Amazon's Fire and the US Trade Deficit - Forbes

As my colleague, Eric, notes, Amazon seems to be selling the Kindle Fire at just around about manufacturing cost. You can see the bill of parts and the packaging, assembly and so on costs in his post.

The bit that interest me is how this impacts upon our impressions of the US trade deficit with China. The way that trade statistics are collated, if Amazon sells 1 million Kindle Fires then the trade deficit will go up by $199 million. At least the headline number will.

Further, there will be the usual cries from the usual quarters that all of the good, well paid, manufacturing jobs have been moved to China and that's why American wages are stagnating.

Now the trade deficit number is actually correct but that latter point is not. For out of this $199 per Fire, the actual manufacturing, assembly, cost is only $8.40. Almost all of the rest of it is the cost of parts manufactured elsewhere. Take, as an example, the apps processor. This is, I think, a TI omap. A dual core one, based on the ARM core. That costs $15: nearly twice the manufacturing cost of the unit as a whole.

No, I don't know where the TI fab is, it could be just about anywhere, Singapore, the US, China itself, Taiwan. But a goodly part of that $15 will in fact be paying for the high value, well paid, jobs back in the US of the people who designed the chip.

Further, it's based on the ARM core meaning that people sitting in Cambridge, England, get some of the money (my guess is 10 to 20 cents per core, based on several billion cores a year and $600 million in revenues). This process then goes on with all of the other expensive and high tech components which are in the device.

The total value added by the manufacturing, the assembly, is that $8.40. Huge amounts of the rest of the value flow to other parts of the world, to those high paid jobs where they've done the designing, not the piecing together.

Which leads to a point I've made before. Yes, it certainly used to be true that manufacturing jobs were high paid blue collar labour. But there's no point in campaigning to bring manufacturing back, because manufacturing, assembly, just isn't a high paid nor high value added (the two statements are the same one of course) activity any more. The money is in the design of things, not the making of them.

One other thing struck me about this report. The costings are for the current cost of the components: this is what Amazon will be paying right now for the parts to make a Fire. And the declaration is that they'll be making a small loss per unit, hoping to make it up on people buying digital or physical content through Amazon.

Well, yes, except a rough rule of thumb in the electronics business is that component costs fall by 1% a week. To get a certain level of performance that is, if you keep the parts list stable, (that is, don't upgrade the processor when the next generation becomes available etc) then your bill of parts declines in price by 1% a week. Which, after 6 months, is a fairly substantial reduction in your costs, after a year, even better.

It may well be that Amazon will make no margin on the first units shipped: but at a constant selling price units shipped in month 6 might have 35% margins (for it is compound, 1% per week) and increasing as time goes on.

Which actually sounds like a sensible pricing policy really: the company knows very well that it's going to ship millions of units. Taking the production run as a whole, say the original model of the Fire lasts in the market place for a year. By month 12, week, 50, they might have hardware margins of 50% or more.