Value Creation and Capture, iPhone 4

Value Creation and Capture iPhone 4

Source: adapted from OECD (2011) “Global Value Chains: Preliminary Evidence and Policy Issues”, Organization for Economic Co-operation and Development, DSTI/IND(2011)3, Paris, 2011.

The iPhone, a popular cellular phone designed and marketed by Apple Computers, reflects a product with an international division of production with parts and assembly taking place in several countries. A complex value chain is involved, which creates difficulties in correctly assessing international trade balances. International trade measures the value of exports and imports irrespective of what has happened before to the goods. Even if only a mundane and low-value task were performed on a good before being exported, the full commercial value of the good would count as an export. The same applies to imports, where their value would be calculated in the trade balance based upon the origin of the goods. The emergence and growing importance of global value chains are thus having a distorting effect on how international trade is measured.

The final assembly and customization of the iPhone 4 took place at the Foxconn factory in Shenzhen, China, a complex that employs 250,000 workers. Foxconn is a subsidiary of the Taiwanese electronics manufacturer Hon Hai Precision Industry Company, specializing in contract manufacturing. For each iPhone imported to the United States, its entire factory gate price ($194.04 in this case) is attributed to a trade deficit with China. In reality, only about 3% of the wholesale added value takes place in China, with the bulk of it concerning Korean and German suppliers (mostly for flash memory and tactile screen). In this case, the product exaggerates the true extent of trade imbalances since the country of origin accounts for a small share of the total added value of the good. By controlling distribution and marketing, Apple is able to capture about 45% of its total value.