The core of the problem
For a case study of why the Pearl River Delta is trying to upgrade its manufacturing capacity, look no further than the Californian tech giant Apple.
More than a decade ago a team of academics at the University of California looked at the value-creation in the making of an iPod.
Their findings were that – while the iPod was assembled in China (by Foxconn, the Taiwanese contract manufacturer) – the lion’s share of the profits were earned in the United States.
The researchers estimated that retailers were adding $75 in mark-up to the iPod’s $224 wholesale price. The unit costs for the parts for the iPod were about $144, paid mostly to Korean, American and Japanese suppliers. Apple was deriving the best returns with $80 in gross profit on each unit. And the factories in China that put the iPods together were at the bottom of the pile, with no more than $4 in contract fees.
Four years later the researchers ran the same exercise for the iPad and the iPhone. The results were similar: only a fraction of the final prices of Apple’s gadgets – less than $10 – was paid to the firms assembling them in China.
Foxconn’s work for the Californian giant now includes the assembly of its most recent gadget – the Apple Watch.
And the British press has calculated that it would take almost three years for a Foxconn employee to save up for the most expensive version of the watch, assuming that none of the worker’s wages were spent on anything else, including income tax.
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