The Apple iEconomy: A Positive or Negative Development?

The iPod: the new standard.

It used to be cars –even refrigerators or air-conditioning that was the common measure of household standards. Now, with 51% of American households (that’s 55 million homes! ) owning at least one Apple product, it seems that having any device created by Steve Jobs is quickly becoming the new standard.

Since Apple Inc. was first incorporated on January 3rd, 1977 in Cupertino,California, the company has grown to become one of the most powerful and successful companies in the world, achieving a pace of innovation nearly unmatched in modern history.

Apple’s line of computers and consumer electronics, including the iPhone and the ubiquitous line of iPods, have revolutionized our interaction with technology so much so that the company has been named as the most admired in the world  for the past five consecutive years by Fortune magazine.

The problem with Apple’s success however, is that it seems to be achieving it like many other successful companies: outsourcing labour to the cheaper Asian markets and maximizing profits by cutting expenses to the bare minimum. We’ve heard this story many times before; big powerful company wants lower costs so big powerful company applies pressure to their suppliers who, in turn, exploit their workers.  But what’s Apple’s story?

If anyone was searching for evidence to counter the benefits we have received from Apple’s products, they really could just follow the company’s supply chain, a feat made easier now that Apple has released it’s list of 2011 suppliers.

It all starts when officials from companies around the world arrive in Apple’s Cupertino offices, or invite Apple executives to visit their foreign factories. These companies are all vying for one goal: to become a supplier. The process can be broken down into two parts: suppliers specify the costs of their labour and the parts, and then Apple calculates how much it will pay for each part. Most suppliers are allowed only the slimmest of profits. As a result, suppliers often try to cut corners in order to maximize their profits and keep their lower-cost business model competitive and attractive to Apple. With so many suppliers clamouring for a piece of Apple’s pie, the company has the power to ensure that these suppliers are giving them the lowest price possible, lest they pick another supplier who could offer an better and cheaper alternative.

With its market power and ability to dictate terms to its electronic components suppliers, Apple can be thought of as a monopsonist.

If you merely mention that Apple’s production operates in an imperfectly competitive form, any economist can automatically tell you that the company is not operating in a way that achieves the highest possible gain to society.

Instead of paying for a quantity that would be considered socially optimal, Apple purchases less from its manufacturers than what it need to match the demand for Apple products. At this quantity (Q*), the company should be paying its suppliers at PA, but they instead pay the lowest price they can – P*.

That economically dreaded triangle that forms, called deadweight loss, is the clearest indicator of economic inefficiency; further transactions that could have occurred do not and supplier and buyer welfare is not maximized.

All of this is done because Apple wants to maximize its profits, and since they are preventing mutually beneficial trade with its suppliers from occurring, Apple has generated a market failure.

At this point, I don’t think any of you are clutching your iPods in despair over the deadweight loss that this device has incurred, which makes sense since no one is really going to start a protest accusing the whole institution of impeding the global economy because the company stole its suppliers’ theoretical economic surplus.

If anything has riled up consumers against Apple, it would be the recent string of news regarding chemicals-related injuries, suicides, and factory explosions which have all exposed the public to the troubling practices inside many of Apple’s suppliers.

Fifteen Foxconn workers threatened a mass suicide in order to protest the working conditions of the factory.

If you own an Apple product, chances are it got its start  in one of the Chinese factories owned by Foxconn, a Taiwanese tech company who work closely with Apple to assemble the iPhone, the iPad, and various Macintosh computers.

Compared to our standards, conditions in these factories are dismal. The 230,000 employees often work 12 hour days, 6 days a week. The average worker earns less than $17 a day, and over a quarter of these employees live in the cramped company barracks. As workers fulfill their various jobs, assembling the numerous i-gadgets or cleaning screens, aluminum dust fills the air. The lack of proper ventilation only adds to the health problems of the workers, and was the reason behind the two aluminum dust explosions in Foxconn and another Apple supplier.

To Apple’s credit, they are doing some part to deal with these issues. They recently launched a supplier responsibility initiative, which is why the list of suppliers was released in the first place. This initiative involves the implementation of their supplier code of conduct which details standards on labor issues, safety protections and other topics. Apple audits its suppliers regularly and when abuses are discovered, the company demands corrections.

