The threat is close to home

You don’t have to be paranoid to believe that there is an international capitalist conspiracy. All it takes is a close look at the Apple iPod.

U.S. trade unionists, like most Americans, are worried about the trade deficit with China. After recent visits there, they learned that 60 percent of imports from China are made by transnational corporations based in the United States. Thus the “threat” to the U.S. economy is much more from General Electric, Apple, Wal-Mart or Google than it is from China.

It turns out that China often obtains only a tiny fraction of the value of many products purportedly “made in China.”

In a striking illustration of this phenomenon, Hal R. Varian, a professor of business at the University of California at Berkeley, writing in The New York Times, recently recapped the findings of a research team that analyzed production of the Apple iPod.

First, it turns out Apple doesn’t make the Apple iPod. The company outsources 100 percent of the manufacturing process to Asian companies, including Asustek, Inventec and Foxconn.

Second, Varian explains that this doesn’t tell us very much either, because these outfits only do partial assembly. None of them has anything to do with the production of the 451 parts that make up the iPod.

This makes the value-creation process of the iPod especially difficult to assess.

In the research team’s study, the retail value of the 30-gigabyte video iPod was $299. The most expensive component was the hard drive ($73), manufactured by Toshiba. This was followed by the display module ($20), the video/multimedia processor chip ($8) and the controller chip ($5). The labor associated with the final assembly of the iPod in China amounted to only $4.

Varian said one approach to determining the origin of the iPod’s value would be to credit the country of origin of each component’s maker. So $73 of the cost would be attributed to Japan, since Toshiba is Japanese; the $13 cost of the two chips would be attributed to the U.S., since the suppliers, Broadcom and PortalPlayer, are American firms; and so on.

This didn’t work, however, because Toshiba, although Japanese, makes its hard drives in the Philippines and China (cheaper labor). Similarly, Broadcom and PortalPlayer, although American, make their chips in Taiwan (again, cheaper labor).

Another approach would be to look at the production process as a sequence of steps, each performed by a different company operating in a different country. At each step, inputs like chips and boards were converted into outputs like a circuit board. The difference between the cost of the inputs and the value of the outputs was the “value added” at that step, Varian says. This “value added,” in turn, was attributed to the country where the process took place.

Citing the research team’s estimates, Varian said, “The $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs. This $19 is attributed to Japan, since Toshiba is a Japanese company.”

Continuing with this approach, the major components of the iPod were examined and “value added” was calculated at different stages of production and then assigned to the country where it was created. The process revealed that the largest share of the “value added” goes to enterprises in the United States.

Varian says that more than half — $163 — of the iPod’s $299 retail value in the U.S. was captured by American companies: $75 for distribution and retail costs, $8 to domestic component makers, and $80 for Apple’s profits. Japan contributed $26.

Government spokespersons say we buy much more from China than they buy from us, creating a trade deficit in their favor. They say that each $299 iPod sold here contributes $150 to that deficit. The truth is that, using the method described by Varian, only $3, or 1 percent, of the value of the iPod that is “made in China” is captured by China. The bulk is captured by U.S. corporations.

The people who own Apple are brilliant. They truly deserve some type of “Brave New Capitalists of the World Award.” They have figured out how to take 451 generic parts produced by workers in companies and countries all over the world, sell the final product for a profit that goes into their pocket, and blame the country that made the least in the process for the trade deficit they profit from.