Tim Cook Is Right About U.S. iPhones, For a Different Reason

(Bloomberg Gadfly) -- Is building the same as manufacturing? How about assembling?

These are esoteric questions, but they appear to be of great import to Apple Inc. CEO Tim Cook.

"It's not true that iPhone isn't built in the United States," he said in an interview with Recode and MSNBC this week.

Cook's not just the boss of Apple. He was previously in charge of its supply chain, so he knows more about how an iPhone is built than anyone on the planet (except maybe current COO Jeff Williams.)

I see where he's coming from. Cook is rightfully frustrated with the perceived wisdom that the iPhone is a Chinese-made product, and Apple doesn't get enough credit for all the work that's done in the U.S.

Unfortunately, Apple spells out the provenance of its products in its own annual report.

"While some Mac computers are manufactured in the U.S. and Ireland, substantially all of the Company's hardware products are currently manufactured by outsourcing partners that are located primarily in Asia."

Not helping matters is the inscription on the back of every iPhone: Designed by Apple in California. Assembled in China.

Cook's problem is that the word design (or engineer) isn't as politically compelling as manufacturing, assembling or building.

Design deserves to be broadly defined. Not only does it incorporate the sleek finish dreamed up by Jony Ive and his team, but it includes the work of thousands of engineers and scientists who scour the globe developing new materials; the product managers who teach suppliers how to make a component in a specific way; and the retail staff trained to introduce and explain the devices to end consumers.

All these aspects are part of the iPhone's product design, and explain how Apple can charge significant mark-ups and take the lion's share of the industry's profits. Its 38 percent gross margin puts the rest of the smartphone market to shame.

Apple posted $229 billion in revenue last year. After taking out components and manufacturing costs, about $88 billion was still left in gross profit.

That's the value of design. But, as I said, it's not sexy. Neither is the $11.6 billion Apple spent on R&D, most of which would have gone to U.S. employees. And a large part of the $15.3 billion that went on sales, general and admin expenses probably paid American salaries as well.

What grabs interest is manufacturing jobs. Donald Trump's Make America Great Again campaign isn't fueled by creating accounting and marketing positions. It's hardhats and safety goggles, grease and dirt and noisy machines. The stuff China is really good at. The work that Trump wants to bring back to America.

Of the $141 billion that went to production -- aka cost of goods sold -- much of the work went to Asian companies, like Hon Hai Precision Industry Co. and Pegatron Corp. Hon Hai gets about half of its $161 billion in annual revenue from Apple. But its gross margins are just 7 percent. The value add mostly goes to American corporations.

At U.S. chipmakers Intel Corp., Texas Instruments Inc. and Qualcomm Inc. -- all Apple suppliers -- gross margins are around 60 percent. That's 60 cents in the dollar of value add by those company's design and engineering teams, along with the thousands of jobs required to get there. Apple also designs its own processors, which means similar value is created in-house.

Cook is right when he says the iPhone is a U.S. product. Not because it's built in the U.S., but because its value is in American design and engineering and marketing.

"We know that Apple could only have been created in the United States," Cook told Recode/MSNBC. "We love this country. We're patriots."

Yes you are, Tim. Yes, you are.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.

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