The Apple Business Model Is Good for U. S. Manufacturing

In his November 2, 2011 column in the Washington Post, Harold Myerson takes issue with Walter Isaacson's analysis of the value of the contribution of Steve Jobs and Apple to U.S. economic prosperity. He asserts that we need to build domestic production because without it innovation will disappear. While I agree with Myerson that manufacturing is a vital source of innovation -- two-thirds of all R&D is done in that sector -- and that there is frequently a link between domestic production and innovation, Myerson either misunderstands or misconstrues the Apple model and its value to the U.S. economy.

Recent research on the value accruing to different elements of the Apple supply chain show that the U.S. inventors of i-Products capture most of the economic value, including wages, embedded in their products. For the iPhone, Apple keeps nearly 60 percent of the wholesale price of the product, and about 36 percent for the iPod. These figures represent gross profit margins, and they are huge by normal business standards, which is why Apple is the second most valuable company in the United States by market capitalization. For the iPod, 80 percent of the wages embedded in the product go to U.S. high-wage workers. Wages are much higher for the engineers, designers and marketers in the United States than for the production workers in Asia, but productivity is also much higher to justify the differential. Related research shows that most multinationals increase U.S. employment and profits as they build their foreign businesses.

What Myerson misses with the Apple model is that the huge profit margins associated with the Apple brand are due to the creative touch of Jobs and his collaborators, including the engineers who design the products and the marketers who build the buzz to sell the superior products. Manufacturing expertise is important, but Apple designs products that time and again have been produced at the mass scale abroad, without day to day oversight from their own engineers at headquarters. One struggles to find comparable examples of new products invented in China and India which have mass appeal and which allow firms to capture the huge profits available to them. The whole economic, cultural, social, and legal environment in the United States has tended to support constant innovation, albeit with ample amounts of failure along the way, which is not as culturally negative as in some societies like China. Even industries like pharmaceuticals, with their innovation-driven high-profit models, derive most value through their U.S. operations even as the high U.S. corporate tax rates drive production off shore.

Myerson is right to emphasize the importance of domestic manufacturing. This is especially for the most heavily competed sectors like machinery, consumer products and autos which do depend on close interaction between production and R&D for what are mostly incremental improvements or adaptation to changing local markets. Diminishing the almost uniquely American model symbolized by Jobs and Apple, however, makes the task of a manufacturing revival that much harder.