Apple worker compliance improves and so do Foxconn's margins

The relationship between Apple's compliance policies and the profits of contract equipment manufacturers is worth watching.
Written by Larry Dignan, Contributor

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."


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