Who Will Pay for Apple Supply Chain Changes?

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Eldredge
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Impact of wages
Eldredge   2/21/2012 10:44:38 AM
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Does anyone know what percentage of Foxconn's cost are wages versus materials? I'm sure the added cost will end up being distributed over the supply chain, at least to some extent, and translated to higher consumer cost as well.

Bolaji Ojo
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Re: Impact of wages
Bolaji Ojo   2/21/2012 11:39:22 AM
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Elredge, Determining this is difficult, though not impossible. Companies typically don't break out wages so to get a range of what cost of goods sold (COGS) breaks out into one might have to look at inventory numbers on the balance sheet and figure out beginning and end inventory per quarter then guess or track back to what might be the labor portion in the COGs or in the SG&A (selling, general and administrative) costs.

Foxconn does not report COGS and the inventory numbers it report represent only a fraction of its sales, which means it would be extremely difficult figuring this out. Notwithstanding what analysts say, Foxconn isn't about to break out the impact of this wage increases on its operations.

Hospice_Houngbo
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Re: Impact of wages
Hospice_Houngbo   2/21/2012 2:53:49 PM
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 Apple will not survive without its suppliers. It is more likely that Foxconn will have to bear most of the costs, but the company will/can find a way to make Apple share some of the costs as well.  

Bolaji Ojo
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Re: Impact of wages
Bolaji Ojo   2/21/2012 4:55:30 PM
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Hospice, The chances for Foxconn to bear the entire cost is slim. It may for the current contract but once the contract is ready for renewal the discussion with Apple will have to include spreading the cost.

burn0050
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Re: Impact of wages
burn0050   2/21/2012 5:11:48 PM
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Frankly, it should be Apple's cross to bear. Their products carry a profit margin of anywhere from 20-50%. I think they can afford to take a hit in the manufacturing costs to help fix some unfair labor practices. While we own several Apple products, their cost tactics have always infuriated me.

The upsell on their devices has always been memory. But the markup is RIDICULOUS. To go from 16Gb to 32Gb on a phone is an extra $100, while their cost is probably $5 (or less). A consumer can buy a 16Gb SD card for $15 (or less). Upsell something else that's worth the money. But, that would cut into those HUGE profit margins for them. The company was built on the ego of Steve Jobs (rest his soul), and its prices match. For him, I think, it was more about the product being elite - so he charged more, not because of a profit margin (read his biography, it's not about the money - although I doubt that didn't play a part).

Bolaji Ojo
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Re: Impact of wages
Bolaji Ojo   2/21/2012 7:40:36 PM
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burn0050, I feel your angst. As much as it might be nice to have an iPad, I have refused to buy one. I also don't own an iPhone. I do have an early edition iPod, which an Apple employee at an iStore once told me they wouldn't service because it was so old!

In other words, I have moments when I think Apple's products are overpriced. The company gets extra dollar for the "goodwill" its products generate and for the perceived "quality" as well as the other thing analysts are crazy about -- the ecosystem. Of course, some of this is hogwash but people have bought into it.

Will Apple readily give this up in the new environment where bashing the company has suddenly become "cool"? I doubt it. Although I agree its margins are hefty and it can easily absorb the extra cost of the Foxconn wage hikes and other supply chain makeover it is implementing, it may be difficult for Apple to change its old ways of pushing costs onto its suppliers and extracting the most value from customers.

Bolaji Ojo
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Re: So are the Newly...
Bolaji Ojo   2/21/2012 11:25:33 AM
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Rich, Just new chains or the charger for an iPad. Apparently, the newly increased wages are still considered so low by the Chinese government that they are exempt from income tax.

Hospice_Houngbo
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Re: So are the Newly...
Hospice_Houngbo   2/21/2012 3:05:32 PM
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Increased wages and better working conditions doesn't mean that chinese factory workers will become rich overnight. But the morality in all that story is that those workers will not be denying their rights anymore. But they will have to accept things to change gradually.

Barbara Jorgensen
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Who will pay?
Barbara Jorgensen   2/21/2012 3:29:48 PM
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@Hospice: I doubt the wage increases will be passed on only to Apple. OEMs have a pretty good idea of what their competitors are doing, so Foxconn will not be able to keep that secret. Can you imagine what would happen if Foxconn raises it rates with Apple, but not with Dell? If Foxconn passes labor costs on to customers, it will be for all customers.

What is more likely is that Foxconn will find another way to make up the difference. Foxconn probably gets huge volume discounts from suppliers on components it uses across its customer base. It could start ratcheting up those prices. Or, it could negotiate a better discount and not pass the savings on to customers.  This is pretty common with the EMS industry.

There are even more underhanded ways, such as substituting a cheaper part for the one on the AVL and hoping the OEM doesn't notice. I'm not saying that Foxconn does this, but it does happen. I know of a distributor that had to tell a supplier its product didn't make it on to a printed circuit board. Needless to say, the supplier was livid.

