Apple worker compliance improves and so do Foxconn's margins

Apple worker compliance improves and so do Foxconn's margins

Summary: The relationship between Apple's compliance policies and the profits of contract equipment manufacturers is worth watching.

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Apple said that the percentage of workers in its supply chain in compliance with a 60 hour work week has improved to 89 percent in February. That percentage came as Hon Hai's Foxconn was revving production of the new iPad, but the contract equipment manufacturer is likely to still see an Apple led operating profit boom, say analysts.

Apple's supply chain labor at work. Credit: Apple

The relationship between Apple's compliance policies and the profits of contract equipment manufacturers is worth watching. After all, outsourcing providers will likely need to add workers if hours are cut to keep up with demand for Apple's new products---new iPad today and iPhone 5 a few months from now. Consider:

Apple said on its supplier responsibility page via Daring Fireball:

In our effort to end the industry practice of excessive overtime, we're working closely with our suppliers to manage employee working hours. Weekly data collected in January 2012 on more than 500,000 workers employed by our suppliers showed 84 percent compliance with the 60-hour work week specified in our code. In February 2012, compliance with the 60-hour work week among 500,000 workers at those suppliers increased to 89 percent, with workers averaging 48 hours per week. That's a substantial improvement over previous results, but we can do better. We will continue to share our progress by reporting this data on a monthly basis.

The flip side to that is that Foxconn likely had to either add workers to keep production humming---Apple did sell 3 million iPads in about three days. Those additional workers likely cost Foxconn more.

So what's the financial hit? Analysts were mixed. Many appear confident that Foxconn parent Hon Hai will improve profit margins on volume. In addition, Foxconn is about done with a site relocation that should boost efficiency.

Macquarie analyst Daniel Chang said in a research note:

We estimate the iPad operating profit margin has improved from loss/breakeven in 1H11 to 1.5–2% currently, due to yield improvement and larger scale. Sales volumes for both products continue to grow strongly, and should continue to support Hon Hai’s margin performance.

Analysts say that iPad is made exclusively by Hon Hai's Foxconn. Chang added that Foxconn has a better handle on its manufacturing and labor costs too. Chang said:

After Hon Hai’s aggressive wage hikes in the past few years, we believe the salary base in its main manufacturing sites largely exceeds the minimum requirements. Despite that, Hon Hai should still be able to report margin improvement, which would indicate the risk is well managed given its strong scale, relocation efforts and customer acceptance of sharing costs.

In other words, Hon Hai and its Foxconn unit may just have its labor pool allocations down to a science. Morgan Stanley analyst Jasmine Lu said: "Hon Hai has built up formidable barriers to entry via scalable labor supply and low-cost structure. It is difficult for peers to catch up."

Related:

Apple's external inspections of Foxconn a good first stepApple’s supply chain flap: It’s really about us | CNET: Tim Cook: Apple cares about ‘every worker’ in its supply chain

Topics: CXO, Apple, iPad, Mobility, IT Employment

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8 comments
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  • Sure, all slaves are expected to be compliant

    But are they happy? Oh and a forced 60 hour work week is insane. I bet they get no extra compensation for all that time either.
    bobiroc
    • Reading is fundamental

      "...with workers averaging 48 hours a week"

      I average at least that amount, if not more, in my First World, salaried job. As for your "I bet they get no extra compensation..." supposition, well you are wrong. Download the This American Life podcast from this past weekend where they retract and correct much of the report they did on these issues recently. Factory workers at Hon Hai are paid hourly, just as factory workers in the U.S. are. One reason now cited (after more investigation) for the excessive overtime is that the workers want the extra money. I'm not defending the practice, but evidently they do get paid for their time.

      Are they happy? I don't know. I don't particularly like the job I'm doing right now, but I like the salary, the people are decent, and it allows me to provide for my children and support my lifestyle. That's why I took the job so even if it doesn't entertain me, I would have to say I get what I want from it. I would venture to guess (since you opened up the realm of guesswork) that this is true of most workers in China as well.

      At least one of Hon Hai's (Foxconn's) customers is auditing the situation and is PUBLICLY disclosing what is going on, what is changing, and what the progress has been to date. Can the same be said of other big customers?
      What would your solution be?
      use_what_works_4_U
      • I apologize for my comment

        I made it because of the press on worker treatment in those factories and the many stories of worker suicides or attempts at suicide. I guess you are right that maybe they are trying to improve things over there but I still remain skeptical based on their history.
        bobiroc
      • Back at ya, Bob

        I also apologize for the snarky tone I took. Your apology is accepted, but unnecessary.

        I think that the most important thing is that we all recognize the conditions, and the fact that *all* the major OEMs use these factories and these conditions to bring us the stuff we want to buy. For years we have been told by the industry at large that they can't control what happens in a contractor's facility. Well, clearly that's been debunked! I wish that the improvements had come sooner, but I am glad to see the action regardless. Now, will the rest of the OEMs follow suit?
        use_what_works_4_U
      • What constitutes "workers"

        if manufacturing and assemply line workers are grouped in along with janitors, cooks, laundry personel, middle management, facilities, (typical "low hourly % jobs), then yes, the [i]average[/i] hours worked will drop.

        What are the average hours worked for Assembly line employees?
        William Farrel
    • Forced?

      NO ONE is forcing those workers to work at Foxconn. No one ever has. They can walk away at any time and find someplace else to work. Judging the situation through the lens of US History from the Industrial Revolution to now then yes their working conditions suck but workers at Foxconn make more than workers at other factories, suicide rates are less than the national average (I threw that one in for the inevitable Foxconn suicide comment), and they've been getting raises for the last few years. Hell no one at my company has seen a raise in the last 3 years, no raises at my wife's job either.

      As for 60 hour work weeks I've done them quite a few times - I'm in the middle of working one right now. Sure I get OT but that is mandated by the government which was a direct result of labor unions which the Chinese do not have. So if you are looking for someone to blame for the plight of those workers blame the Chinese Government.
      athynz
  • These Low 1.5-2% margins that Foxconn is Touting are Unacceptable in the US

    When Cupertino, CA Apple Corporation is doubling their wholesale cost to the retail consumer and the "fact" that Apple is hording $368 billion untaxed dollars in China, it would come as no surprise the level of contracted shared customer accepted costs in the manufacturing of their products in China. We'll never know the whole story for them or Microsoft or Google or even Facebook. It is all one big marketing machine for those that took down a Golden Age in this country for the added security of trolling the globe for their own self interest.
    Zurk_Orkin
    • Oh, please

      Psst: the phrase "doubling their wholesale cost to the retail consumer" is gibberish. It marks you as someone who is stringing buzzwords together in a lame attempt to sound knowledgeable, while exposing yourself as someone who hasn't the slightest idea what you're talking about.

      There is also no such thing as "contracted shared customer accepted costs." That too is a string of meaningless buzzwords.

      You should stick to figuring out where Facebook manufactures their faces. Once you have "the whole story" on them, you can explain it to us.
      Robert Hahn