(Photo courtesy of The New York Times)
The day of inexpensive iPhones, iPod touches and iPads may be coming to an end thanks to “soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive and inflation and rising housing costs.” Will that next device wind up costing us more?
The New York Times is reporting that consumer electronics manufacturers who have become accustomed to getting their latest gizmo made cheaply in China may have to rethink their strategy, and that will undoubtedly affect Apple as well. Any way you slice it, manufacturing in China is about to get more expensive -- and you might wind up paying more for your next notebook computer, digital camera or smartphone as a result.
“Electronics companies are trying to figure out how to deal with the higher costs,” says Jenny Lai, a technology analyst at an investment bank based in Hong Kong. “They’re already squeezed, so squeezing more costs out of the system won’t be easy.”
Out of many of the consumer electronics companies manufacturing in China, Apple may actually be the best prepared. The iPhone maker has “fat profit margins of as much as 60 percent and pricing power to absorb some of those costs” -- but others like Dell, Hewlett-Packard and LG survive on much slimmer profit margins and are more at risk if the manufacturing costs rise. “The challenges are going to be much bigger for them,” Lai reveals.
The reality is that even a device like Apple’s new iPhone 4, which is priced unsubsidized at $599 (a two-year contract with AT&T brings the price much lower), leaves very little of its sale price where the manufacturing is done. iSuppli estimates that the total cost to build the iPhone 4 is $187.51, with the least expensive part of the process being the manufacturing and assembly.
Most of that is due to the fact that Chinese workers are paid less than a dollar an hour to “solder, assemble and package products for the world’s best-known brands.” Foxconn (a division of the Hon Hai Group of Taiwan) is at the top of that heap, with 800,000 workers in China alone. Jason Dedrick, a professor at Syracuse University, compares Foxconn to Wal-Mart stores. “They’re low-margin, high-volume,” he explains. “They survive by being efficient.”
Despite being mostly invisible to consumers, consumer electronics manufacturing is a $250 billion industry spread among only a handful of companies operating on the slimmest profit margins imaginable. The problem is, when an unforeseen wrinkle pops up -- such as the recent worker unrest that has resulted in a number of suicides at Foxconn -- the only answer is to pour money on the problem, and that may eventually drive up the costs of our gadgets here.
“We’ve concluded Hon Hai’s labor-intensive model is not sustainable,” says Isaac Wang, an analyst with iSuppli Research in China. “Though it can keep hiring 800,000 to one million workers, the problem is these workers can’t keep working like screws in an inhuman system.”
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