I was shocked recently when it was reported that Apple Computer reported it's largest profit ever... even in the history of mankind. And it reminded me of an old blog I posted on August 27, 2013 (with help from my writing partner Allen Laudenslager). Coincidentally, Forbes published an article soon-there-after in September 25, 2013: Forbes: If Apple Brought iPhone Manufacturing To The US It Would Cost Them $4.2 billion.
Let's pretend for a moment you're the guy in the three wishes joke stranded on a deserted island and you find an old bottle washed up on the beach; you pop the cork and out comes a genie who grants you three wishes. What would you wish for?
Well, you reply, the most logical choice is to be rescued from this deserted island.
Good one; it’s our basic human need to survive or live.
Now what’s your second wish?
A good wife or husband, you answer.
Another good one; it’s our basic human need to love and to leave a legacy (children).
You’ve made two good wishes. Now for your third and final wish?
You think for a moment, well a million dollars would be good, a billion dollars would be better, but having all the money in the world would be the best! Yes, I wish for all the money in the world.
BUUUUZZZZZZZZ! Bad choice! It’s our basic human vice of greed.
If you had all the money in the world then no one else would have any and it would become worthless. By itself, money has no intrinsic value; it's only a medium of exchange for goods and services, a way to store and exchange your work for someone else’s without direct barter.
Corporate America is not much different than the foolish guy in the three wishes joke. We all have a basic need to live, to love, and to leave a legacy. Unfortunately, we’re all cursed with vices like greed (like wishing for all the money in the world). How is Corporate America doing this? Generally speaking, they pay their employees as little as possible, charge their customers as much as possible, hoard most of their cash, and avoid paying taxes. Before they know it, they too will have all the money in the world but it will become worthless because no one else will have any to buy their products.
Apple epitomizes of what’s wrong with Corporate America today. They pay their Chinese factory workers as little as possible (about $1.11 an hour), make them work as much as possible (twelve hours a day, six days a week), and treat them as poorly as possible. Apple then charges their customers as much as possible for their products. After this, they hoard their cash and do their level best to legally avoid paying taxes (mainly using overseas tax havens). And before they know it, they too will have all the money in the world but it’ll become worthless because no one else will have any to buy their products.
According to the research firm iSuppli, they estimate the iPad2 (with 32Gb memory, WiFi and Cell) costs about $10 to assemble in China; the material costs about $325 for a total of $335 per unit for labor and material. Apples then sells this device for $729, which gives them a gross profit margin of 54%.
Now if Apple were to manufacture the iPad2 in the U.S. it would cost them about $292.77 to assemble (at a labor/benefit rate $32.53/hour); the material costs would be about the same $325 for a total of $617.77 per unit for labor and material. Apple’s gross margin would then shrink to 15.25%.
Sure, manufacturing in the U.S. would shrink Apple’s gross margins. It’s not a question of making a profit, but how BIG of a profit Apple would make. They choose to manufacture in China because they can earn 54% gross margins instead of a measly 15% in the U.S. The only problem is that consumers will no longer be able to afford Apple’s products because they’re earning much lower wages.
While Apple and the rest of Corporate America have not achieved their wish for all the money in the world they have purposely designed their business models to lock up as much cash as they can and sequester it at the corporate level as cash on hand or as bonuses to a few corporate mangers; in doing so their money is becoming worthless because no one else has any.
Much of today’s unemployment is caused by slow demand. People aren’t spending as much of their income for those products because they just don’t have the cash! Flat salaries coupled with inflation have eroded the bulk of the buying public’s disposable income resulting in the slow recovery from the 2008 recession. We'll be stuck in this quagmire unless and until the corporate mangers learn that their shortsighted wish for “all the money in the world” is the root cause of their financial woes.