Apple's iPhone supply chain faces sharply increasing costs in China

Posted:
in iPhone edited January 2014
A close look at the iPhone 4 supply chain demonstrates how contract manufacturers, including Apple partner Foxconn, are fighting rising costs in China in order to stay competitive and profitable in today's market.



A new report this week The New York Times used Apple's iPhone 4 as an example of rising costs in the Chinese supply chain for global consumer electronic devices. It spoke of impending increases in manufacturing costs in China, noting that "soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs" could significantly increase production costs for the Cupertino, Calif., electronics company.



Although estimated labor costs comprise just 7 percent of the overall final cost of the iPhone 4, analysts note that many of the companies in Apple's supply chain also rely on efficient, low-margin Chinese factories to keep their costs low. The report also said that Apple's high margin products should be able to absorb the increased costs with minimal disruption, while other brands may face a bigger challenge.



A large percentage of Chinese factories are located in the southern part of China, especially Shenzhen, which, as a Special Economic Zone, provides special government-endorsed incentives to manufacturers, with unique laws that are more relaxed than in the rest of China. Despite these incentives, Foxconn Technology, a division of the Taiwanese-based Hon Hai Group, recently announced its intention to move "hundreds of thousands of workers to other parts of China" in response to rising costs. Moving its operations inland would reportedly save Foxconn 20 to 30 percent in labor costs.



The report said that wages in China have increased by more than 50 percent since 2005. Salaries are expected to increase another 20 to 30 percent this year, as workers continue to feel they are being underpaid, and those employees have the support of local governments.



Foxconn has 800,000 supply chain workers in China alone, with contracts to supply major electronics companies including Apple, Dell and HP. Foxconn is the biggest name in the $250 billion industry, which the report noted is "invisible to consumers."



The report draws heavily from a teardown report of iPhone 4 from market research firm iSuppli. The El Segundo, Calif., firm placed the total bill of materials for the new smartphone at $187.51, but does not include labor and manufacturing costs. According to the Times, the combination of sharply rising wages, continued appreciation of the Chinese currency, and unsustainable labor practices are threatening both the margins of contract manufacturers and major brands and the stability of China's manufacturing boom.



In June, it was reported that Apple was giving back some of its profits to workers who assemble its products. Foxconn had already promised a 20 percent raise in the wake of investigations into several highly publicized suicides that took place at the manufacturing giant's Shenzhen plant. In response, Apple conducted an independent investigation into the working conditions at the plant, which employs over 400,000 workers.
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Comments

  • Reply 1 of 31
    anantksundaramanantksundaram Posts: 18,814member
    Ah, the inevitable and relentless march of globalization. Gotta love it.



    India, Vietnam, he we come!
  • Reply 2 of 31
    zoetmbzoetmb Posts: 2,378member
    Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.



    So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.



    We've become completely spoiled by the absurdly low prices of most consumer electronics and as a result, we've become even more of a "throw-away" society. And one of the costs of that insistence that everything be priced so low ($49 DVD players anyone?), is that we've exported millions of factory jobs (which isn't all bad news - it's not terrible that people in the third world are gaining employment and in at least some cases, creating a middle class, if they don't feel like committing suicide first).



    And yet, there are items that are priced (IMO) absurdly high: like $40 cases for an iPad. For $40 for a small piece of sewn cloth or $25 for an iPhone case made with about 20 cents worth of plastic (the packaging probably costs more than the product itself), you'd think they could be manufactured in the U.S. (or other high labor cost country).
  • Reply 3 of 31
    monstrositymonstrosity Posts: 2,182member
    Quote:
    Originally Posted by zoetmb View Post


    Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.



    So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.



    We've become completely spoiled by the absurdly low prices of most consumer electronics and as a result, we've become even more of a "throw-away" society. And one of the costs of that insistence that everything be priced so low ($49 DVD players anyone?), is that we've exported millions of factory jobs (which isn't all bad news - it's not terrible that people in the third world are gaining employment and in at least some cases, creating a middle class, if they don't feel like committing suicide first).



    And yet, there are items that are priced (IMO) absurdly high: like $40 cases for an iPad. For $40 for a small piece of sewn cloth or $25 for an iPhone case made with about 20 cents worth of plastic (the packaging probably costs more than the product itself), you'd think they could be manufactured in the U.S. (or other high labor cost country).