Unfortunately, with an operation as big as Foxconn's, a lot of things can be overlooked. Look at long it took for its labor practices to be flagged.

Bolaji Ojo
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Re: Who will pay?
Bolaji Ojo   2/21/2012 5:04:01 PM
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Barbara, Considering how slim margins are at EMS what do you think will happen when contracts come up for renewal between Apple and Foxconn? It's certainly unaceptable to ask the EMS provider to add to its costs without getting reimbursed.

Barbara Jorgensen
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Re: Who will pay?
Barbara Jorgensen   2/21/2012 7:32:19 PM
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@Bolaji: Given the time that it would take to disengage from Foxconn--anywhere between 3 and 5 quarters by some estimates -- and find a new partner (4 to 8 quarters) I would expect Apple to weigh the pros and cons. I think Foxconn will ask its OEM customers--including Apple--to pay more. In the end, I think Apple will stick with its partner and pass costs on to end-customers. They are a business, and that's what's in the best interest of Apple shareholders.

Bolaji Ojo
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Re: Who will pay?
Bolaji Ojo   2/21/2012 7:44:22 PM
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Barbara, I believe you have put your finger on the first symbiotic relationships in the history of the electronics industry. Apple cannot dump Foxconn and neither can Foxconn dump Apple without both parties suffering major harm. They'll figure out ways to get along and share extra costs. I predict, though, that Apple will go back to its old ways of transferring costs to suppliers and selling customers the "ecosystem experience." Why both suppliers and customers put up with it is the real puzzle.

_hm
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Re: Who will pay?
_hm   2/22/2012 5:04:03 AM
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Is this applicable to Apple products only? Foxxcon and Chinese supplier assembles products for many others. All these organizations will have to pay more to compnies like Foxxcon.

Will this bring back some work to USA?

 

Bolaji Ojo
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Re: Who will pay?
Bolaji Ojo   2/22/2012 8:27:05 AM
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_hm, The situation is not Apple-specific. All the companies that manufacture with Foxconn have the same problem. However, Apple is the most visible company and is receiving the greater attention as a result.

You asked if the Apple changes will bring jobs back to the United States. I doubt it. The jobs Foxconn has won't be viable in the US or in other Western countries. At under $2 per hour, Foxconn's workers' pay wouldn't be considered living wage in the US. Plus, the dormitory condition won't be accepted here.

Douglas Alexander
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Re: Who will pay?
Douglas Alexander   2/22/2012 9:54:22 AM
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Bolaji, I think I read or heard that an IPhone cost somewhere in the neighborhood of $9.00 to manufacture. Even if the cost triple, won't Apple still make tons of money on each sale? I have the original IPad and just got rid of the original iPhone which I replaced with a Galaxy II Skyrocket Adroid phone from Samsung. All these phones will eventually mimick each other in features so the competitive nature of similar products will eventually determine market share for each competitor. The various Apps are becoming universal as well. There are just so many notepads or contact managers or PDF readers before you've been there, done that syndrome sets in.

Bolaji Ojo
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Re: Who will pay?
Bolaji Ojo   2/22/2012 8:30:00 PM
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Douglas, Even if Apple gets Foxconn wages to triple, the US company will stay make billions in profit. Current wages as reported by NBC News for Foxconn workers come to $1.78 per hour. Few workers in the U.S. will think they've struck the motherlode if they make $10 per hour.

And, as you indicated, all the smartphones are becoming in some ways generic. The idea Apple's ecosystem or Nokia's ecosystem or Google's Ecosystem is better than the competing system is becoming a failed argument. The ecosystem has become commoditized.

Eldredge
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Re: Who will pay?
Eldredge   2/23/2012 9:42:09 AM
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@Barbara - I would tend to agree. Maybe Foxconn will absorb a token reduction in margin, but certainly won't bear the full cost increase on their own.

Anna young
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Re: Who will pay?
Anna young   2/29/2012 10:10:38 PM
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The Apple & Foxconn story is dying out without a comment from the Chinese government. The story isn't over. Most of this will play out in a theater but that is not going to be in China because the government isn't really interested in the story.

jallen
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Paying for Fair Labor Practices
jallen   2/21/2012 5:29:56 PM
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People of conscience consideer the social and ethical consequences of their buying practices, even if it means paying extra, or sometimes doing without a product.   During Apartheid ethical people boycotted South African products, and while Jack Welsh was Chief of GE I wouldn't buy a light bulb from them to keep from falling down the stairs.  I would much rather pay a bit more for an Apple product made under fair and safe labor conditions than to know my purchase was making workers sick and miserable.  This is especially true since most Apple products are far from necessities.   

Bolaji Ojo
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Re: Impact of wages
Bolaji Ojo   2/22/2012 7:26:58 AM
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Rich, He's laughing in heaven (and his estate is ecstatic) that you bought an iPad. I didn't buy an iPad for a bunch of reasons, one of which is the price but also because there are alternatives that I am carefully considering. I like Apple products but won't buy any of them as part of a herd.



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