Apple's Foxconn flap may pinch contract manufacturers

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.

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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.