[Image by Sven Teschke]
An article in the New York Times published 2 days ago suddenly gained a lot of traction and got discussed, reposted and reblogged today: Apple making money off of the United States, while directly employing “only” twice as many employees in the US than overseas – but indirectly more than ten times those combined, none of which in the US
I’ve published on Apple’s revenue and profit a few times now, last of which was two months ago. A historical year for Apple: it surpassed Google on profit per employee – operating profit so before taxes, by the way
But, let’s face it: Apple’s success coincided with turning away from the United States for manufacturing their products, and towards the East. Correlation but no causation? Fair enough.
Here’s what makes China so great, according to the article:
An eight-hour drive from that glass factory is a complex, known informally as Foxconn City, where the iPhone is assembled. To Apple executives, Foxconn City was further evidence that China could deliver workers — and diligence — that outpaced their American counterparts.
That’s because nothing like Foxconn City exists in the United States.
The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day. When one Apple executive arrived during a shift change, his car was stuck in a river of employees streaming past. “The scale is unimaginable,” he said.
Foxconn employs nearly 300 guards to direct foot traffic so workers are not crushed in doorway bottlenecks. The facility’s central kitchen cooks an average of three tons of pork and 13 tons of rice a day. While factories are spotless, the air inside nearby teahouses is hazy with the smoke and stench of cigarettes
Imagine that? Spending $ 100 for a human being who works 72 hours? That’s one-and-a-half dollar per hour, $ 1.50 for those who like to see numbers over words.
Can anyone beat that in the West? No. The article then goes on to claim
It is hard to estimate how much more it would cost to build iPhones in the United States. However, various academics and manufacturing analysts estimate that because labor is such a small part of technology manufacturing, paying American wages would add up to $65 to each iPhone’s expense. Since Apple’s profits are often hundreds of dollars per phone, building domestically, in theory, would still give the company a healthy reward.
Well excuse me for laughing out loud. Sixty-five dollars is the equivalent of a 48-hour Chinese workweek. Hard choice there? I don’t think so. And I doubt the “hundreds of dollars profit per phone” there, so I did some calculations
Taking 2011, you can see from my latest post on Apple that they manage $ 560,000 profit per employee, but that’s before taxes. Regardless of taxes, employee revenue amounts to $ 1,791,000 – yes, that’s almost 2 million dollars.
Two million dollars! Where does that revenue go?
No idea, but if we just play dumb this simply means that the average Apple employee costs $ 1,231,00 – over one million dollars.
That can’t be true of course, and it isn’t. Like Google, Apple’s cost are mostly hardware related. Look at the old HP in my post, and you’ll see that hardware makers have extremely high costs per employee – so let’s just look at the margins per device for Apple, shall we? Taking the last fiscal year, 2011 (iPhone and iPad figures include related sales, such as e.g. carrier agreements, services, and accessories):
Unfortunately, and understandably so, Apple doesn’t give away sales / total cost per device – so we’ll have to find a way around that.
The blunt way is to divide total profit after taxes by total number of devices, which leads to a figure of $ 158 net profit per device – but that wouldn’t be fair to the iPod, or their desktops, now would it?
We could assume they make the same margin per device, percentage-wise, and then these figures are the result (the margin per device would be the same margin as the net profit margin of course, being 26.82%):
Hundreds of dollars profit per device? Not really, dear New York Times. Yes, for the desktops and laptops, but those are the least quantity sold: together, they make up for only 10% of total units.
On the iPod Apple doesn’t even make half a hundred dollars, and iPhone and iPad reach well over one hundred, but not even two hundred dollar per device – and in my book “hundreds” means at least two hundred, usually four to five hundred on average
Anyway, I was wondering how these margins relate to the margins for the Chinese workers that build these. I consulted the Chinese tax system, and the current exchange rate that tells me 1 dollar equals 6 yuan, and then I learned that the average Chinese worker employed by Apple earns 600 yuan for a 72-hour workweek. They probably work 50 weeks a year too, with an average of 5 to 15 paid leave days a year. Notwithstanding the fact that a 72-hour 50-week work year would be the equivalent of 1.8 years for the average American, annual pay would be 30,000 yuan, being 2,500 yuan per month
According to the tax table mentioned above, monthly tax would be 10%, being 250 yuan, minus the quick deduction, being 105 yuan, leaving the employee with 2,355 yuan monthly income: given the exchange rate, that’s a net monthly income of $ 392.50 – just a little over the net margin Apple makes on a desktop.
So, with 300 hours of work in a month, a Chinese employed by Apple makes a net margin that’s less than two average Apple devices
If this Chinese were to work 40 hours a week for 50 weeks a year, like his average American counterpart, he’d net $ 213.70 per month: not even enough to equal the two lowest-margin Apple products (in my theoretical example), the iPad and the iPod.
In other words, the net margin on 15 iPhones / iPads would pay for one entire employee year.
No, those jobs aren’t coming back for sure.