Costs of China Labor Militance Quickly Becoming Visible

July 7, 2010 - PRLog -- We at Economy Watch been covering the outbreak of the new labor militance in China ever since the Western media began reporting on it.

And now the – literal – economic costs of that unexpected explosion are beginning to be not just felt in China,

but analyzed all over the world in very concrete terms, even as they have just started begin to appear.

Last month, for example, while enthusiastic global consumers were playing with their new Apple iPhone 4,

researchers in Silicon Valley were engaged in something more serious.

They cracked open the phone’s shell and started analyzing the new model’s components,

trying to unmask the identity of Apple’s main suppliers.

These “teardown reports” provide a glimpse into a company’s manufacturing.

What the latest analysis shows is that the smallest part of Apple’s costs are here in Shenzhen,

where assembly-line workers snap together things like

microchips from Germany and Korea, American-made chips that pull in Wi-Fi or cellphone signals, a touch-screen module from Taiwan and more than 100 other components.

But what it does not reveal is that manufacturing in China is about to get far more expensive.

Soaring labor costs caused by worker shortages and unrest,

a strengthening Chinese currency that makes exports more expensive,

and inflation and rising housing costs

are all threatening to sharply increase the cost of making devices

like notebook computers, digital cameras and smartphones.

Desperate factory owners are already shifting production

away from this country’s dominant electronics manufacturing center in Shenzhen,

and toward lower-cost regions far west of here, even deep in China’s mountainous interior.

At the end of June, a manager at Foxconn Technology — one of Apple’s major contract manufacturers —

and site of the infamous suicides that galvanized worker unhappiness

both there and elsewhere in China’s industrial leviathan –

said the company planned to reduce costs by moving hundreds of thousands of workers to other parts of China,

including the impoverished Henan Province.

While the labor involved in the final assembly of an iPhone accounts for a small part of the overall cost —

about 7 percent by some estimates —

analysts say most companies in Apple’s supply chain —

the chip makers and battery suppliers and those making plastic moldings and printed circuit boards —

depend on Chinese factories to hold down prices.

And those factories now seem likely to pass along their cost increases.

“Electronics companies are trying to figure out how to deal with the higher costs,”

says Jenny Lai, a technology analyst at CLSA, an investment bank based in Hong Kong.

“They’re already squeezed, so squeezing more costs out of the system won’t be easy.”

Apple can cope better than most companies because it has fat profit margins of as much as 60 percent

and pricing power to absorb some of those costs.

But makers of personal computers, cellphones and other electronics —

including Dell, Hewlett-Packard and LG —

deal with much slimmer profit margins, according to several analysts.

“The challenges are going to be much bigger for them,” Ms. Lai said.

Most other industries, from textiles and toys to furniture, are under considerably more pressure.

One way to understand the changes taking shape in southern China

is to follow the supply chain of the iPhone 4,

which was designed by Apple engineers in the United States,

sourced with high-tech components from around the world

and assembled in China.

Shipped back to the United States, the iPhone is priced at $600,

though the cost to consumers is less,

subsidized by AT&T in exchange for service contracts.

“China makes very little money on these things,”

said Jason Dedrick, a professor at Syracuse University and an author of several studies of Apple’s supply chain.

Much of the value in high-end products is captured at the beginning and end of the process,

by the brand and the distributors and retailers.

According to the latest teardown report compiled by iSuppli, a market research firm in El Segundo, Calif.,

the bulk of what Apple pays for the iPhone 4’s parts goes to its chip suppliers, like Samsung and Broadcom,

which supply crucial components, like processors and the device’s flash-memory chip.

In the iPhone 4, more than a dozen integrated circuit chips

account for about two-thirds of the cost of producing a single device, according to iSuppli.

Apple, for instance, pays Samsung about $27 for flash memory and $10.75 to make its (Apple-designed) applications processor;

and a German chip maker called Infineon gets $14.05 a phone for chips that send and receive phone calls and data.

Most of the electronics cost much less, according to this fascinating article in the New York Times.

The gyroscope, new to the iPhone 4, was made by STMicroelectronics, based in Geneva, and added $2.60 to the cost.

The total bill of materials on a $600 iPhone —

the supplies that go into final assembly —

is $187.51, according to iSuppli.

The least expensive part of the process is manufacturing and assembly.

And that often takes place here in southern China,

where workers are paid less than a dollar an hour

to solder, assemble and package products for the world’s best-known brands.

No company does more of it than Foxconn,

a division of the Hon Hai Group of Taiwan,

the world’s largest contract electronics manufacturer.

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