Hacker News Reader

Comment by ralferoo | Hacker News Reader

I'm surprised that they admitted that their cost to produce the phone in China is $550 and they sell it for $799, while the cost to produce the phone in the US is $650 and they sell it for $2000. That's a 45% markup on one and 207% markup on the other.

Taking just those figures in mind, they shouldn't be at all worried about tariffs - anything more than an 18% tariff, it's cheaper for them to build in the US than China for US customers. Honestly, that's much lower than I expected, especially considering they're even more restrictive in their component sourcing than most companies would need to be because they're catering to a security-focused group.

I guess the real issue is that they don't have any more production capacity in the US, rather than it just being a cost issue.

View on HN

Define "produce", I guess? The price differential suggests that it refers to final assembly, which is common when components have different tax codes than the final product.

Creating domestic jobs this way doesn't have a great track record however. They are usually quite expensive. And they don't help the geopolitical uncertainty at all, which is at least hinted at being something of an end goal.

Sure, you can ship parts all over the phone and have assembly in the final country. But what does that solve? What people usually think of when discussing where products are "produced", the components or at least a majority thereof, is the same.

Where do you source OLED screens in necessary quantity to produce a popular mobile phone model in the US, or any other Western country? Or the batteries? It's not a question of cost. It a question of non-existence.

Changing global production is a not a singular problem but something that would require laser focus during several decades and many different areas just to be something that could be taken seriously.

> Creating domestic jobs this way doesn't have a great track record however

Especially when you gut the DoE and make zero effort to invest in either higher education or trades training.

If US wants a manufacturing revolution it needs to start with an education revolution.

I don't see how the US can compete with China on sheer production and access to manufacturers and suppliers of tech, compared to cities like Shanghai, Qingdao and Shenzhen, among others. It's like a candy store for engineers. Building a single plant just isn't economically feasible when you have so much uncertainty from the chaos at the WH. Not to mention, this will take a decade or much, much more.

A better way (IMO) to do it would have been tax incentives to build US plants to move manufacturing back in the US, have research university programs as feeders for tech innovation centers, and funding for technical colleges to expand their programs for skilled labor needed instead of gutting multiple agencies that would have overseen/guided this expansion. And oversight, of course. And attainable goals set in contracts to receive funding, not just, "here's a pile of money we'll forget about in 4 years."

Digikey, McMaster-Carr. Lots of other options. they might not have a store front in your city, but they can get you everything you need for reasonable prices.

Those are distributors and there is only a handful of them.

In China they have the manufacturer down the street from the distributor who is down the street from your factory.

With Digikey we are paying $80 to overnight a $5 part from Minnesota. We need to be able to go send a guy to pick it up in an hour.

No sane company wants to work that way. Just in Time is a great thing, you shouldn't be over nighting anything you should be working so that you know when you need each part months in advance. If you can get a part in China faster it is because someone has expensive inventory and that is a bad sign in general. You do of course need some emergency supply and such, and retail customers don't plan in advance well - but a business shouldn't be buying retail anyway.

It's not JIT, it's that planning works on months advance notice like you mention is in large part because the supply chain is global and shipping takes a lot of time. When digikey has a month lead time because some component is out of stock, it often means "It's going to take a month for this to arrive from the factory".

In China, you can just go down the street to the factory.

As for shipping overnight, it's incredibly common in R&D and repair.

Only if the factory in China will make that thing today. If they are one their New Year holiday (I forget what they call it) you won't get anything. If they are busy making something else you won't get anything - unless by human factors you can convince them to work for you instead of meeting their promises to other customers.

Sure, but you don't have to wait 6 weeks for a cargo ship.

The concept of having centralized full-chain production for enormous productivity boosts is not some wild concept, it's ancient and well known. Industries have clusters because it benefits everyone in the cluster. The US has very few and weak manufacturing clusters.