    Rather than looking on the negative side of things all the time. The western desire for gadgets and other goods has accelerated development of many poor countries.

    And when it becomes economically viable, india and vietnam (as someone just said) will be next on the list to benefit.

    It's not all violin playing misery.

    To allow labour costs to artificially rise, denies someone else, in another country, with even less money, a chance to benefit from globalisation.
  • Reply 4 of 31
    Quote:
    Originally Posted by zoetmb View Post


    Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.



    So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.



    Kudos to you!
  • Reply 5 of 31
    Ahhh, blame the Little Emperors.
  • Reply 6 of 31
    sheffsheff Posts: 1,407member
    How about bringing iPhone and iPad production to Mexico. Maybe it will help quell the drug violence if people have alternative legitimate sources of income. Perhaps we can even pay them higher wages if we use part of the drug war money for that.
  • Reply 7 of 31
    dgilbertdgilbert Posts: 2member
    How about bringing production to the USA. Support American workers. Let cost be higher if necessary.
  • Reply 8 of 31
    marokeromarokero Posts: 99member
    Quote:
    Originally Posted by sheff View Post


    How about bringing iPhone and iPad production to Mexico. Maybe it will help quell the drug violence if people have alternative legitimate sources of income. Perhaps we can even pay them higher wages if we use part of the drug war money for that.



    Better yet, how about bringing manufacturing back into the United States? I do my best to buy "Made in USA" but it's not always possible. One day there won't be any more developing nations to exploit, and manufacturing abroad may be more expensive than here at home.
  • Reply 9 of 31
    nvidia2008nvidia2008 Posts: 9,262member
    Quote:
    Originally Posted by anantksundaram View Post


    Ah, the inevitable and relentless march of globalization. Gotta love it. India, Vietnam, he we come!



    Africa will be next. Let all the exploitation continue!
  • Reply 10 of 31
    nvidia2008nvidia2008 Posts: 9,262member
    Quote:
    Originally Posted by zoetmb View Post


    Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.



    So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.



    We've become completely spoiled by the absurdly low prices of most consumer electronics and as a result, we've become even more of a "throw-away" society. And one of the costs of that insistence that everything be priced so low ($49 DVD players anyone?), is that we've exported millions of factory jobs (which isn't all bad news - it's not terrible that people in the third world are gaining employment and in at least some cases, creating a middle class, if they don't feel like committing suicide first).



    And yet, there are items that are priced (IMO) absurdly high: like $40 cases for an iPad. For $40 for a small piece of sewn cloth or $25 for an iPhone case made with about 20 cents worth of plastic (the packaging probably costs more than the product itself), you'd think they could be manufactured in the U.S. (or other high labor cost country).



    It's crazy isn't it? Even in most developing countries, it's cheaper to import boatloads of Chinese crap instead of manufacturing locally. Simple things like toys, simple electronics, DVD players, torches, just about everything!
  • Reply 11 of 31
    Even if the products were assembled in the USA, all the components would likely come from China, Taiwan and South Korea.



    Even if by some miracle, the USA managed to build up the colossal supply chain necessary to supply all these parts, and be competitive with the one already in place in Asia, the chemicals and metals necessary for those components are...sourced from Asian companies that have strangled the supply.
  • Reply 12 of 31
    marokeromarokero Posts: 99member
    Quote:
    Originally Posted by nvidia2008 View Post


    It's crazy isn't it? Even in most developing countries, it's cheaper to import boatloads of Chinese crap instead of manufacturing locally. Simple things like toys, simple electronics, DVD players, torches, just about everything!



    The Chinese are deceitful in their exporting practices. Brazil had been importing shoes from China last year, then for 2010 it decided it would not import from China but from another asian country. China "laundered" the shoes through that other asian nation and still got the shoes into Brazil. I guess that's partly our own fault for outsourcing manufacturing to lowest bidder...
  • Reply 13 of 31
    dr millmossdr millmoss Posts: 5,403member
    Quote:
    Originally Posted by anantksundaram View Post


    Ah, the inevitable and relentless march of globalization. Gotta love it.



    India, Vietnam, he we come!



    This reminds me of an observation made by Winston Churchill: "It doesn't take all kinds, there just are all kinds."



