Follow the Money

If you read the news and believe many economists, it seems that America does not need to have a strong manufacturing base to be a viable economy. The argument is that as long as we are a center of innovation the economy will be fine. There are different components of an innovation economy, but how do you show its value. To explore the innovation economy, I decided to look at the electronic and specifically the iPod. I decided on the iPod for several reasons; The iPod is the innovation of an America company, but it is manufactured in the pacific rim. The iPod has excellent market share in both the domestic and international markets. There is a great deal of data available about the iPod. The majority of information about the value distribution is taken from the paper Who Captures Value in a Global Innovation System? The case of Apple’s iPod, at http://pcic.merage.uci.edu/papers/2007/AppleiPod.pdf.

The 30GB 5th-generation iPod has a retail price of $299, with $190 of that cost being gross margin for Apple ($80), retailer ($45), distributor ($30), major component manufacturers ($34), and minor component manufacturers ($1). If the product is sold in America, then up to $163 of the gross margin goes to American companies, or about 54.5% of the retail cost. The numbers change if the distributor and/or retailer are foreign owned. The hard numbers for American companies are the $80 for apple and the $7 for the “chips”, or about 29%. This number could rise if some of the minor components had ties to American companies.

Let’s look at some numbers, if $1,000,000 worth of iPods is sold in America about $455,000 (45.5%) of those dollars leave America. To make up those dollars, Apple has to sell $1,569,000 worth of iPod in other countries to bring in 29% needed to match money leaving the country. To put it another way, Apple has to get 63% or more of their iPod sales internationally for the product to be a net positive for the American economy.

Since the point of this post is not to determine whether the iPod itself is a net negative or positive on the American economy, I will not delve into the domestic verse international sales numbers. The point is to get a “high-end” number to work with when discussing manufactured electronics. The iPod represents the “high-end” due to the relatively high gross margin they command due to name recognition.

Even with a higher gross margin, the iPod still requires almost a two to one ratio of international to domestic sales to be a net positive for the economy. I can only speculate what the ratio is for lower margin items, such as cellular telephones.