Don't Forget the Engineering

The latest Manufacturing News has an article on the value that Apple's domestic operations receive from sales of the iPod.

Not much of Apple's iPod is manufactured in the United States, but the majority of value added is captured by Apple, according to the Personal Computing Industry Center in Irvine, Calif.  Apple's gross profit "is greater than the price of any single input, so it is definitely greater than the value added for any of its partners," says the Personal Computing Industry Center in preliminary findings for a study sponsored by the Alfred P. Sloan Foundation. " For sales made through Apple's own Web or store outlets, it retains an even larger share of the value."

This was determine by hiring a company to pick apart the iPod, tally up the component cost, and thereby estimate cash contributed to Apple.

The most expensive part in the iPod dissected by Portelligent Inc. was the hard drive supplied by Toshiba, at a cost of $73.  The next most valuable part is the display supplied by a joint venture of Toshiba and Matsushita. The cost: $20.39.

And they also looked at supply chain costs.

The center also looked at the back-end of the supply chain - the distribution and retail aspect of the iPod. It found that with the wholesale cost of $225 (minus the $80 for Apple's profit) the remaining $75 is for distribution ($30) and retail ($45). "In the case of retail units sold in other countries, a significant portion of the U.S. share [of value captured] would shift elsewhere," says the study.

There's even a measurable impact on the China - U.S. trade balance.

"Trade statistics can mislead as much as inform," the study concludes. "For every $300 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost). Yet, the value added to the product through assembly in China is probably a few dollars at most.

$80 of profit for Apple isn't too shabby, especially for a consumer product.  And yes, it does return predominantly to the U.S.  But let's think about one major cost that wasn't captured by the study, a cost that is often forgotten, especially when considering the supposedly "outrageous" profits by pharmaceutical companies.  I'm talking about development.

Apple had hundreds or even thousands of engineers dedicated, for many years, to developing the iPod in all its flavors.  They also had the luxury of knowing their product stood a better than 10% chance of success, unlike most drug companies.  The investment by Apple was incredible.  It paid off, but let's not forget about that investment.

Does $80 in profit still seem high?  I wonder when Apple finally broke even considering their initial investment.  We know what it costs to procure the parts and assemble it, and it is even possible to quantify the developmental effort... but we often don't remember that part.

Don't forget the engineers!

Comments

[david foster]

The $80 is not really a profit number; it is a gross margin number. Not only does it not acount for engineering osts, it does not account for marketing costs. Not to mention taxes and cost of capital.

I don't see any manufacturing costs for final assembly in the article. If "parts costs" is $144 and "wholesale cost" is $225, and profit/gross margin is $80, then that would leave a whole dollar for the assembly, which seems unlikely, especially if the outsourced manufacturer has to hold parts inventory.

[david foster]

OK, I found the original paper and it says direct labor costs were excluded because they are too hard to measure. But it seems like this would also excude all other costs for the assembly, including facilities, supervisory overhead, equipment costs, supplier profit, and taxes to the host government.

Did I miss something?