According to the company, these audits have found consistent violations of Apple’s code of conduct. In 2007, two-thirds of the thirty-six plus audited suppliers indicated that employees regularly worked more than 60 hours a week. In extreme cases, 15 year-olds were hired, and records were falsified. Over the next three years, Apple conducted more than 300 audits, and each year, more than half indicated that employees were working extended overtime. Last year, of the 229 audits conducted, 93 facilities still had workers exceeded the 60-hours-a-week work limit.

Notice a pattern? This lack of change might be explained by a former executive involved in Apple’s supplier responsibility group: ”Noncompliance is tolerated, as long as the suppliers promise to try harder next time.”

For the suppliers, following Apple’s supplier’s code obviously means higher expenses. Since the code isn’t enforced strongly, there’s no incentive for suppliers to change their ways except maybe for the sake of morality. Oftentimes in business, that’s hardly a strong enough incentive. ”The only way you make money working for Apple is figuring out how to do things more efficiently or cheaper,” states an executive at one company that helped bring the iPad to market. ”And then they’ll come back the next year, and force a 10 % price cut.” This only perpetuates the working conditions as companies replace expensive chemicals with cheaper and more toxic alternatives, and force employees to work faster and longer.

Working conditions aren’t the only underlying issues with Apple’s supply chain system.  For Americans, it’s the fact that, of all the people needed to engineer, build, and assemble Apple’s products, barely any of them work for the United States since they are all outsourced to the cheaper Asian factories like Foxconn. For the U.S., that’s 700,000 jobs  that could alleviate its job crises and high unemployment levels.

But does all this information and statistics actually show that Apple has done more harm to the global economy than it has done good?

The benefits that Apple has provided to the world and its economy is more obvious than the drawbacks. We can not deny that Apple has transformed our relationship with technology. The multi-functioning aspects of Apple’s products have given its consumers greater convenience and functionality, raising our standards for what we expect from any of our electronic devices. Music and media interaction has evolved into a whole other level; iPods and iTunes have changed the way in which we listen to music by adding the feature of instant access. Visual communication production was changed when the Mac computers allowed typesetting, retouching, illustration, and film editing to become available to the average consumer.

Apple’s innovations and designs have paved the way for further technological development –either through the competition generated or the firm’s own motivation to outdo themselves, that has benefited society as a whole. These spillover benefits created indicate that there are not enough Apple products out in the market to meet the amount that society wants. 

With all that’s said and done, we still demand more of their products because they’ve truly made our lives better. The cheap labour and the pressure placed on suppliers where the biggest criticism of Apple lies? That sounds an awful lot like what other companies such as Walmart is doing), and the millions of Walmart’s daily consumers are all snapping up the lower-cost products without consideration for any of the implications. In terms of Apple’s manufacturing process, the company also doesn’t stray to far from its less mighty, but still successful competitors. It’s estimated that 40% of the world’s consumer electronics are produced in Foxconn’s factories, including products from brands such as Amazon, Dell, Hewlett-Packard, Nintendo, Nokia and Samsung. So why are we all so hung up on Apple’s misgivings? Maybe the answer is because Apple is good for the economy. So we expect it to do better; in short, we expect Apple to achieve maximum greatness for the world.

With recession-proof annual earnings of $108 billion, all of Apple’s success seems to oblige them to do even more, especially for their home economy. That’s because Apple is “the quintessential example of the Yankee magic that everyone from Barack Obama to Michele Bachmann insists will pullAmerica out of its job crisis.”

Apple may be a technological pioneer, but that doesn’t mean it’s holding the key to saving the American economy, waiting for the perfect moment to release the ultimate iSolution, perhaps through a press conference in San Diego.

First off, just as the previous graph indicates, the positive externalities generated from the firm’s products means Apple needs to supply more of its gadgets, and they are already having trouble meeting that current demand. Given that Asia, with it flexible labour and environmental rules, and bountiful population of unskilled workers can’t churn out enough suppliers or workers to meet up with the demand, there’s not much to be said about the U.S.  Even if Apple was able to find hundreds of thousands of workers willing to work a low-skill job, the only logical move in opening some manufacturers in the U.S. is to move the entire supply chain there, which is not easily replicable in the short-run. A supply chain in America would increase labour and production costs, which would ultimately jack up the price of any Apple product. Now, you’ll actually have a protest accusing the whole institution of impeding the global economy.

