What Would a Fair-Labor iPod Cost?
Just how much of a Constructive Capitalist is Apple? There’s been a ton of discussion about Apple’s Chinese suppliers, and their relatively bad labour conditions recently — along the lines of, “enjoy your sweatshop produced iPods, evil Americans.”
What’s more interesting is the counter-factual: how much would it cost to produce a “Good iPod”? One not produced in a sweatshop, but under decent labour conditions. Like, for example, one produced in the USA — hardly a paragon of labour standards, but a begining point.
That’s what I calculated. The Sloan Foundation data estimate just of an iPod’s cost is the final assembly in China. Using average Chinese hourly compensation costs, that’s about 2.7 hours of labour. I then used American hourly compensation costs to adjust for what that final assembly might cost in the States.
The results are surprising. An American made iPod Classic costs just 23% more than a Chinese made iPod Classic: more, to be precise. The same relationship holds across the iPod family (price differentials in the 20-30% range) The iPod is a durable good, so that’s a difference — but smaller than one might expect.
Now, these numbers aren’t exact — they’re estimates I threw together in 20 minutes. Yet, if anything, perhaps they overstate the price differential, because they don’t factor in scale, learning, and experience effects — and they assume Apple passes on increased labour costs entirely to consumers. But they provide enough of an indication to ask:
Is a 23% price difference between a “Good” and “Evil iPod” worth it — to Apple, society, communities, and our economy? Would Apple’s business suffer from charging people more for an iPod? Can we afford to pay 23% for goods made according to higher labour standards?
I think the real question is: how long can we afford not to? The less we invest in one another, the worse off we all are eventually. The higher standards we set for ourselves, the more potential value we can create.
The American manufacturing sector has been eviscerated by an insistence on near-term cost-cutting — and today, our lack of standards and manufacturing competence has led to a dearth of innovation exactly when we need it most.
If goods cost what they should, we would consume what we could authentically afford, instead of overconsuming what we couldn’t. If their prices reflected real human costs, perhaps yesterday’s unsustainably large macro imbalances wouldn’t have built up in the first place. And that, from an economic point of view, would be good for everyone.
Here’s my conclusion.
Apple is a Constructive Capitalist. It has done remarkably constructive things — on the demand side. It has freed people from the shackles of innovation-stifling monopolies in mobile, computing, and music, vaporizing evil in market after market.
Yet, today, Apple faces a new challenge. Can it be equally constructive on the supply side? Can it offer even higher-value goods produced to a groundbreaking new set of labour standards for the 21st Century? Can it bring production — not just consumption — out of the industrial era, and into a 21st Century, that demands a better kind of business?
It’s not impossible. In fact, getting constructive is the next great source of radical innovation. Every day, more and more companies are getting radically constructive — and upending their rivals, industries, and sectors as a result. I discuss 21st Century innovation — and Constructive Capitalism itself — here.
NB — The spreadsheet is here for those who want to play with it, hack it, and tweak it.
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Interesting points. Would your numbers reveal how much of the cost in transportation and warranty issues could be recovered by shifting the manufacturing site? Parts supply, maybe?
While the basic philosophy / premise of the article is fair and agreeable, it takes a rather simplistic view of the cost-economics involved. The relation between the “cost” of a CE product and it’s “retail price” is far more complex than is represented in the linked spreadsheet. And therefore I’d hesitate to buy into the conclusion that a good iPod is probably not too expensive. Let me explain why.
[ Note that I use the word “cost” to represent what it costs the producer to make and sell the product, and the word “price” to represent the money it costs the consumer to buy it].
Firstly, there are several factors contributing to the “cost” of a product. There’s bill-of-material (cost of all the physical parts of the product and it’s packaging), then there is the factored “development cost” (engineering costs for product design - mechanics, electrics, software, ..), then there are factored in production costs (investment in manufacturing equipment and factory setup, labor costs, cost of inventories), taxes and duties involved (per component), and finally, transportation costs. There are also hidden costs such as “fall-off” / manufacturing “yield”. These are all “costs”. And then there are several “expenses” on top of this to sell a product. Think of ad spends, launch campaigns, event promotions, trade-show participation, celebrity endorsements, dealer margins etc etc…
The price of a product can be computed in several ways. Some people take the “cost” of the product and multiply it by a factor to cover in the expenses of bringing the manufactured product to market. So, if C is cost, K is the factor, then the price P = (C * K). Given that there are several elements contributing to the cost (let’s say c1, c2, c3..cn), with this formula, every element contributes uniformly to the price. More often than not, a more complex formula is used, wherein the cost factors are broken down into types, which contribute in varying degrees to the price. Moreover, one can apply several optimization techniques to make choices such that certain cost components are optimized. For example, manufacturing in certain countries entails tax benefits as against importing manufactured goods, although the cost of manufacturing in these places is relatively high. So companies toy with several manufacturing/assembly models so as to benefit from low-cost manufacturing in some places, then transport the semi-finished “kit” to the destination country where it undergoes a final-assembly with a high-cost, but integral savings due to low taxes.
Without going in further detail, suffice to say that going from cost to price is a complex equation of several variables, many of which are dynamic and not always under the control of the producer. Also, there are several cost factors (apart from cost of labor) which vary across different parts of the world (ex., cost of logistics/inventory, cost of hiring and firing people etc). All this leads me to believe that a “good iPod” would cost a lot more than shown here.