Apple's Foxconn flap may pinch contract manufacturers

Apple's Foxconn flap may pinch contract manufacturers

Summary: Contract equipment manufacturers are going to face higher compliance and labor costs as companies like Foxconn try to put human rights worries to bed.

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TOPICS: Apple
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The fallout from the Apple supply chain flap with Foxconn will raise the costs associated with making electronics as contract manufacturers focus more on compliance, according to an analysis by IHS.

In its analysis, IHS likens the Fair Labor Association investigation of Apple's Foxconn plants to the sweatshop issue in the apparel and footwear industry in the 1990s. The FLA found multiple issues in Foxconn plants that make Apple gear.

As a result, IHS said a chunk of the contract manufacturing sector's $360 billion in 2011 sales may be at risk. Contract manufacturers will focus more on compliance and that move will boost costs. The possible fallout: Either Apple's profit margins will take a hit or consumers will see prices move higher.

Related: Apple's supply chain: A profile of a Foxconn factory employee | New Foxconn regulations will ripple through Apple's supply chain | Supply chain wars: Hon Hai's Sharp investment helps Apple vs. Samsung | CNET: Foxconn audit finds violations, fixes promised

The biggest risk for the contract equipment manufacturers is that brands have to assess public relations issues when outsourcing. Electronics manufacturing services (EMS) and original design manufacturing (ODM) firms generated $360 billion in revenue for 2011. Revenue may fall in 2012, but that group will see revenue surge to $426.1 billion in 2015.

IHS is predicting the following:

  • Pay scales will rise in China;
  • Compliance will force contract manufacturers to increase hiring;
  • Rising costs in China will lead to other outsourcing locales;
  • Components will remain the highest expense in an electronic device so increased labor cost may not be a huge hit.

Topic: Apple

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5 comments
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  • So basically,

    the prices that Foxconn initially sold Apple on were a misrepresentation of the actual cost. The original price was quoted without annoyances like worker rights and safety compliance. If Foxconn can tell Apple that the quotes they gave them were created with compliance in mind, then there should be no reason to increase the price or costs.

    If rising prices force manufacturers to look elsewhere for cheap labor, we are essentially going to run out of poor people to turn into economic slaves. We need to halt the progress of China ASAP!
    Vapur9
    • "Cheap labor" is a relative term.

      A Foxconn worker's monthly pay is ten times that worker's monthly housing expense. How many Americans can make that claim? I can't.
      Steve Webb
      • It is a relative term alright!

        Steve, Foxconn workers earn between $285 and $455 per month. They work 12 hour days and six or seven days a week. After work those workers go home to the Foxconn dormitory, where they lived. Those small dormitory rooms that sleep 4 to 6 in bunk beds with cold and cold running water, there is no hot. If you are tight Foxconn is charging them 10% of their earnings for a room shared with 4 to 6 people. Tell me Steve, is that the type of housing you live in? You are right in a way, "housing" is a relative term.

        http://www.investorplace.com/2012/03/thursday-apple-rumors-tim-cook-visits-foxconn-plant/

        http://www.nytimes.com/2012/03/30/business/apple-supplier-in-china-pledges-changes-in-working-conditions.html?pagewanted=all

        Nokia did an investigation of a plant in China that manufactured a product of theirs. The video taped the entire investigation, including the visit to a dormitory room. You would bot want to live there, Steve. I am not expecting Tom Cook to release a video of his visit.
        pfrench1
  • Apple again

    So, why Apple again?

    Those contract manufacturers offer their services to anyone and many, or in fact most US companies manufacture their electronic assemblies there. This means, that possibly all manufacturing costs will increase.

    Then, because Apple has provided for huge margins, they will likely continue to sell their products at the same or lower prices, while other companies will have to increase prices and some might even get out of business. All of this is of course good development - for everyone.
    danbi
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