Your only mistake is thinking those institutions are filled with competent people rather than being a jobs creation program for the inept

This is a chicken-and-egg problem. It's economically irrational for any given individual to pursue vocational training in a field where there isn't a job waiting for them at the end. You can make the training in these fields available, but without the jobs, who will bother using it?

One of the root causes of the situation we find ourselves in is that the federal government has been subsidizing higher education beyond diminishing returns for decades. Simply removing the mechanisms to do that would be a net improvement.

> Define "produce", I guess?

If you're sincerely interested in the answer to that question, I'd highly recommend reading the article, because a good portion is dedicated specifically to answering that.

I read the article - up to a point. The guy goes to such great lengths not to admit that a huge proportion of the physical parts in the phone are from China. E.g, he keeps saying "Western distributor" to avoid saying "China-made." (Think about it: why would any reader care about the distributor's nationality?!) He just rambles on and on, trying to baffle us with bullshit - eventually I stopped reading.

There is zero chance that a smartphone will ever be made out of 100% US-manufactured parts, or even close to it. And the evidence is right in this article, if this is the best effort to manufacture a "US phone."

> Define "produce", I guess?

The article does, in fact. Their US made phone is manufactured, not just assembled, in the United States, and also attempts to source nearly all parts and materials from US suppliers as well.

Yes, and article starts out by definining manufacture as "assembly using more advanced tools than a screwdriver". They solder. Good for them. They keep mentioning that their resistors are made in the US. That's great, but not unique to them.

They don't manufacture their important components. Not even Apple does that. No one does. There is roughly zero chance that any of the non-interchangable bits, the SoC, the battery or the screen, is manufactured in the US.

And there is nothing wrong with that. It's just silly to pretend otherwise.

As I read that, "more than a screwdriver" was to make a point about how hard it is to even fulfill the requirements for "assembled in the USA". "Made in the USA" is even stricter. And they were going beyond that and claiming secure supply chains with western distribution. It did seem a little like a marketing pitch since it focused on what they did versus what the final gap really was, but apparently they sell it to the govt for that big markup. Presumably you don't want to try and sneak things past such a customer.

If you're just thinking of price, the farther down the supply chain you go the less impact of tariffs.

All of their PR says "Made in the USA Electronics," which is oddly specific that it may refer to just parts in the phone and not the actual phone.

I mean, again, you could essentially just post FUD that is directly refuted in the article, or you could... look. They specifically cite their NXP CPU is manufactured in South Korea. But to act like fabricating the mainboard here in the US is not manufacturing is remarkably silly. Your previous post referred to "final assembly", which would suggest just plugging some final components together, which Purism clearly is doing significantly more than.

https://puri.sm/products/liberty-phone/#table-of-origin

and how do you check if electrons in the circuit are US and not Chinese?

Cost is just one part of the equation. What about the ability to quickly switch the supplier of a part, to make a small design change, to ramp up the production of the next model, etc? Lots of articles suggest that you can start manufacturing and adapt much faster in China than in the US.

Also, there is nothing in the article that talks about the quality of the phone. Being manufactured in the US does not automatically make it a high quality product. I'd take an iPhone manufactured anywhere in the world than this Liberty phone.

> the real issue is that they don't have any more production capacity in the US

Economists selling people on free trade like to omit this, but production capacity, efficiency, cost, and technical know-how, aren't static, but improve based on demand.

You do not understand microeconomics. No economist would ever advocate for free trade in an academic environment. Competitive markets are the goal. The older I get the more I think microeconomics should be a basic course for voters. All the things you list “production capacity, efficiency, cost, and technical know-how” are well studied.

And you seem to be omitting that they won’t change given the demand won’t change.

In other words, people won’t just buy multiple iPhones just because it’s made locally.

I omitted it because I thought it was so glaringly obvious that it didn't need explaining: a factory owner doesn't care what the global or local demand for a product is, but at the demand for his factory's output. Which can increase, despite the consumer demand staying the same, if the competitiveness of other factories diminishes, like from tariffs.

It's $650 in a world in which you don't have tariffs with China.