    So no, you don't have to love it.
  • Reply 14 of 31
    kstlouiskstlouis Posts: 10member
    Quote:
    Originally Posted by dgilbert View Post


    How about bringing production to the USA. Support American workers. Let cost be higher if necessary.



    I fully agree with supporting local industry when possible (I am Canadian, but the sentiment is the same), but I don't think you understand exactly how much this would increase the cost of these products. These workers are putting in 1.5 to 2 times MORE hours per week, and yet are still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY. That is a massive increase in labour costs. Sure, you'd save a bit of money in shipping, but it wouldn't even come close to compensating. While it is unfortunate, especially since you guys could surely use the jobs right now, I can't think of any way that we could build these products in North America and still sell them at even close to the same price. VERY few people would be willing to pay for an iphone/droid/etc. with that much of a price hike.
  • Reply 15 of 31
    anantksundaramanantksundaram Posts: 18,814member
    Quote:
    Originally Posted by nvidia2008 View Post


    Africa will be next. Let all the exploitation continue!



    Ah, looks like someone has been brushing up on his Marx lately.
  • Reply 16 of 31
    anantksundaramanantksundaram Posts: 18,814member
    Quote:
    Originally Posted by nvidia2008 View Post


    It's crazy isn't it? Even in most developing countries, it's cheaper to import boatloads of Chinese crap instead of manufacturing locally. Simple things like toys, simple electronics, DVD players, torches, just about everything!



    Do you stop to think that it might actually make families better off, by affording them things that they otherwise could not have?



    Or, are material things such as toys and electronics and torches only for people like us?
  • Reply 17 of 31
    st3v3st3v3 Posts: 63member
    Quote:
    Originally Posted by kstlouis View Post


    I fully agree with supporting local industry when possible (I am Canadian, but the sentiment is the same), but I don't think you understand exactly how much this would increase the cost of these products. These workers are putting in 1.5 to 2 times MORE hours per week, and yet are still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY. That is a massive increase in labour costs. Sure, you'd save a bit of money in shipping, but it wouldn't even come close to compensating. While it is unfortunate, especially since you guys could surely use the jobs right now, I can't think of any way that we could build these products in North America and still sell them at even close to the same price. VERY few people would be willing to pay for an iphone/droid/etc. with that much of a price hike.



    So you think these workers "putting in 1.5 to 2 times MORE hours per week, and yet still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY" is just so that we can have low cost gadgets?
  • Reply 18 of 31
    palegolaspalegolas Posts: 1,271member
    I wonder how much the iPhone 4 would cost if it was Fair Trade.
  • Reply 19 of 31
    dr millmossdr millmoss Posts: 5,403member
    Quote:
    Originally Posted by anantksundaram View Post


    Ah, looks like someone has been brushing up on his Marx lately.



    That's more than a tad knee-jerk, don't you think?
  • Reply 20 of 31
    nvidia2008nvidia2008 Posts: 9,262member
    Quote:
    Originally Posted by anantksundaram View Post


    Ah, looks like someone has been brushing up on his Marx lately.



    Quote:
    Originally Posted by Dr Millmoss View Post


    That's more than a tad knee-jerk, don't you think?



    LOL I'm not to fussed about his comment.



    Quote:
    Originally Posted by anantksundaram View Post


    Do you stop to think that it might actually make families better off, by affording them things that they otherwise could not have?



    Or, are material things such as toys and electronics and torches only for people like us?



    That's actually a pretty good point. Well, "us" is different, because I'm in Malaysia right now. The main financial pressures on the middle class (OMG I used the word "class" LOL) here is housing, medical fees, petrol and groceries.



    It is true that China-made stuff has given a wide variety of material goods to many people, even in developing countries. But it can be a double-edged sword. It means that manufacturing capability and foreign investment is reduced in that developing country compared to China, for a wide range of goods.



    On the other hand though, there are more pressing issues here in Malaysia like the cost of staples, housing prices and petrol prices. Also car prices.



    Bottom line, for developing countries, cheap stuff from China can equal happy + affordable, but remember that these developing economies have to compete directly with China on many fronts, not least manufacturing.



    Personally, I'm concerned with human rights & dignity kind of issues. Economic issues, such as countries not being able to successfully compete with this-or-that-other-country, is a totally different game because it is dependent on a whole lot of other things like good government, etc.



    Tricky situation.
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