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Oct 20, 2011
China is now the second-largest market in the world for California-based technology company Apple.
In China, iPhones and iPads are selling faster than hot cakes. According to chief executive Tim Cook, Apple's sales in the country have jumped fourfold over the last 12 months to hit US$4.5 billion in the quarter just ended. That's 16 per cent of the company's worldwide sales.
US politicians might want to consider some of the implications of those numbers before they talk about slapping punitive duties on Chinese-made goods to protect American jobs.
Apple is exactly the sort of company Washington's tub-thumpers have in mind when they lament the loss of US manufacturing jobs to factories in China.
Apple may be archetypal Silicon Valley success story, but the gadgets it sells in such vast numbers are not manufactured in the US. Instead they are made in vast factory complexes in southern China employing hundreds of thousands of lowly-paid workers.
As a result, for every US$499 iPad shipped across the Pacific to the US from its factory in China, the US trade deficit rises by US$275.
If those iPads were made in the US, reason the China-bashers in Washington, legions of jobs would be created for American workers, and the US trade deficit would be eliminated.
But things aren't that simple. Crack open an iPad, and you find that, although it is assembled in China, none of the components are manufactured by Chinese companies.
Most of the machine's high-value innards are actually made by Korean companies, including LG and Samsung, who contribute the display and memory chips. Other bits and pieces come from companies based in Taiwan, Germany, Japan and even the US.
According to a recent analysis by researchers at the University of California, Irvine, these assorted component manufacturers capture US$88 of the value of each US$499 iPad sold in US shops. Distributers and retailers get another US$75.
Material costs make up US$154 of the retail price, while the labour costs of assembly - the element that so vexes the China-bashers - account for just US$8.
Apple itself, responsible for design and marketing, captures by far the lion's share of the value of each iPad sold: a handsome US$150 (see the chart).
Looked at in this way, the damage inflicted on American jobs and the US trade balance by US companies outsourcing their manufacturing to China dwindles almost to nothing.
And if you then consider the value captured by the American economy as a result of Apple's soaring sales in China, the picture reverses entirely.
That same iPad, which sells in California for US$499, sells in Shenzhen, the city where it is assembled, for 3,988 yuan, or US$625. Allowing for the differences in sales taxes, that mark-up implies that for each iPad sold in China, Apple captures value of at least US$219.
None of that gain shows up in the US trade statistics. After all, the iPad was both manufactured and sold in China.
But the value certainly shows up in Apple's profits, which came to US$6.62 billion for the three months to September. And the benefit of those profits flow back to the US economy, to Apple's highly paid US workforce and to the company's largely US-based shareholders (and to the US tax authorities).
And it's not just Apple. According to one estimate by Hong Kong-based economist Enzio von Pfeil, rejigging the figures to account for the international sales of all US multinationals drastically changes the picture of world trade imbalances. In 2005, instead of racking up a national trade deficit of US$714 billion, von Pfeil reckons the US actually ran a global trade surplus of US$2.7 trillion. China ran a deficit of US$1.7 trillion.
In other words, the US economy benefits enormously from the sales of Apple and other US companies in China, even though they may not manufacture their goods in the US.
American politicians might like to remember that before threatening punitive trade action against Beijing.
tom.holland@scmp.com Copyright (c) 2011. South China Morning Post Publishers Ltd. All rights reserved.