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Apple pledge likely to boost China factory wages

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POSTED March 30, 2012 8:48 p.m.



 

BEIJING (AP) — Consumers probably won't have to pay more for iPads, iPhones and other popular consumer electronics despite a Chinese company's pledge to trim work hours and raise wages for its hardscrabble assembly workers.

The paychecks have already been steadily growing even before this week's pledge, and labor expenses remain a small portion of the total bill for most gadgets made in China.

At most, the cumulative wage increases could crimp the profits of major technology companies. Manufacturers have a bigger worry in finding ways to save money on the parts that power the devices.

Nonetheless, assembly costs are likely to escalate because of Foxconn Technology Group, which assembles an estimated 40 percent of the world's electronics, including the hot-selling iPhone and iPad.

Foxconn, owned by Taiwan's Hon Hai Precision Industry Co., promised to limit hours while keeping total pay the same. That commitment will translate into higher hourly wages.

The pledge came after Apple Inc., the world's most valuable company, hired a labor auditor to review the practices and conditions in Chinese factories run by Foxconn. A report on the audit, released Thursday, evoked images of a sweatshop and said Foxconn routinely violated overtime laws by assigning its assembly-line workers to toil for more than 60 hours per week.

Foxconn's concession is expected to have ripple effects not only because it involves Apple, one of the world's most scrutinized companies, but also a major Chinese employer that cuts a broad swath.

Foxconn has about 1.2 million workers and either currently or has assembled products for a long list of technology companies including Microsoft Corp., Hewlett-Packard Co. and Dell Inc. Those companies' smartphones, computers, video game consoles and other devices have become household staples around the world.

"I think whatever Foxconn did will have an impact, certainly, on all Chinese workers in all trades," said Willy Lin, managing director of Hong Kong-based Milo's Knitwear, which makes clothing in three factories in China for European clients.

Japan's Toshiba Group, which employs 32,000 workers in China to make products such as refrigerators and TVs, said it already plans similar changes to reduce overtime work and improve working conditions at its factories.

China has long been a low-cost manufacturing center for goods stamped with some of the world's best-known brands.

But wages there have been steadily rising for years as companies compete for workers.

IHS iSuppli analyst Thomas Dinges believes China's communist leadership also realizes that the country's economic evolution requires raising the standards of living so more factory workers assembling the devices will eventually be able to buy them.

After the 2008 global financial crisis triggered a freeze in the minimum wage to help exporters compete, Chinese workers have received big pay increase over the past two years, though salaries remain paltry by Western standards.

Foxconn responded to a spate of suicides by employees in 2010 by more than doubling its basic monthly salary to 1,800 yuan ($290). That year, Toyota Motor Corp. and other Japanese automakers also granted pay hikes following a wave of strikes that had tacit government support.

China's leaders have already promised to double the country's minimum wage from 2010 levels by 2015.

The minimum wage in Shanghai, one of the world's most expensive cities, is about 1,200 yuan ($200) a month after an increase of more than 10 percent last year. The northern city of Tianjin raised its minimum wage to 1,070 yuan ($175).

Beijing has tightened enforcement of wage and hour rules "because there has been a general lack of compliance — greater than in other countries," said K. Lesli Ligorner, head of the China employment group for the law firm Simmons & Simmons. "China is trying to make sure that at least at the lowest level of unskilled workers, there are greater protections in place for them."

The higher wages in China haven't resulted in higher prices for electronics so far, nor have they seriously dented the profit margins of technology companies, Dinges said.

That's largely because the labor bill typically represents less than 10 percent of the total cost for most gadgets. It's even less significant for Apple, which has used its clout and high demand for its products to negotiate extremely favorable deals with its suppliers and contractors.

ISuppli estimates that Apple pays less than $8 for the assembly of a 16-gigabyte iPhone 4S and $188 for its components. The phone sells in the U.S. for $649, though wireless carriers offer them at a subsidized $199 with a two-year service contract.

The estimates suggest that if Apple were to absorb a Foxconn wage increase to keep pay the same and cut the work week from 60 hours to 49, it would pay about $2 more to have an iPhone made. Dinges expects Apple to offset any higher labor expense by wringing out savings elsewhere.

Not that $2 will make much of a difference. Apple's regulatory filings imply that it makes hundreds of dollars in profits per phone.

Apple's latest iPad costs slightly more to make even though the tablet computer is less expensive to assemble than the iPhone, according to iSuppli. The firm estimates parts cost $325. Labor adds just $4 more to the bill.

Other technology companies might have a tougher time dealing with potentially higher labor costs because their profit margins are far thinner than Apple's.

Even so, higher prices for parts remain a bigger worry than rising labor costs. For instance, the labor costs for Microsoft's Xbox 360 are less than $10 while all the parts cost nearly $210, according to iSuppli. The video game console retails for about $300.

Amazon.com Inc. may already be selling its $199 tablet computer, the Kindle Fire, at a loss after marketing expenses and distribution costs are factored in. ISuppli estimates the Kindle Fire's parts cost about $173 while labor expenses add another $14.

Personal computer makers such as HP and Dell already have had to deal with higher prices for disk drives after massive flooding closed key factories in Thailand last fall. Now, prices for an important memory chip called DRAM could rise because a major Japanese supplier, Elpida Memory Inc., recently filed for bankruptcy protection.

Wages, workplace conditions and the environmental impact are sensitive for many U.S. and European companies after years of scathing criticism from human-rights groups. Nike Inc., Gap Inc. and The Walt Disney Co. are among the companies that have spelled out labor standards with the foreign factories that make shoes, clothing, toys and other goods sold under their brands.

Now it's the technology industry's turn to crack down, even if it means higher assembly costs.

Veteran technology analyst Rob Enderle believes U.S. technology firms will be able to pressure Foxconn and other Chinese manufacturers into absorbing the higher labor costs on their own. As leverage, the U.S. firms can threaten to move the assembly work elsewhere, such as Mexico or Taiwan.

Higher costs in China already have prompted some companies in labor-intensive industries such as shoes and textiles to migrate to Vietnam and other lower-wage economies.

"It's too early to tell how this is going to work out," Enderle said. "My expectation is that a lot of these Foxconn workers who are getting higher salaries are going to be unemployed a year from now because they were quietly let go or the work moved elsewhere."

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