True price of electronic luxuries

The pledge by Foxconn to raise the pay of its Chinese workers will not see the prices of gadgets soar, as parts and not assembly are the worry for firms, write Joe McDonald and Michael Liedtke

CONSUMERS won’t have to pay more for iPads, iPhones, and other popular electronics despite a Chinese company’s pledge to trim work hours and raise wages for its assembly workers.

Even though take-home pay has been steadily growing before this week’s pledge, labour 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% 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 labour auditor to review the practices and conditions in Chinese factories run by Foxconn.

A report on the audit, evoked images of a sweatshop and said Foxconn routinely violated overtime laws by assigning its assembly-line workers to toil for over 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 scrutinised companies, but also a major Chinese employer that cuts a broad swath.

Foxconn has about 1.2m workers and assembles or has assembled products for a long list of technology companies including Microsoft, Hewlett-Packard, and Dell.

Those companies’ smartphones, computers, video game consoles, and other devices have become household staples around the world.

Japan’s Toshiba Group, which employs 32,000 workers in China to make products such as fridges and televisions, 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 centre for goods stamped with some of the world’s best-known brands.

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

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 (€217).

That year, Toyota 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 (€150) a month after an increase of more than 10% last year.

The northern city of Tianjin raised its minimum wage to 1,070 yuan (€130).

It is estimated that Apple pays less than $8 (€6) for the assembly of a 16gb iPhone 4S and $188 for its components.

Beijing has tightened enforcement of wage and hour rules “because there has been a general lack of compliance — greater than in other countries”, according to 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.”

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. Labour adds just $4 more to the bill.

Other technology companies might have a tougher time dealing with potentially higher labour costs because their profit margins are far thinner than Apple’s. Even so, higher prices for parts remain a bigger worry than rising labour costs.

For instance, the labour 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 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 labour expenses add another $14.

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

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 autumn.

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 US and European companies after years of scathing criticism from human-rights groups.

Nike, Gap, and Walt Disney are among the companies that have spelled out labour 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 US technology firms will be able to pressure Foxconn and other Chinese manufacturers into absorbing the higher labour costs on their own.

As leverage, the US firms can threaten to move the assembly work elsewhere, such as Mexico or Taiwan.

“It’s too early to tell how this is going to work out,” says Enderle.

“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.”

Apple costs

*iPhone 4S $649 (€469; Irish prices at Apple.com are from €609)

*Memory chips $28.20

*Touch-sensitive screen $37

*Wireless chips $23.54

*Camera $17.60

*Other materials $81.66

*Assembly $8

*Basic iPad $499 (but Irish prices at Apple.com are from €479)

*Memory chips $30.70

*Touch-sensitive screen $117

*Battery $32

*Other materials $126.30

*Assembly $10