With all the talk about how globalization and outsourcing affect U.S. unemployment, many people seem to be of the mindset that if we were to revive the U.S. manufacturing base, the unemployment problem would take care of itself. Personally, I’d love to see more goods made here in the good ol’ U.S. of A and thus more manufacturing jobs, but its a two-way street: Labor costs in the United States are SUBSTANTIALLY higher than they are in other countries, namely developing ones like China, Taiwan, Malaysia, etc.
Currently, Apple has contracted with Foxconn to make their iPad 2′s in China, where employees are reportedly paid (after receiving a 30% raise) a king’s ransom of 1,200 Yuan/month, or about $185 at current exchange rates (y/$ = 0.154), or, if we assume an average 8-hour/day, 250-day/year (probably unrealistic assumptions), $1.11/hour. But what if Apple decided to do the “patriotic” thing, and hire U.S. workers in the U.S. to make its heralded tablet? How much more would it cost to make the iPad 2 in the U.S. versus in China? Let’s run some back-of-the-envelope numbers and see:
Average U.S. manufacturing/mining/construction compensation is $32.53/hour as of December, according to the BLS. Research firm iSuppli estimates the iPad 2 costs $10 to manufacture, which – using the $1.11/hour rate – works out to about 9 hours each to complete. If assembly and manufacture took the same amount of time in the U.S. as it does in China (another possibly unrealistic assumption), the cost of making each iPad 2 comes out to $292.77!
Again, according to iSupply, the material cost for the 32gb iPad 2 WiFi + 3g – which sells for $729 - is about $325, or $335 including labor, which puts Apple’s gross margin (ex shipping/handling) at 54%. Just using the simple math above, if the iPad 2 was made in the U.S it would cost $617.77, bringing Apple’s gross margin down to 15.25%! Of course, Apple is not in the business of self-immolation, and given their relatively substantial pricing power, they could just make the iPad 2 more expensive, let’s say, increasing the price to the point where their gross margins stayed intact, from $729 to $1,144.02!
Is the demand curve for iPad 2′s normal, i.e. is it downward-sloping (with a negative price elasticity of demand), or is it a Veblen good, i.e. as the price increases, the quantity demanded actually increases? Will consumers still keep lining-up to shell-out their (presumably) hard-earned money for a product that won’t make it into their hands for weeks, that will likely be rendered obsolete (in the “cool” sense) with the iPad3 a year or so down the road if the price rises 57%?
Even if Apple found that the demand curve was in-fact downward sloping, and that their revenue maximization point (price/unit * # of units sold) involved absorbing higher manufacturing and assembly costs, buyers would still be asked to pay significantly more for a “Made in The U.S.A.” iPad 2 than the comparitively cheaper “Made in China” version. This brings us to the quasi-ultimate question (short of the larger macro-economic one, for another time): How much more are U.S. consumers willing to pay for the “Made in The U.S.A” stamp, if anything?
I don’t have an answer, at least not anything even remotely approaching a definitive one.
How much more would you pay? $100? 5%? Zero? Let us know in the comments!