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Follow the Money
Posted on March 11th, 2009 8 commentsIf 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.
8 responses to “Follow the Money”
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Tariq Mahmood March 24th, 2009 at 18:26
Finally some common sense!!!!
This article is spot on and although it is just a summary of the article by Greg Linden, Kenneth L. Kraemer, and Jason Dedrick from 2007 it is spot on.
I have been thinking along these lines since I was in high school, I try to plan as much as my behaviors around these facts, and I don’t understand for the life of me why more people are not educated along these facts.
Cost of a product to the end consumer should not be only thing we look at, how much of the cost is leaving the society should be our chief concern. This is neither protectionist nor racist, it is giving the best life to your community first.
I would add that these analysis’s should be more frequently done and published as they are a viable argument to repeal free trade agreements and institute subsidies to “inefficient” industries.
Already in countries like China, India, Pakistan, and Malaysia the governments subsidize food prices and fuel prices. In Canada and the EU the governments subsidize health care. American companies are put at a disadvantage from these subsidies.
It is not only a matter of low wages being paid to workers overseas, it is also a matter of subsidized living for these workers.
I also would rather see a focus on really increasing global production, rather then simply deferring production from the West to the East while consumption remains the same (the additional income from globalization does increase consumption, but ultimately the trade deficient experienced by the EU and USA shows that much of globalization is about deferring work from the West to the East and not increasing global production).
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The united states only makes up 6% of the world population, why should we assume that they should not be able to run a 2:1 sales ratio or higher with the rest of the world. Even if you only looked at highly developed countries like the US, EU members, Japan, Russia, Korea, Australia, Canada, etc… The US population is still less than 33% of the worldwide population. Americans overconsume everything from food to oil to iPods and if we can’t sell twice as many of something like an iPod in foriegn markets than we need to think about how we are doing things.
A more interesting case study for you might be Coca-Cola…
With the iPod you also forget about iTunes, in order to accurately gauge the inflow/outflow you should probably look at that because most of the music on their is made in america and hosted in america. So try and find out what the attach rate is for an iPod with iTunes. It is bound to be positive and the higher it is the lower the foriegn sales need to be.
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pma-admin May 7th, 2009 at 12:46
Mike,
Thanks for pointing out the population numbers. As you mention, “if we can’t sell twice as many of something like an iPod……..than we need to think about how we are doing things.” This is exactly my point. If the iPod can’t be a net positive for the economy, what innovation economy product can.There was a urban myth that Apple could give away shuffles since they would make more money from iTunes sales to more then make up for the cost of the give-a-way. A recent research paper showed that up to 83% of the songs on most iPods are illegal. Never the less, you point is still valid. The further revenue from iTunes does help, but it is still probably not enough to make the iPod a net positive.
Coca-Cola might be a good case study, but it does not fall into the “manufactured” product definition that I would like to stick to.
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The article is ver good. Write please more
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Is it me or did this article make you want to buy an iPad?
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This Blog is very nice.
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Great post!
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good info !
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