$65 per phone? Not likely (labor costs, fairness, profit)

The question of what is a fair return to workers for manufactured goods is a complex one in the details, but, often, a simple on in terms of gut-check ethics.

Valerie, in an excellent comment, on Nyein’s post, pointed out that the journalist (not an expert, but reporting on expertise) in the “Retraction” episode mentioned iPhones might be $65 more if made in the US.  That struck me as too high, so I checked it out.  Now, cost data on products is usually hard to find as it can be strategically important.  So, this involves a lot of guesswork.

First, an analyst, Horace Deidu,  made a good estimate of labor costs.

This leaves about 17 hours unaccounted for in the throughput time. Could this time be spent in labor intensive operations? In the ABC report the wage of workers on the line is given as $1.78/hr[4]. 17 hours of labor input would imply $30 labor cost per iPhone.

So,17 hours per phone.

The average US manufacturing wage is around $23, according to the Bureau of Labor statistics.  If it took the same number of hours in an “average” US facility, the increased cost is enormous.  Around $360.  That is three times US minimum wage.

BUT, US workers and plants are far more productive (amount of output per hour worked).  Around ten times more.  So, that is probably  where the $30 more per phone comes from.

U.S. minimum wage in California is $8/hour.  So, if China and the US had said that minimum wages should be the SAME, when they agreed to”freer” trade. then the cost difference would fall to at least 1/4th.  Why?  Well, since the Foxconn workers make a little less than $2/hour, they would be making 4 times as much, and, ceteris paribis, the cost would increase for Apple.  In fact, the Foxconn workers earn MORE than minimum wage in China, hence, it is probable if the wage floor came up, the Foxconn workers would make MORE than US minimum wage and the subsequent cost of iPhones in China would be even closer to US labor costs.

However, total equivalency of wages might not be realistic if you think about purchasing power.  The Economist has this very clever “Big Mac” metric which is a way to get at global purchasing power parity which captures both wages and cost of goods across economies.  So, for example, a dollar buys a little more than 3.5 in China of what it does here (3.67 in Jan 2012).  That means that a minimum wage that is closer to parity with us is not the equivalent of $8/hour but $8/hour divided by 3.67 to account for greater purchasing power there.  Or, the minimum wage would be twice as much.

So, in that case, applying that to the estimates of iPhone costs, we get the following.

Current Chinese Shenzen wage: $1.7/hour.

If Chinese minimum wage were in parity with US: about $3.5 (since parity is more than 2 (8/3.67))

So, if Chinese workers at Foxconn earned the purchasing power equivalent of US minimum wage workers, they would get about twice what they are getting.

This would bring labor cost to $60/per phone.

iPhones generate about $357 in profit per phone.

That would lower to $327 in the above model.

Would they pass that on to consumers?  Or lower their profits?  Both?
That is unclear.  But I don’t think this hypothetical  increase in what Chinese workers keep of the value of their labor input is going to cost any consumer $65 per phone.

This entry was posted in Company, tech/no, Uncategorized and tagged , , , , , , by Jordi. Bookmark the permalink.

About Jordi

I am an assistant professor in the Management School at Bucknell University. I specialize in organization theory, social networks, and studying the network society. I have three children, including twins. They love bouncing on the couch, legos, music, and my waffles. My wife teaches English at the same university. I am interested in most things, but these days, networks, social entrepreneurs, the environment, innovation, and virtual worlds. Finding Hidden Abodes and Shaking Iron Cages since 1972

3 thoughts on “$65 per phone? Not likely (labor costs, fairness, profit)

  1. The idea that the cost of the phones could actually be lowered by increasing the wages of the workers in Shenzen is rather astounding, but also makes it clear why Apple hasn’t raised wages. From the corporate perspective, when you’re concerned with your bottom line, why raise wages and lower the price of your product? Even if the above calculations are the slightest bit accurate, it reflects poorly on Apple.

  2. Lower price of phone? I didn’t say that, did I? The labor costs to Apple would be higher if they pay more at Foxconn. The questions are How much? Who absorbs the increase (consumers through price or Apple through lower margin)? How does labor cost in Shenzen compare to what it might be in the US or other higher wage economy?

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