In a world in which you do, you pay more for the machines, the materials, the components you can't make in the US (a phone is thousands of component, phone makers don't make most of them), etc.

It's probably $650 to design it, build half the parts, ordering most other parts and assemble them.

Now what's interesting with the tariffs is that it's not just it will make the parts you can order more expensive, it will make the supply of such parts available to you restricted since you are now competing with buyers that don't have tariffs and can outbid you easily.

Or course, all this include rare earth supply which China already restricted for US export, so even the part you can make are going to be super expensive. The premium is going to be way more than the tariff ones.

Finally, since you are not going to be able to sell to the Chinese market of 1.5M of people, you will sell fewer phones, meaning your volume effect will be lower.

Meanwhile, competitors from Asia and Europe will be able to sell to the rest of the world, unrestricted by such problems, so much more price competitive and with a more robust cash flow. So you will lose markets in other areas too, hitting your volume effect even more, possibly sending you spiraling.

So, it's definitely pop corn time.

Is this the price in just components? I skimmed through the article and that wasn't clear. Because if it doesn't include labor costs, then its reasonable that the US phone sells for a lot more.

Your question prompted me to look up “cost of goods sold”.

From https://www.investopedia.com/terms/c/cogs.asp

> Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

So the $550 or $650 COGS includes the cost of labor for manufacturing, but excludes (say) marketing and auditing costs.

And would exclude all of the R&D, certification and testing, procurement, and in some cases depreciation from factories/equipment

Right, but this is the same company, so the cost of marketing, auditing, R&D, etc. shouldn't be different for these products. That's a fixed cost for the company.

This is a guess, but the argument is probably that it took way more R&D effort for them to figure out how to produce it efficiently in the US, and they've chosen to increase the cost of the US phone variant to offset this particular R&D expenditure that the Chinese variant didn't have.

From the interview:

> So it's about $650 to produce that entire phone. But what we're doing by selling it for greater originally, we're looking at a lot of differentiators for us. It wasn't just made in the USA. It's the fact that it's a secure supply chain, that you know, staff that's completely auditing every component, which means we're selling to a government security market with all those additional layers that we've added on top.

So I guess the answer is that they're selling to the "government security market" so they can charge whatever the hell they want.

It is not just the labor/components, but that it is for a different market with different expectations and requirements. From the article:

> You can look at our concrete numbers. We sell a Chinese made Librem 5 phone for $799. We sell the Liberty phone for $2,000. When you're looking at just those numbers alone, that looks like a giant leap in cost. But there's a couple of factors that are not publicly known when you're looking at just those prices. When you're looking at COGS, cost of goods sold, our Librem 5 phone is equivalent in cost to about an iPhone. It's about $500 and some odd dollars, $550. So we can see that the Librem 5 phone doesn't have a very high margin when we sell it. The Liberty phone, same COGS componentry wise, but to produce it on US soil, we're adding not quite a hundred dollars. So it's about $650 to produce that entire phone. But what we're doing by selling it for greater originally, we're looking at a lot of differentiators for us. It wasn't just made in the USA. It's the fact that it's a secure supply chain, that you know, staff that's completely auditing every component, which means we're selling to a government security market with all those additional layers that we've added on top.

I did find that so surprising that it almost doesn't feel right. Hard to see why they'd bother making two different SKUs in two different places if the cost delta is only $100 they'd surely be better off shifting all the volume to the american phone and working to get it down to down to $550.

How much volume are we talking about. I don't know the important numbers but my guess is the automotion needed to get the in us cost down is more than they sell. That is a million dollar machine that repleces 60 workes is a bad investment when they only have one worker.

*Excluding tariffs.

It's good they are being transparent. This is the future. Does "produce" include staff salaries involved in manufacture? Does it include salaries for staff in R&D?

My understanding of "cost of goods sold", which is quite likely to be wrong, is yes for the first and no for the second. Or at least, it'd include the pro-rated salaries of the staff for the time spent producing the goods.

