[OPE-L] iPod and LTV

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Jun 29 2007 - 12:10:05 EDT

This kind of accounting probably represents the strongest common sensical
rejection of the labor theory of value. Not labor but ideas, genius and
creativity add value. Against materialism for idealism, etc.

An iPod Has Global Value. Ask the (Many) Countries That Make It.
NY Times
June 28, 2007

Who makes the Apple iPod? Hereís a hint: It is not Apple. The company
outsources the entire manufacture of the device to a number of Asian
enterprises, among them Asustek, Inventec Appliances and Foxconn.

But this list of companies isnít a satisfactory answer either: They only do
final assembly. What about the 451 parts that go into the iPod? Where are
they made and by whom?

Three researchers at the University of California, Irvine ó Greg Linden,
Kenneth L. Kraemer and Jason Dedrick ó applied some investigative cost
accounting to this question, using a report from Portelligent Inc. that
examined all the parts that went into the iPod.

Their study, sponsored by the Sloan Foundation, offers a fascinating
illustration of the complexity of the global economy, and how difficult it
is to understand that complexity by using only conventional trade

The retail value of the 30-gigabyte video iPod that the authors examined was
$299. The most expensive component in it was the hard drive, which was
manufactured by Toshiba and costs about $73. The next most costly components
were the display module (about $20), the video/multimedia processor chip
($8) and the controller chip ($5). They estimated that the final assembly,
done in China, cost only about $4 a unit.

One approach to tracing supply chain geography might be to attribute the
cost of each component to the country of origin of its maker. So $73 of the
cost of the iPod would be attributed to Japan since Toshiba is a Japanese
company, and the $13 cost of the two chips would be attributed to the United
States, since the suppliers, Broadcom and PortalPlayer, are American
companies, and so on.

But this method hides some of the most important details. Toshiba may be a
Japanese company, but it makes most of its hard drives in the Philippines
and China. So perhaps we should also allocate part of the cost of that hard
drive to one of those countries. The same problem arises regarding the
Broadcom chips, with most of them manufactured in Taiwan. So how can one
distribute the costs of the iPod components across the countries where they
are manufactured in a meaningful way?

To answer this question, let us look at the production process as a sequence
of steps, each possibly performed by a different company operating in a
different country. At each step, inputs like computer chips and a bare
circuit board are converted into outputs like an assembled circuit board.
The difference between the cost of the inputs and the value of the outputs
is the ďvalue addedĒ at that step, which can then be attributed to the
country where that value was added.

The profit margin on generic parts like nuts and bolts is very low, since
these items are produced in intensely competitive industries and can be
manufactured anywhere. Hence, they add little to the final value of the
iPod. More specialized parts, like the hard drives and controller chips,
have much higher value added.

According to the authorsí estimates, the $73 Toshiba hard drive in the iPod
contains about $54 in parts and labor. So the value that Toshiba added to
the hard drive was $19 plus its own direct labor costs. This $19 is
attributed to Japan since Toshiba is a Japanese company.

Continuing in this way, the researchers examined the major components of the
iPod and tried to calculate the value added at different stages of the
production process and then assigned that value added to the country where
the value was created. This isnít an easy task, but even based on their
initial examination, it is quite clear that the largest share of the value
added in the iPod goes to enterprises in the United States, particularly for
units sold here.

The researchers estimated that $163 of the iPodís $299 retail value in the
United States was captured by American companies and workers, breaking it
down to $75 for distribution and retail costs, $80 to Apple, and $8 to
various domestic component makers. Japan contributed about $26 to the value
added (mostly via the Toshiba disk drive), while Korea contributed less than

The unaccounted-for parts and labor costs involved in making the iPod came
to about $110. The authors hope to assign those labor costs to the
appropriate countries, but as the hard drive example illustrates, thatís not
so easy to do.

This value added calculation illustrates the futility of summarizing such a
complex manufacturing process by using conventional trade statistics. Even
though Chinese workers contribute only about 1 percent of the value of the
iPod, the export of a finished iPod to the United States directly
contributes about $150 to our bilateral trade deficit with the Chinese.

Ultimately, there is no simple answer to who makes the iPod or where it is
made. The iPod, like many other products, is made in several countries by
dozens of companies, with each stage of production contributing a different
amount to the final value.

The real value of the iPod doesnít lie in its parts or even in putting those
parts together. The bulk of the iPodís value is in the conception and design
of the iPod. That is why Apple gets $80 for each of these video iPods it
sells, which is by far the largest piece of value added in the entire supply

Those clever folks at Apple figured out how to combine 451 mostly generic
parts into a valuable product. They may not make the iPod, but they created
it. In the end, thatís what really matters.

Hal R. Varian is a professor of business, economics and information
management at the University of California, Berkeley.

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