Does Apple Make $30 Per iPhone for Every Dollar it Pays Workers to Make Them?
Extrapolating from new data served up in a Nightline report, an analyst tries to piece together what it costs to manufacture an iPhone and how much goes to labor.
Apple controlled less than 10 percent of the global handset market last year but by some accounts hauled in 50 percent or more of the industry's available operating profits. It helps when you're making nearly $30 in profit on an iPhone for every dollar you pay the workers who make them.
Admittedly, the ratio may not be quite that stark. The 30:1 figure was calculated by plugging in the lower bound of an estimate of Apple's labor costs per iPhone presented by Asymco analyst Horace Dediu Wednesday. Dediu ventured to estimate those costs based on new information revealed during on conditions at Apple partner Foxconn's Chinese factories that aired this week.
Dediu's estimates are not official, but they're based on some clever guesswork. He figured that each iPhone generates $650 in revenue for Apple. The next step was to deduce Apple's gross margins on iPhones, which he put at 55 percent. That means Apple makes a profit of $357 per iPhone, while spending $293 to make each one (Dediu rounds down the profit figure and rounds up the cost for some reason).
Next, Dediu plugged in the bill of materials for an iPhone, which various teardown analyses have pretty reliably put at around $200. That leaves $93 that Apple is spending variously on manufacturing its smartphones (a cost that includes labor), transporting and storing them, and warranty expenses. The analyst counted R&D and marketing costs as fixed costs and not part of the cost structure he was attempting to recreate.
Finally, by fiddling with the information supplied by Nightline—the time it takes to build an iPhone, how much of that is spent on automated software installation, how many work steps on the assembly line are involved, etc. —Dediu estimated that Apple pays labor costs between $12.50 and $30 for every iPhone it makes (or between 2 percent and 5 percent of the iPhone's sales price).
Compare that range to the earlier determination of Apple's profits per iPhone and you can deduce (again, unofficially) that Apple is making somewhere between $12 and $29 in profit for every dollar it pays labor.
By comparison, some back-of-the-napkin estimates based on Ford's 2011 gross margins and recently reported labor costs in the U.S. auto industry puts Ford's profit per car it sells at about $2 for every dollar it pays its workers. Even if Ford was able to drop its labor costs to the lower boundary of Dediu's range for Apple's, 2 percent of the sales price of its cars, Ford would still only be making about $8 in profit on a car for every dollar it paid its labor force to make it.
That's obviously not an apples-to-apples comparison, pardon the pun—smartphones aren't sedans. Different industries can produce very different ratios of profit to worker pay for a variety of reasons.
But it's an interesting exercise in the context of the criticism Apple and its components suppliers like Foxconn over working conditions at the Chinese factories they operate.
As a final note, Dediu reckons that Apple actually spends considerably more to manufacture iPhones than other companies spend to make comparable devices, due to things like quality control and complexity. Possibly "twice or three times the average," he writes.
If so, that makes Apple's ability to generate profits from its products that absolutely dwarf what it pays to have them made all the more remarkable, or to its increasingly vocal critics, troubling.