One bad Apple …

The iPhone 4s costs a hefty £499 for the 16gb model, when bought at the Apple Store  – correspondingly the 32gb model costs £599 and the 64gb model £699 – but have you any idea what they cost to make or, more relevant, what is the profit margin for Apple Inc for each iPhone sold through their dedicated outlets?

Recently, California based iSuppli, a global leader in market intelligence providing comprehensive industry reports on the electronics sector, carried out research that revealed an estimate of the materials that make up the iPhone 4S 16gb model and the costs amounted to £118. This figure is a long way from the final sale price of £499, but remember that labour costs have to be added to find out the gross profit margin.

Most of Apple’s electronic products are made in China by a company called Foxconn, which is primarily an original design manufacturer. Its clients include major international electronics and information technology companies. Notable products which the company manufactures include not only the iPad,  iPhone, iPod, but the Kindle, PlayStation 3, and Xbox 360. Earlier this year, ABC’s ‘Nightline’, a show in the US, went into the Foxconn factories and their investigation ended up revealing that workers earn just £1.12 an hour.

Horace H. Dediu, an electronics industry analyst with a focus on mobile phones – and especially Apple Inc – made a calculation using the ‘Nightline’ report to estimate that Apple  incurs labour costs of between £7.86 and £18.56 for every iPhone it makes, representing an average of just 3% of the iPhone’s sale price. The ‘New York Times’ has harshly criticised the labour practices of Apple’s factories, and featured an interview with a former employee of Foxconn, who said: “Apple never cared about anything other than increasing product quality and decreasing production cost. Workers’ welfare has nothing to do with their interests.”

The bottom line is that material costs appear to be about £118. Furthermore, Dediu has calculated that an additional £58 is spent on manufacturing its smartphone, a cost that includes the labour costs, transportation, storage and warranty expenses. Assuming those figures are accurate, we reach a total of about £176 to manufacture an iPhone that retails at £499. This represents a profit for Apple of £323 per iPhone.

This demonstrates why the share price of Apple Inc is so high. However, for them to maintain their high profits and low manufacturing costs, the company pays its workers in China appallingly low wages. There are two observations that stem from these figures: Why are we being ripped off and why are Apple so disgracefully contemptuous of the people that buy and make their products?


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