Since we’re evaluating Apple’s contribution to the world’s economy, it actually doesn’t matter that there’s a lot of foregone job possibilities in the U.S. Other countries have those jobs and opportunities, and that benefits the global economy through theirs instead. Of course, conditions at most of these manufacturers are far from ideal, but this negative development can’t be entirely blamed on Apple. Other companies employ either the same factories, or other manufacturer that use similar tactics. Apple’s fault does not lie in the fact that they are mistreating their workers, it’s more because they are not using their full market power to make other companies, like their suppliers, change their ways. At the end of the day, no matter how an Apple product is created, the output from these suppliers still contribute something to the economy, even if some of these conditions are less than ideal.

As the iPod travels through its production & supply chain, it attributes value to each of the countries that its 451 parts come from. When the research was conducted, the $299 U.S. retail value of the iPod can be broken down like this: $73 from Toshiba’s hard drive, $20 from the display module, $13 for the video/multimedia processor and controller chip, and the assembly at $4. Countries where any of Apple’s devices are created and assembled, like Japan,China, and Korea, all have extra value added into their economy because of Apple. The U.S. benefits the most from this; with the iPod, $163 of its value was captured by Apple’s conception and design of the product, and the distribution, retail, and domestic components from other American companies and workers.

If that value-added wasn’t enough and the U.S. still wants to complain about the fact that Apple hasn’t been an effective driver of job growth at home, they should look at it this way: Apple has still generated 46,000 direct jobs in their home country. Indirectly, the iOS app economy has created about 210,000 jobs. Add in the figures from the huge number of accessory manufacturers that have sprung up in theU.S., and the employment impact is even greater.

So really, if you combine their technological innovations, employment generation, massive sales, and you know, the fact that they have allowed you to listen to music without hauling a boombox on your shoulder (a reduction in muscle strain injuries does benefit the economy in some form), Apple has been a positive development for the world.

We may be holding on to the negative aspects of Apple’s growth because we consider Apple the modern variation of the American dream, just reformatted into a glossier, sleeker, and cleaner package. The Apple logo conjures up an image of thinkers and entrepreneurs that have used innovation to propel us further into the future than we ever thought possible. And because of this idea, we also expect them to champion a human rights labour movement and reconstruct the American manufacturing industry. Whether they do so or not, you can’t deny that they have impacted our lives and the economy at a greater degree than any of the negative developments the company is associated with. And that’s clearly the anodized-aluminum case with the iPod you pop in your earphones to listen to music with.

Advertisements

Asbestos, Definitely Not Best For Os

Imagine being winded by a half block walk, fighting to catch your breath as your lungs slowly harden, gasping for air against a disease that will eventually suffocate you. Pretty scary right? Welcome to the world of asbestosis, a disease caused by the inhalation of asbestos fibres, and a disease for which there is no cure. Asbestos, when it was discovered in 1879, was called “white gold,” today, it is banned in 50 countries. The World Health Organization has identified asbestos as being amongst the most dangerous occupational carcinogens in the world, causing diseases such as lung cancer and mesothelioma, in addition to asbestosis. Knowing this, it comes as little surprise that Canada has effectively banned asbestos for domestic use. What is surprising, and perhaps shocking, is that next to Russia, Canada is the second largest exporter of asbestos to Asia. What do you do when you have lots of a carcinogenic substance that nobody is willing to use at home? Export it, of course; to countries like India where the health standards are much lower. This is exactly what Canada is doing, and so the question becomes whether Canadian companies should be allowed to mine, market and sell asbestos.

Asbestos is, without a doubt, a very useful substance. Asbestos was once a global commodity that was known as a “magic mineral” because of its insulating and fire resistant properties. The usefulness of the substance is seen by the fact that at one point, asbestos was everywhere, you could find it in houses, cars, factories, and thousands of both household and industrial products. It was used in all kinds of insulation and was in practically everything ranging from brake pads, paint, cement, sidings, shingles, pipes, ceiling and floor tiles, and clutch facings, all the way to crayons. In fact, asbestos was considered so valuable at one point that the American military planned to defend the Quebec mines if Germany ever gained control of Canada. Asbestos cement was also used to make Winston Churchill’s bunker during World War II. It is evident that asbestos is an extremely useful and versatile substance, both durable and relatively cheap, so why should we be banning it?

