to that place alone. This helps explain why, in broad terms, a developed economy does not need a trade surplus (or even a balance) in order to survive. Let's take the iPod (or the iPhone for that matter) as an example. On the back of it it says "Designed by Apple, Made in China" or words to that effect. What this tells you is who designed it and who put it together. What it doesn't reveal is the complex economic web that the product represents - that the cash you pay for one of them is scattered to many different countries around the world. In a very enlightening series of papers on precisely this, a team of US academics (Greg Linden, Jason Dedrick and Kenneth L. Kraemer, all of the University of California, Irvine) have found out where the money goes, and their conclusions might come as something of a surprise. For one, although in trade statistics the Chinese export value for a unit of a 30GB video model in 2006 was about $150 (in other words for every iPod sold $150 went onto the Chinese exports ledger) Chinese producers really only "earned" around $4. China, you see, is really just the place where most of the other components that go inside the iPod are shipped and assembled. The remaining cash instead went to the US, Japan and a host of other countries (among which the UK is one) who made the parts that go inside. In other words, where the product is not necessarily where gets the lion's share of the profits. <http://blogs.telegraph.co.uk/finance/files/2009/11/ipodchart.jpg> ipodchart In fact, this breakdown of where the cash you pay for an iPod goes shows that the vast majority finds its way straight back to the US, rather than going to China. A hefty chunk represents the retail and distribution costs (which will depend on where you are, though in the case of this diagram they are in the US), then after that Apple recoups a massive chunk, effectively for having designed the thing. The rest of the money goes to the people who make what goes inside. As it happens, for most of the (older) iPods the team examined, the most expensive components were the hard disks, which were manufactured by Toshiba, a Japanese company, in the Philippines. Here, again, the same principle was at work: the designer of the hardware recouped far more of the profit than the factory which puts it together. Due to the way trade statistics are compiled, these flows of cash back to the US are unlikely to show up in the trade balance. But when you work out the overall US balance of payments, it will show that cash has flowed back into the country as a direct result of the intellectual property Apple owns in the iPod. It is a cursory reminder that we don't necessarily need to hammer steel and bash products together here in the UK in order to become a better-balanced manufacturer. There was all sorts of hand-wringing that took place a few years ago when Dyson made the decision to relocate the manufacture of their products to Malaysia, but the same principles that apply to the iPod also apply to the Dyson products. It is highly likely that Britain gets a far greater share of the proceeds from every vacuum the company sells than either Malaysia or any of the other component manufacturers or assemblers. It is another reminder, too, of the importance of innovation for the UK economy. But before, God help me, I start sounding like Gordon Brown, here are the economists' own conclusions. Check out their website, which has their recent papers on the real story <http://www.crito.uci.edu/papers.asp> of globalisation, trade and manufacturing. First, nationality matters. 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. Apple keeps its product design, software development, product management, marketing and other high value functions in the U.S. This is not necessarily because the U.S. work force has superior capabilities in all of these areas, but because Apple has developed very specialized knowledge and ways of doing things that reside within the company and would be difficult to transfer to external locations. Second, innovation matters. The producers of high value, critical components capture a large share of the value of an innovative product. For the 30GB Video iPod, the highest-value components are the hard drive and the display, both supplied by Japanese companies. Thus Japan captures the next largest share of the value of the iPod, thanks to its companies' strengths in those technologies. US chip makers such as Broadcom and PortalPlayer [one might also add Wolfson of Edinburgh which provides the audio codex chip] provide less costly inputs, but earn high margins and thus bring additional value to the U.S. By contrast, Inventec, which was actually responsible for assembly of this iPod (the activity that most people think of as "making" a product), earns a relatively modest share of its value. So in general, the greatest value from providing inputs to an innovative product goes to the countries whose firms provide critical, differentiated technologies. Third, trade statistics can mislead as much as inform. For every $299 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost) plus the cost of shipping. Yet the value added to the product through assembly in China is at most a few dollars. Even if we included the direct labor involved in making various parts and components in China, it would still add only marginally to China's share of the value. By this same logic, if the iPod were assembled in the U.S., most of the corresponding $150 bilateral (US-China) trade deficit would disappear, but the overall U.S. trade deficit associated with each unit would only fall by a few dollars. The rest would simply shift to the countries where the components are made, as those would have to be imported to the U.S. for final assembly. This is not to say that the U.S.-China trade imbalance is not a serious concern in a broader sense, but it shows that there is a need for better data to understand what that deficit really means for each country. To conclude, no single country is the source of all innovation and therefore U.S. companies need to work with international partners to bring new products to market. These companies will capture profits commensurate with the extra value they bring to the table. This is simply the nature of business in the 21st century, and the fact that many U.S. companies are successful in this environment brings significant benefits to the U.S. economy. As long as the U.S. market remains dynamic, with innovative firms and risk-taking entrepreneurs, global innovation should continue to create value for American investors and wellpaid jobs for knowledge workers. But if those companies get complacent or lose focus, there are plenty of foreign competitors ready to take their places. PS Incidentally, after writing my column I've received a few encouraging emails from readers who have themselves made the switch from finance to manufacturing. One is Ian Hart. Not so long ago he was employed in the City to put his scientific background and qualifications to "good use", trading derivatives. In the wake of the crisis, he has applied them to something far more worthwhile, making gin. He has created his own London Dry Gin, Sacred Gin <http://www.sacredspiritscompany.com/> , which has already won a number of awards. Excellent news! If anyone has any similar stories - for instance a rocket scientist who is now actually making rockets - do let us know.
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