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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.