This question can be answered by three words: asbestos, causes, cancer. The banning of asbestos exports was never a question of its usefulness, the problem is the massive market failure associated with it. Namely, negative externalities. For all its benefits, the use of asbestos is also coupled with extreme negative impacts. As mentioned before, exposure to asbestos, a carcinogen, leads to the diseases asbestosis and mesothelioma. People often express concern for the people working in asbestos factories, but simply improving conditions at asbestos factories only solves part of the problem, because the negative externalities don’t end there. The primary exposure is not to factory workers; it is to people such as construction workers, masons, plumbers and electricians, whose job it is to do things like cutting through asbestos pipes, sheets and tiles all day. Not only that, people working in buildings made with asbestos are exposed to it each and every day. And if that isn’t bad enough, the families of those working in asbestos factories are also exposed to the fibres that are brought back to the house. A girl named Cavanagh Matmor’s grandmother died of exposure from fibres her husband, who worked in a Toronto factory with asbestos, brought into the house with him. The World Health Organization reports that each year more than 100, 000 people die from diseases due to asbestos exposure, and more will continue to die, as 125 million people are exposed to asbestos at work each and every day. Those are some pretty scary numbers, and the failure of asbestos is summed up pretty well by Dr. Amir Attaran’s description of asbestos use in his country, “It’s a scientific failure, a clinical failure, and a social and moral failure of India. It is a failure of culture and science.”

That’s a pretty fancy suit you got there! Wait…why doesn’t the other guy have one?

The negative externalities associated with asbestos exposure are obvious, so why does demand for it continue to exist in developing nations such as India and Indonesia? After all, you can’t really say it’s our fault if they know what they’re getting into but keep asking for more right? Well, first off, the negative externalities may not be so obvious to the workers in these nations because their employers hide that information from them, and they do not have the education to read the English warnings on the bags they carry. There are two major reasons why the demand for asbestos in these countries continues to exist, and even grow: lax limitations on control and use, and the fact that the people are poor. With limited regulations, there is nothing to stop companies from using asbestos, so they don’t stop. Banning asbestos in Canada and selling it abroad is basically saying “we don’t care who dies from asbestos, just as long as it isn’t us.” In Canada, buyer’s preferences have shifted completely away from asbestos now that people are aware of the health risks, so much so that the government has banned its use, but that hasn’t prevented Canada from shipping it out to other nations with poorer regulations. In these places, a worker might have cloth tied over their face as safety equipment at best. Durai Swami, who worked with asbestos for 24 years has the right idea when he says, “In Canada, you have all these safety measures. In my country, they’ve left us to carry it and die.” Yet they continue to work because the economic incentive of even a meagre wage outweighs the potential health risk. To them, asbestosis or no asbestosis, they need a job and the industry employs 100, 000 people directly, and a further 300, 000 indirectly. These countries also have many people, and many poor people. India, with a growing population of 1.2 billion, presents a huge number of buyers creating demand for the product. It isn’t difficult to understand why people in these nations continue to use asbestos, considering that asbestos cement sheets are both durable and cheap, costing half as much as roofing made of galvanized steel or tin, and lasting twice as long. An economic incentive that great becomes difficult to pass up, which explains why Asia’s share of the world’s asbestos use went from 14% during 1920 to 1970, all the way up to 33 percent from 1971 to 2000, and currently sits at 64%. However, there will be a huge price to pay, as Dr. Arthur Frank, Chairman of Environmantal and Occupational Health at Drexel University explains, “What we can expect is very predictable – an absolute catastrophe of death and disease.”

It is understandable why people in India continue to use asbestos, what is less understandable is how Canada can continue to justify these exports to its population. We know what is happening with our asbestos once it gets to other nations, we know the damaging impacts it has, the statistics are right in front of us. So if we think and know it is wrong, why doesn’t the population force the government to ban exports? One possibility is that the Canadian asbestos is mined in Quebec. Because of the cultural and language differences, Quebec’s affairs are somewhat separated from the rest of Canada, as if they were practically two separate nations. Without the rest of Canada as involved, there isn’t as much pressure on the federal government, and so the key to Canada’s asbestos lies with the Quebec government. This is because without the $58 million loan guarantee from the Premier, the industry will have to cease operations. However, whether from Quebec or the rest of Canada, Canadian asbestos is all the same to workers in India and Indonesia, and the damage is done to Canada’s reputation as a whole. The only way politicians such as Stephen Harper and Jean Charest will make changes to Canada’s position on asbestos is if there is sufficient pressure from the public, and so even if the population is opposed to it, perhaps the isolation of the industry in Quebec is preventing that pressure from building.

