Apple Supplier Foxconn's Wage Increases Could Have Ripple Effect Across Electronics Industry
By Noel Randewich and Poornima Gupta
SAN FRANCISCO (Reuters) - Hewlett-Packard and Dell Inc are keeping a close eye on a big jump in wages for workers that assemble Apple Inc's iPhone in China, and could be forced to nudge up prices for their own products if labor costs keep rising.
Major contract manufacturer Foxconn Technology Group -- which counts Apple, HP, Dell, Nokia and Motorola Mobility among its major clients -- last week raised wages for its workers in China by 16-25 percent, the third hike since 2010.
The wage increases reflect a rising trend across the Chinese electronics manufacturing industry and could pressure already wafer-thin margins at the likes of HP and Dell.
HP Chief Executive Meg Whitman said rising wages in China could eventually have a ripple effect across the world electronics industry.
"If Foxconn's labor cost go up, their product cost to us will go up," she told Reuters in an interview on Wednesday.
"But that will be an industry-wide phenomenon and then we have to decide how much do we pass on to our customers versus how much cost do we absorb."
Dell, which on Tuesday reported a 18 percent slide in quarterly profit, said it was also keeping an eye on wages in China.
"It's not clear to us how that will play out in terms of our costs," Dell Chief Financial Officer Brian Gladden told Reuters. "It remains to be seen how that flows through the overall supply chain. We will continue to watch that."
But Gladden said labor costs are a "very, very small piece" of the total cost of its products.
To companies like HP and Dell that specialize in creating ultra-efficient supply chains and cutting costs to preserve razor-thin profit margins, any rising expense can be trouble.
"HP and Dell's PCs could cost a bit more. Those companies have been trying to pass on extra costs. It may or may not work. Their products aren't as differentiated as Apple's," said Shaw Wu, an analyst at Sterne Agee in San Francisco.
Apple's main manufacturer of iPads and iPhones, Foxconn is already in the spotlight because of its poor labor conditions, with reports of employees committing suicide.
Foxconn's February wage hike was announced days after Apple said a U.S. non-profit labor group had begun an "unprecedented" inspection of working conditions at its main contract manufacturers, including Foxconn.
Foxconn's wage increase comes as Chinese electronics manufacturers face higher costs to attract workers.
The government of Shenzhen, a freewheeling boomtown bordering Hong Kong, announced in January it was increasing its minimum wage by 13.6 percent despite warnings from factory owners the move could deal another blow to exporters already reeling from a sharp drop in Western orders.
Taiwan-based Foxconn said the pay of a junior level worker in Shenzhen, southern China, had risen to 1,800 yuan ($290) per month and could be further raised above 2,200 yuan if the worker passed a technical examination. It said that pay three years ago was 900 yuan a month.
(Reporting By Noel Randewich; Editing by Michael Perry)
Copyright 2012 Thomson Reuters. Click for Restrictions.
Related on HuffPost:ABC's "Nightline" recently gave viewers an unprecedented look inside the factories where iPhones, iPads and MacBooks are made. Take a look at the slideshow (below) to see the most surprising facts about life in these "iFactories."
On February 21, <a href="http://www.huffingtonpost.com/2012/02/22/nightline-apple-supplier-foxconn_n_1293393.html?ref=technology" target="_hplink">ABC aired a "Nightline" segment featuring Bill Weir's visit to a Chinese Foxconn factory</a> responsible for making some of Apple's popular devices. During a tour of the factory, Weir says he "expected more robots" but in fact most of the gadgets at Foxconn are made the old-fashioned way: The high tech parts are put together by hand. For example, iPhones are assembled by hand in 141 steps. One iPad takes five days to assemble and passes through 325 sets of hands.
Two shifts of workers toiling in 12 hour shifts can make 300,000 iPad camera modules in one day, not to mention shape sleek iPads out of "raw hunk[s] of aluminum" at a rate of 10,000 per hour. <a href="http://abcnews.go.com/watch/nightline/SH5584743/VD55173552/nightline-221-apples-chinese-factories-exclusive" target="_hplink">Image via Nightline</a>
7 To A Room
Many workers live at the factory, where they pay $17.50 per month to live 7 to a room in Foxconn dormitories. <a href="http://www.forbes.com/sites/connieguglielmo/2012/02/22/nightline-goes-inside-apple-factories-in-china/" target="_hplink">The average starting salary is $285 per month,</a> and workers must pay for their food. <a href="http://abcnews.go.com/watch/nightline/SH5584743/VD55173552/nightline-221-apples-chinese-factories-exclusive" target="_hplink">Image via Nightline</a>
No Free Lunch
Workers get two hour-long meal breaks during each 12-hour shift. They eat together in a cafeteria where they pay $.70 a meal. This is about a quarter of their hourly wage. <a href="http://abcnews.go.com/watch/nightline/SH5584743/VD55173552/nightline-221-apples-chinese-factories-exclusive" target="_hplink">Image via Nightline</a>
Tim Cook Investigated Suicides
In 2010, after a spate of suicides at Foxconn's Shenzen plant, then COO Tim Cook flew to China to investigate the matter. <a href="http://abcnews.go.com/watch/nightline/SH5584743/VD55173552/nightline-221-apples-chinese-factories-exclusive" target="_hplink">According to Nightline,</a> Cook put together a team of psychiatric experts to examine the issue. It was at that team's suggestion that the infamous nets were installed between the buildings to prevent suicides. There have been 18 worker suicides at Foxconn since 2010. <a href="http://www.reuters.com/article/2012/02/15/us-china-apple-idUSTRE81E1FQ20120215" target="_hplink">According to Reuters' interview with Fair Labor Association president Auret van Heerden, the group's initial findings from its audit of Foxconn</a> suggested that the suicides could have been "a function of monotony, of boredom, of alienation perhaps."
Weir said he was surprised to see how young the workers were. He said many were in their late teens and no one looked like they could be over 30. Many had left their hometowns, oftentimes in the countryside, in order to get jobs at Foxconn. Weir also toured Chengdu and spoke with the relatives of workers who had left for jobs at Foxconn. According to Cult of Mac, <a href="http://www.cultofmac.com/147878/foxconn-employees-say-underage-workers-were-hidden-before-fla-inspection/" target="_hplink">Foxconn may have hidden underage employees</a> when the Fair Labor Association conducted its inspections. While Apple allows for workers as young as sixteen to assemble their products, those eighteen and under are afforded "special protections," <a href="http://www.appleinsider.com/articles/12/02/22/factory_workers_claim_foxconn_hid_under_age_employees_before_fla_inspection.html" target="_hplink">according to Apple Insider.</a> These include not being allowed to perform some tasks and working shorter hours than older workers.
Foxconn Exec Wants To Pay More
When asked how Foxconn would react if Apple suggested doubling workers' pay, Foxconn executive Louis Woo told Weir that the company would welcome a raise for employees. "Why not?" Woo said. "That would be good for the employees and also definitely good for China and good for us."
Workers have to wear static-proof jackets and take "air showers" to make sure the work area remains dust-free. Even one spec of dust could prove ruinous to the iGadgets' delicate innards. <a href="http://abcnews.go.com/watch/nightline/SH5584743/VD55173552/nightline-221-apples-chinese-factories-exclusive" target="_hplink">Image via Nightline</a>
WATCH A CLIP FROM THE NIGHTLINE SEGMENT