How the iPhone Impacts U.S. Trade Deficit with China
by John MacWilliams, Bishop & Associates Inc.

Much has been written about the bulging U.S. trade deficit— particularly with China—and about the electronics industry’s increasing dependence on China manufacturing.

Over the past decade, several factors have come together to make China a manufacturing powerhouse for the electronics industry—particularly in high-volume, consumer-oriented products such as Apple’s iPhone. These factors include China’s low (although increasing) labor costs; the outsourcing phenomenon with companies such as Foxconn and Flextronics, that are now part of a whole new contract manufacturing industry; and the building of a world-class manufacturing infrastructure in China for the production of high-volume electronic products. Also prevalent in China are very thin organizations and margins, in many areas that are not conducive to U.S. corporate operating modes or financial goals.

The Wall Street Journal discussed the U.S.-China trade question in an excellent piece on the iPhone, showing, among other things, that U.S.-China trade statistics can be misleading (WSJ, “iPhone Adds $1.9B to U.S.-China Trade Deficit,” December 15, 2010). This is because of the global supply chain’s contribution to an end product’s value-added, and the low percentage a product’s manufacturing cost is to total cost, i.e. low labor costs in China.

This article uses research by professor Yuqing Xing, Ph.D., and Neal Detert, researcher, at GRIPS: the National Graduate Institute for Policy Studies.

The goal of the GRIPS paper was to explore how a product such as the iPhone, conceived and designed in the U.S., but with a global supply chain, could significantly contribute to the U.S.-China Trade Deficit. The total U.S.-China trade deficit was $227B in 2009 and $275B (est.) in 2010. The iPhone alone in 2009 contributed $1.9B. However, the GRIPS paper shows that below those gross trade figures, by using a value-added analysis, the iPhone could actually produce a surplus for the U.S.

The paper includes a list of major components (ICs, display, camera module, etc.) and their estimated cost in the manufacture of the iPhone. Not included in the data are connectors, which are in the “all-other category.” The analysis includes iPhone unit sales statistics, and the contribution of labor toward the iPhone’s total cost.

The paper concludes that U.S. predominance in high-tech products like the iPhone may actually increase, not reduce the official U.S.-China trade deficit. But it also examines the input of low-cost China manufacturing. The iPhone’s major component parts are made in the U.S., Germany, Japan, and elsewhere, and if a value-added analysis were to replace bulk trade statistics on the iPhone, it would actually result in a small $48M U.S. trade surplus. It also concludes, most surprisingly, that the phone could hypothetically be assembled in the U.S. and still make a profit, or that if the CN Yuan were revalued by as much as 20%, its impact on the selling price could be small.

There are other parameters to be analyzed, perhaps in a future paper. These include the total cost advantage in China over, say, U.S. manufacturing; and whether the U.S. manufacturing infrastructure, including EMS firms, could produce such products as the iPhone in the U.S.—or Japan—profitably, for export around the world. In addition, a more technical analysis might predict how future highly integrated Si (i.e. System-on-Chip) might make point-of-origin turnkey manufacturing of consumer products more possible.

These are provocative questions. The group at GRIPS is to be applauded for their insightful paper.

Read the GRIPS’ paper: “How iPhone Widens the U.S. Trade Deficits with PRC”

Bottom line for the connector industry: The $43B connector industry is part of a complex multi-100B$ global supply chain. It behooves us to understand the forces that impact international trade. It is also of value to understand trade statistics, why customers do what they do with their outsourcing, and what the future could hold for a rebirth of domestic manufacturing in developed countries.

John MacWilliams Senior Consultant and Analyst, Bishop & Associates Inc. John MacWiIliams has been in the electronics industry for over 40 years. His main areas of experience have included: U.S. competitiveness programs, market research studies, authored articles, field sales and management, product marketing management, strategic marketing, new product planning, venture development, advertising and media relations, direct sales, manufacturers representative, distribution sales management, and international marketing. MacWilliams has worked with AMP, Diceon Electronics, TRW, and IRC in marketing management positions. Prior to joining Bishop & Associates, MacWilliams served as the group director of marketing and new product planning for AMP. MacWilliams graduated from Lehigh University with degrees in business management and engineering.