It’s plausible that the isolation of asbestos mining to Quebec prevents public pressure in Canada from building up to a great extent, but that doesn’t explain how Canada as a nation can justify exporting a carcinogen on a global scale. After all, the conservative government just decided to block an international agreement that would include asbestos on the Rotterdam Convention watch list of hazardous materials. Bernard Coulombe, owner of the Jeffrey asbestos mine, said, “We don’t want to be on a banned list, that would bring shame for us.” Obviously exporting a carcinogen that you won’t touch yourself to developing nations, simply because they are poorer and have lower regulatory standards, isn’t shameful at all. The Canadian Cancer Society said it was an “unethical decision” and that it was left “shocked and embarrassed.” Canada’s decision certainly didn’t help its international reputation as a fair dealer, but that doesn’t mean it was baseless either. Believe it or not, Canada does have some legitimate justification for its asbestos. Canadian chrysotile is supposed to be of higher quality and safer than other forms of asbestos, and is valued as the industry standard. “Chrysotile” is the recent rebranding of Canada’s white asbestos, which seems suspiciously like slapping a new name on the same product so as to move away from the damaged name of asbestos. In any case, John Nicodemus, an executive director of the Asbestos Cement Products Manufacturers Association of India says, “Canadian fibres are amongst the best in the world – that is why most companies prefer Canadian fibres first.” Conservatives and the mining industry contend that chrysotile is less harmful than the much more toxic blue and brown asbestos other countries produce, and that it is safe if handled properly. And they are correct, Canada’s asbestos is the best out there, so if they’re going to use asbestos anyways, may as well give them the best. However, the key words to note here are “less harmful” and “if handled properly.” “Less harmful” just means that Canada is the best, the best of the worst that is, which doesn’t make it good, as WHO has stated that there is no safe level of exposure to asbestos. Moreover, “if handled properly” is a very big if, considering activists in India argue that there is no such thing as safe use in the country because occupational safety isn’t practised, regulations aren’t enforced, workers’ health isn’t monitored, and there is severe poverty.

The Conservatives try to defend their chrysotile, and the difference in quality is a legitimate argument, to some extent, but no matter what quality asbestos, it certainly isn’t helping Canada’s international reputation. So what reason does the government have to swallow the damage to its status? The answer seems to be entirely political. Taking on asbestos exportation is difficult for the Conservatives, or any political party, because of the industry opposition. The Conservatives are very firm in their support of the asbestos industry, and it may just be a play on their part to win as many seats as they can. In the past election, the NDP swept up in Quebec with 59 Mp’s elected, leaving the Conservatives hanging on to just five ridings south of the St. Lawrence, which is mostly made up of the asbestos region. For the government, the decision on asbestos became a balancing act of social incentives. Ban asbestos and please health organizations, along with maintaining Canada’s international reputation, or support asbestos, and keep the support of its regional base in Quebec. Ultimately, it seems that on the social incentive scale the side that gets Harper votes is the one that wins out. Not an admirable decision by any means, but it is an understandable one; after all, the goal of any government is to get votes and stay in power, especially holding on to its established ridings. However, Harper certainly knows what’s wrong with asbestos, planning to begin a $1 billion renovation project to clean asbestos from the parliamentary buildings, so perhaps it is time for our government to suck it up and ban asbestos for good, because it’s the right thing to do.

The right thing to do, that’s what this issue ultimately boils down to. Developing countries have the economic incentive to go on using the cheap and durable asbestos, and profits for Canada provide the incentive to go on selling it. The Conservatives have the opposing social incentives of global reputation and its Quebec region support. However, it is not the economic incentives that are most important, nor are the social incentives; what must be considered first and foremost is the moral incentive. Is allowing Canadian companies to mine, market, and sell asbestos, not domestically, it’s banned here, but export it, the right thing to do? As Frank, a public health expert at Drexel University says, “Canada is the world’s biggest hypocrite when it comes to asbestos. It is taking it out of Parliament buildings but willing to sell it overseas.” The government should know that asbestos is a carcinogen. The government should know that asbestos-related diseases kill an estimated 107, 000 people worldwide each year. And so, the government should know what it must do. An Indian named Ragunath Manwar asks Canada, “Doesn’t you government feel a moral responsibility that what they are doing is killing us?” It certainly should, and it is about time for Canada to stop exporting death.