Chinese Working Conditions Raised ... Along With the Price of Gadgets?

Foxconn girl

The worker's environment in Chinese electronics manufacturer Foxconn has been a sticky issue for Apple's PR department, but it's also highlighted one big fact: If Western firms stick with Chinese sources, gadgets will get more expensive.

This is the thrust of a piece at the New York Times, which starts by looking at the reports about the new tear-down revelations concerning Apple's newest iPhone version: The smallest part of the cost of putting the thing together seems to be the manufacturing/assembly element, in China. The electronics themselves are sourced from all over the world--wherever there's a facility of sufficient scale and expertise to supply Apple's voracious demands. These parts are subject to their own market forces and price swings, demonstrated most obviously in the variable pricing of flash-based memory chips. But swings in component costs are very much structured into the business model of every manufacturer of high-tech consumer electronics.

What's not necessarily factored in is variable costs in the manufacturing and assembly line pieces of the production process. The NYT piece contends that manufacturing costs in China are about to get "far more expensive" and that this is going to affect the business of companies like Apple, Dell, HP and others who rely on Chinese factory work's low cost to maximize the profits.

Foxconn and companies like it operate almost on the Walmart model, where the profits come measured in cents per unit, but so many units fly through the fingers of the million-or-so employees per day that the operation does rake in the cash. But as the Foxconn suicide scandal has revealed, along with protests by assembly-line workers for other companies, workers in China are increasingly unwilling to work under such high pressure for such low wages ... and the Chinese authorities may have to cede to their wishes if it's to continue doing business with the West, with its very different thinking about worker rights.

Thus, wages in China will rise, pushing up the cost of manufacturing electronic gadgets. It takes years to get an alternative supply chain running up to reliable speed, particularly where delicate high-tech gizmos like the iPhone are concerned (and where assembly-line slip-ups are already making headlines) so Apple and its competitors are just going to have to suck up the increased cost for quite a while. And that means either innovating the design or assembly process with new tech--which also costs some capital expenditure at first--or taking a hit on profits or passing the costs along to the consumer as increased cost.

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3 Comments

  • Andrea Larson

    Even though this article doesn't specifically address working conditions in China, I will include it here in the context of supply chain: Unfortunately, as long as companies can continue to move farther inland in China where poverty is more extreme, people are desperate, and where today 5 people show up for every 1 new job at a just-opened factory to work for 10% of what Americans are paid to do similar work, this system will continue to grind its way forward. Capitalism on its own does not care; it’s a simple financial calculation. Globalization ultimately may force improved labor practices into supply chains. The question is how quickly will China’s companies and government act to improve working conditions and pay in the face of media coverage of suicides and other protest behavior? With pressure on global companies to be ever more transparent about conditions in their supply chains, will sufficient attention by NGOs and the threat of adverse publicity be enough to shift the calculations of buyers and producers such that the worst labor conditions are curtailed?

    Westerners want/demand their cheap goods with little concern for what it takes to get an iPhone into their hands, governments want foreign exchange, manufacturers want to stay in business, global corporations are rewarded for holding costs down; and cheap labor is easiest way to achieve that goal. The only missing voice at the table is the laborer at the very beginning of the supply chain. And there isn’t much leverage there right now.

  • Ben Lu

    Well, it takes time to get there. I doubt Apple/HP/Dell can find something to replace Foxxcon with the kind of scale, speed and stuff skill level. Vietnam? Or Russia? Greater China is their best bet and rising wages are inevitable. Are western consumers willing to pay more while they make noise about 'sweatshop' conditions?

  • Dr. Joseph Harder

    There are many U.S. companies, those populating the 100 best kinds of lists as well as others, that get great financial results from putting people first. "Putting People First for Organizational Success" by Pfeffer and Veiga provides a nice overview.

    It could be that treating employees better...providing above average wages, job security, voice, and so forth, will result in more motivation, loyalty, commitment, and innovation, and, ultimately, higher productivity.

    Team-oriented lean production methods can result in better manufacturing processes, which in turn can actually lower costs.

    The key is to see it as an investment rather than a cost, if the performance results are to be believed, to do the cost accounting and not confuse, say, pay rate with pay cost.

    I wonder if any Chinese companies are run that way already, and if they are getting good results.

    More importantly, are there cultural differences that would mitigate any of these putative productivity gains?