Friday, January 27, 2012

Social Contracts...

If you read the business section of any large newspaper, any business magazine, or online news service you’ll notice that Apple Computers is all the rage.  Why shouldn’t it be?
Their revenues in 2011 were $108B (a 166% increase in one year), their profits before taxes (EBITDA) were $35.6B (up 184%) or roughly $400K of generated profits per employee.  They have a market cap over $400B and $98B in cash (yes that is "B" as in billion).

Why is Apple performing so well?...didn’t anyone tell them that we’re in a great global recession?

Simply put...Apple is creating products that people want to buy...note I said "want to buy" not need to buy.

There are other gigantic multinational companies who offer consumers products that directly compete with the Apple iPhone including Samsung, HTC, LG, and Nokia, who offer both the Google Android and Microsoft mobile operating systems.  The Amazon Kindle and Barnes & Noble’s NOOK tablet computers are priced much lower than the Apple iPad.

Therefore, consumers do have viable choices from well known companies offering high-quality products at very competitive prices.

Nor are smart phones and tablet computers considered basic necessities such as food, clean water, housing, clothing, gasoline, and/or electricity. 

No one needs to buy a relatively expensive Apple product...but yet they do.

I read an interesting article in the New York Times this past Sunday (click
here for the link) about Apple.  The authors take Apple to task for exporting American manufacturing jobs to factories overseas despite their record profits.  Apple currently employs about 43,000 workers in the United States and another 25,000 workers overseas. However these figures pale in comparison to the estimated 700,000 engineers, assemblers, managers, and supply chain specialists who are employed, primarily in Asia, by contractors who ultimately build Apple products.

These Asian factory workers earn a small fraction of the wages earned by a comparable U.S. worker. With 12-hour work days, on-site dormitory housing, communal bathrooms, and company dining facilities, the life of a typical contract worker is in stark contrast to the lifestyle enjoyed by their American counterparts.

The authors’ main focal point of the article was that Apple was making obscene profits on the backs of cheap foreign labor instead of creating jobs in America.

Apple’s primary defense to these accusations is that there are simply not enough educated, trained and willing workers in America to adequately staff their factories and that the labor cost-content in a typical portable computer is relatively low.  When the iPhone product line was staffed, 8,700 Chinese engineers were hired in 15 days.  Company analysts claim that it would have taken Apple nearly 9 months to hire the same amount of engineers in the U.S. and Apple simply didn’t have the time to wait.

The real interesting fact is that when Apple did have manufacturing here in the U.S. (in Elk Grove, CA), a typical $1500 Apple computer had about $22 of direct labor costs in it while the same machine being made in Asia had $6 of direct labor costs so although the labor costs were lower, the overall impact of the labor costs were negligible. 

Most, if not all, electronic components (parts used in the manufacturing of phones and computers) are manufactured in Asia.  It makes logistical sense to assemble the finished product within the same proximity of the component factories rather than transporting the parts back to North America for assembly.

According to experts, the fundamental problems with manufacturing high-tech electronics in America are more about raw material and supply chain logistics, the time it takes to complete a production cycle, and lack of highly qualified workers than wages.

At the end of the article I noticed that there were over 700 comments by readers.  The overwhelming majority of the comments chastised Apple for making obscene profits by exploiting low-cost labor.  These people were visibly angry at Apple.  They called for the boycott of Apple and all Apple products or to perhaps add a large import duty to the cost of the foreign made products.  They wanted to force Apple to move their manufacturing back to the United States or face serious consequences. 

I chuckled at the naivety of the commentators.

I thought to myself, "Where do they think LG, Nokia, Motorola, Samsung, Toshiba, Samsung, Sony or any other global electronics company manufactures their products...go ahead and boycott Apple and instead buy a Chinese made Kindle or LG phone...that’ll teach them". 

I suppose that the government can add a large import duty to all electronic products manufactured abroad, but that only means it will cost the average consumer more money for an electronic device as the cost of the import duty will surely be passed onto the consumer...of course with the tax receipts flowing into the government’s coffers. 

Organizing boycotts and levying surtaxes will do absolutely NOTHING to create domestic jobs.  These factories are simply not coming back to the United States.  Once again, it’s not about direct labor costs.  

The New York Times article did cause me to reflect however about the social contracts that we have engaged with any large company.

Exactly where do Apple’s corporate/social responsibilities lie?

In my opinion, Apple has three main responsibilities:

  1. They must not break any laws.  This includes international, sovereign, state, and/or local laws pertaining to environmental regulation, intellectual property, child/slave labor, worker safety and anti-corruption.  Each sovereign country has its own set of laws and standards and adherence to these laws and regulations are paramount.  This responsibility includes monitoring and enforcing these standards upon their sub-contractors and manufacturing partners.

  2. They are responsible to earn profits for their shareholders (owners).  Apple is a widely-held public company meaning that its "owners" are you, me, and anyone who has a 401K, IRA, pension and/or mutual fund account.  There are nearly 920 million shares of Apple stock held by hundreds of thousands of institutions and individuals.  Company profits are typically returned to investors in the form of a dividend; however, Apple has used its profits of the past to reinvest in new products and technologies which has caused its current profits (and stock price) to soar and create wealth for its shareholders.  They also have a responsibility to pay taxes on their profits.  Apple paid a bit over $8B in taxes last year or approximately 31% of their profits.

  3. They have a responsibility to create great products and new technologies that are safe and that people want to buy.  If they made dangerous or lousy products (like they did in the late-90’s), then no one would be willing to purchase them.  Apple products sell for a premium price because they are well-designed and well-made with quality components (like their scratch-proof glass screens versus a cheaper plastic screen).
Apple (or any other company) is no more responsible for creating American jobs than Americans are responsible for purchasing their products.  That’s simply not a part of the contract.

If a company meets its responsibilities, as stated above...then they have fulfilled the social contract (in my opinion).

That’s responsible capitalism at its very core...

and I’m happy to support it...

Thank you very much for your support of OptiFuse where we support responsible capitalism and hope that you do as well.

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