The Mechanics of Vulture Capitalism

While I do not begrudge my man Dr. Dre on joining the Billionaire Boys Club with his recent sale of his patented Beats Headphones to Apple for a reported $3.2 billion, I have to speak to the culture of greed which has continued to enslave us in America even while we buy into those addictive and misleading television commercials which exhort us to be one of those yuppies striving to keep up with the Joneses.

One of my favorite shows on TV is 'Shark Tank' on which people come to seek investment from a panel of millionaire/ billionaire businessmen and women. They offer an equity percentage of their companies in exchange for some financial investment, mentoring and advice which invariably and eventually, turns them into multimillionaires. The 'sharks' try to outwit the would-be entrepreneurs by under-bidding them and the more savvy stand their ground. Most people are simply shot down and denied any investment at all.

The reason I open this post with a description of the 'Shark Tank' antics is because I always hear the term 'financial margins' being bandied around on the show. This refers to the difference between the cost of producing a product as opposed to the price at which the product is offered to the general public. Now, don't get me wrong, I am all for making money and Capitalism and all that, and I guess at the heart of every successful capitalistic endeavor lies a healthy profit margin which brings me to my main point. At what point does a profit margin cease to simply justify the business and satisfy the customer, but instead solely, and obscenely, enriches the manufacturer to the detriment of the consumer?

Ten years ago, the world’s most famous professional basketball star visited a previously unknown factory in Dongguan, China, to witness firsthand the production of his Air Jordans. After the visit, some workers alleged that the factory had been employing children and was forcing people to work long hours without commensurate pay. Most of the factory workers are earning the equivalent of $1.60 an hour. The cost of making a typical pair of Air Jordan sneakers is less than $10.00. By the time these sneakers make their way to American shores, there are impatient week-long lines forming around the block waiting to get into scuffles, maim their neighbors and sell their parents jewelry to purchase them at costs of up to $400.00. Sometimes these are then resold on eBay for thousands of dollars, and in extreme cases, people have been known to have been murdered over these shoes.

Those claims prompted Air Jordans’ parent company, Nike, to claim to 'audit' more than 600 factories over the next two years, but on April 5, thousands of workers at the same Yue Yuen factory in Dongguan went on strike over what they said were invalid contracts and false pension promises. According to Radio Free Asia, the government attempted to evict the protesters, who were blocking roads in front of the factory, multiple arrests were made and a spokesman for Yue Yuen called the labor dispute a “simple misunderstanding” and said the factory hopes to resolve the issue soon. Nike did not issue a statement. This is why, in spite of all the tough rhetoric and bravado from the U.S. government about China, it is still the go-to place for cheap labor.

The Taiwanese company Pou Chen Group, which owns this factory, has been in business since 1998 and is the single biggest supplier in China for Nike, Adidas and Reebok. One employee who has been working there since the famous Jordan visit says his supposedly permanent work contract was called invalid by local school administrators—he was trying to use it as proof of employment to enroll his child in the school.

Workers in China producing Apples iPhone work 12-16 hour shifts, and get paid around $0.75- $1 per hour, are required to live in dormitories which contain 15 beds in 12 x12 rooms. The suicide rate at these factories is high. The cost of making a typical iPhone is less than $10. The cost of making the latest iPhone 5 16 GB is perhaps 10 times that. The point is that the profit margins are obscenely huge and that is how billionaires are created in America.

Manufacturing an iPhone in the United States would cost about $65 more than manufacturing it in China, where it costs an estimated $8. This additional $65 would dent the profit Apple makes on each iPhone, but it wouldn't eliminate it. The iPhone average selling price is about $600, and Apple's average gross margin is about 40%. So Apple's gross profit on each iPhone is probably in the neighborhood of $250. Greedy manufacturers want to make bigger profits, so they make their products in places with labor practices that would be illegal in America.

We are bamboozled with supposedly 'legitimate' reasons Apple makes iPhones in China….We are told that most of the components of iPhones and iPads are now manufactured in China, so assembling the phones half-a-world away would create huge logistical challenges. We are told it would also reduce flexibility or the ability to switch easily from one component supplier or manufacturer to another. We are told China's factories are now far bigger and more nimble than those in the United States. They can hire (and fire) tens of thousands of workers practically overnight and because so many of the workers live on-site, they can also press them into service at a moment's notice. We are told they can change production practices and speeds extremely rapidly and that China has a far bigger supply of appropriately qualified engineers than the U.S. does, folks with the technical skills necessary to build complex gadgets but not so credentialed that they cost too much. And, lastly, we are told that China's workforce is much hungrier and more frugal than many of its counterparts in the United States.

I submit this is a slap in the face of the millions of unemployed people in the United States, who could really use the work, an insult to the technological acumen of home grown talent and a left-handed testament to the inherent nature of greed and unconsciousness that permeates every aspect of America's peculiar brand of Capitalism. It is time to stop the exploitation of the masses by inducing them to purchase items they do not need, time to stop promoting a culture in which people's self-esteem is wrapped up in the latest model of Gucci and Louis Vuitton. I own a nice pair of Studio Edition Beats headphone but now feel silly, participating in this demented experiment in which I shelled out hundreds of dollars for Beats headphones, manufactured in China for $14. We are all gullible, culpable, liable and manipulated in this social experiment, and as long as the system is controlled and manipulated by those who are financially at the top of the heap, we shall all continue to be its victims.