I think it's essentially if you had all the designs for a product and asked someone else to manufacture it for you, everything they would spend and charge you for producing the product and delivering it to your ship (or whatever), at which point you take over all the rest of the costs including the shipping.

It's cheaper just to buy the hardware from China and install their OS on it. They overcharge for a lot of their products including their mini pc which you can just boy from aliexpress and install coreboot on it for way cheaper, https://www.alibaba.com/product-detail/New-Top-mini-pc-i7-10....

Depends on the product. Purism doesn't only sell existing (such as servers) or modified (such as minis) hw designs, but also completely original ones (such as phones).

True, but they're also outdated hardware rise. They also sell a service for "aweSIM" which is suppose to be a privacy sim card, but they literally just sign up for you and then overcharge you. Better to use a MNVO like US Mobile and giving them fake PI.

Selling something with a markup is how business works. It's up to consumer to decide whether the added value is worth the markup. Seems like it's not for you.

As I mentioned elsewhere in this thread already, while the Librem 5 is becoming dated, there's still no upgrade path on the market. You need to switch to a completely different category of devices in order to get something more performant than that. I hope that'll change soon, regardless of whether it will be Purism coming up with L5v2 or someone else with their own thing.

I suspect the margin differential is more demand/volume driven if for example they think ~90% of the volume will be for the cheaper device than there has to be much higher margins on the US phone to cover the associated investment/overhead

Making a $550 phone in china is probably more hand-it-over, while the $650 phone probably has a much higher non-recurring cost for R&D.

And both cases have investment in the OS/schematics which are open.

It's remarkable to me that people don't realize that markets are - by definition and design - a race to the bottom. A single decision maker may hold up efficiency for ideological purity, but, ultimately, an efficient corporation is leaving 5% profits on the table if mfg costs 5% more.

It's fairly obvious that trade barriers are good and necessary for a country, not sure why we've allowed this to go on for so long. It's truly fascinating.

I'm pretty shocked at this price-differential, I guess they are just taking advantage of the lack of competition in the made in USA space.

> I'm pretty shocked at this price-differential, I guess they are just taking advantage of the lack of competition in the made in USA space.

I assume that the answer is much simpler than the "evil capitalist" narrative: the respective company is much smaller, and produces on a much smaller scale.

Thus it is an economic necessity that some part of the money is better used to build up reserves to be able to survive worse times.

Additionally, the smaller scale means that the development costs are a much larger cost proportion than for a company that produces on a huge scale.

I wasn't saying "evil capitalist", just that when the competition is limited you can charge higher prices, this isn't evil unless you have used unethical tactics to enforce some sort of monopoly/oligopoly etc....

The fact that they sell both the made in china model and the USA model shows it is not about building up reserves, as if they wanted to do that they would have higher prices on both models, not selective pricing, thus we are looking for a factor which affects their USA model but not China model.

Development costs are not really a factor here, they specifically say they developed both versions simulatenously, but yes if they didn/t it would be a factor.

They actually back up my first point by giving the reason for the pricing: "It's the fact that it's a secure supply chain, that you know, staff that's completely auditing every component, which means we're selling to a government security market with all those additional layers that we've added on top."

If you distill this down it is saying that basically securing the supply chain costs more, but also that it adds value. The government is willing to pay a whole lot more for the same product for that extra supply chain security even if it doesn't cost that much more for the manufacturer to produce because no one else can offer something like this.

Only 100 more? If theg charged 900 I could see a lot of people buying it. Not happening at 2000

They don’t just arbitrarily set prices… demand comes into it.

Tangentially, I think you'll find a lot of this price inflation happening in the US due to Trump's tarrifs. Even if companies find cheaper places to import, if the customers get used to the higher prices, I find it difficult to imagine they'll drop the cost. Quick to go up, slow to go down.

Only to a certain degree. Wages are probably not going to keep matching price increases. If people have less real disposable income, they aren't going to buy as much.

Reply on news.ycombinator.com