Apple's obligation is to its shareholders, not society

PUBLISHED : Wednesday, 25 April, 2012, 12:00am
UPDATED : Wednesday, 25 April, 2012, 12:00am


It used to be said that what was good for General Motors was good for the America.

The implication was clear: the health of the United States economy as a whole depended on the success of the country's biggest corporations.

Over recent years GM has faded to a shadow of its former self, eclipsed in its home market by Asian rivals such as Toyota.

These days, if anyone one wants to cite an example of US corporate might, they name not GM but Apple.

With sales that soared almost 70 per cent to reach US$128 billion last year, Apple's capitalisation hit US$593 billion earlier this month, more than 16 times the value of GM.

Yet despite the California-based company's undoubted business success, no one ever says that what is good for Apple is good for America.

The reason is that Apple doesn't actually make anything in the US. Instead it contracts out the assembly of its gadgets to Foxconn, which employs hundreds of thousands of lowly-paid workers to screw together iPads and iPhones at vast factory complexes in southern China.

If Apple were to manufacture its gadgets in the US, it would have to pay its factory workers around US$21 an hour - the industry average. Even after years of double digit pay rises, Foxconn only pays its assembly line workers about a tenth as much.

That sounds to me like a powerful argument in favour of outsourcing manufacturing work to China.

But not everyone agrees. In 2010 researchers at the Asian Development Bank Institute pointed out that the cost of the various components in an iPhone far outweighs the device's cost of assembly.

As a result, they estimated that if Apple assembled its iPhones in US factories, it would only push the overall cost of manufacturing the gadgets up by US$60 each - or just 12 per cent of the retail price. In other words Apple could manufacture its iPhones in the US and still make a handsome 50 per cent gross profit margin.

Now researchers at Manchester University in the United Kingdom have performed the same calculation for the latest version of the iPhone and come up with a similar result. They estimate that Apple could do all its manufacturing in America and still enjoy a gross profit margin of 46.5 per cent.

What's more, 'there would be gains for the US economy in terms of direct job creation and multiplier effects'.

The Manchester researchers believe that by manufacturing in China, Apple is failing in its social duties. They slam what they call the company's 'jackpot business model' in which 'labour costs are controlled and investment sacrificed to meet short-termist capital market demands for dividends and share price appreciation'.

'Apple,' they conclude, 'is adept at avoiding the social obligation to provide secure, internal, high quality employment of the kind which major US corporates have traditionally delivered.'

They obviously intend this as a criticism, but if you ask me, it is high praise indeed.

Apple doesn't have a social obligation to employ US workers, but it does have an obligation to deliver the best returns it can to shareholders.

In pursuit of that aim, the company has wisely decided to play to its strengths and concentrate on what it does best: design and marketing. Other activities, including low margin assembly work, it contracts out to specialists like Foxconn.

The Manchester researchers think Apple should deliberately make a lower profit in order to benefit the US economy at large.

But that would make little sense. Apple's expertise lies in developing products that consumers want to buy, not in managing factories. By focusing on that expertise Apple has made its shareholders rich, while paying billions of dollars in tax to the US government. In just the last three months of last year, the company set aside an astonishing US$4.4 billion to cover its quarterly tax bill.

If Apple's executives were now to busy themselves with transferring the production of its gadgets to its own assembly lines in the US, the company's performance would surely nose-dive.

After all, providing secure, high quality employment to US workers is what GM used to do, and look what happened to it. In 2009 the company went bankrupt and had to be bailed out by the US government. Today, it employs just a fraction of the labour force in the US that it used to, and the company's growth comes largely from its production of cars in China.

So no, maybe what is good for Apple isn't necessarily good for America. But that doesn't mean that what is bad for the consumer electronics giant would be good for the US economy either.