Asia's leading high-tech publication, DigiTimes, has reported that Amazon.com and Barnes & Noble have contracted with Foxconn Electronics Inc. to build upcoming versions of the Kindle Fire and Nook e-reader, respectively. Which brings us to the next logical question: will Amazon.com Inc. (Nasdaq: AMZN) and B&N receive the same kind of pressure Apple Inc. (Nasdaq: AAPL) did regarding their supply chains?
They should, along with all the other OEMs that outsource their manufacturing to Foxconn. That is the only way real change will take place in China's human rights practices.
The timing, however, is bad. Amazon and B&N are no doubt seeking to save costs by expanding their ODM relationships. Currently, according to DigiTimes, Quanta Computer is the ODM for the 7-inch Kindle Fire, and Inventec builds B&N's Nook. While OEMs will usually select one ODM for a product's launch, it will add ODMs to reduce both price and risk once the product gains traction in the market. Foxconn has recently announced wage hikes for its workers throughout its Chinese factories, which likely means Amazon and B&N will pay higher labor rates.
Amazon is currently the price leader in the tablet market: the Kindle Fire retails for only $199. This is part of the reason Amazon has been able to steal share away from Apple. (See: Is Hardware's Loss Retail's Gain?.) According to iSuppli:
Amazon shipped 3.9 million Fire tablets in the fourth quarter, allowing the company to garner a double-digit share of the market, at 14.3 percent. This drove Amazon to become the world’s second-largest tablet shipper in the fourth quarter, surpassing Samsung Electronics.
In the meantime, the Nook hasn't done so well, and B&N has steadily been decreasing prices, and in some cases giving the Nook e-reader away for free. (Nook's tablet was released today, priced at $199.) There's been discussion that B&N will spin the Nook business off from its core print publishing business. (See: Should Barnes & Noble Spin Off the Nook?.) In order to develop any kind of technology leadership, the Nook will require a significant R&D investment. B&N's falling print sales are dragging the company's overall profit margins down, so R&D will be a tough sell to B&N investors.
Foxconn itself is already seeing the effects of its wage hikes. According to Business Week, Foxconn was trading down today:
The Taipei-listed flagship of Foxconn Technology Group fell as much as 2 percent to NT$99.50, headed for the biggest drop in two weeks, before trading at NT$99.60 as of 1:15 p.m. local time. The benchmark Taiex index added 0.7 percent.
In order to stem this tide, Foxconn is going to have to demonstrate it will be able to maintain the kind of profit margins its shareholder are accustomed to. (See: Who Will Pay for Apple Supply Chain Changes?.) One way to do this is to pass the wage hikes on to its customers. The other way is to find savings elsewhere: cheaper components, increased output, employee layoffs, or shuttering factories. Either way, somebody loses.
If Foxconn charges its customers more, OEMs have two choices: pass the rates on to consumers, or take less of a profit margin themselves. This will be tough for Amazon and B&N, which are already selling their hardware at a loss. If Foxconn cuts corners, component makers and employees may lose. But Foxconn and its OEMs may be able to maintain their margins.
What cannot happen is for pressure to abate on Foxconn as product prices begin to spike. Foxconn's wage hikes were likely due to pressure it was getting from Apple, which was drawing criticism for Foxconn's treatment of employees. As long as Apple was the only company affected by the wage hikes, consumers still had the option of lower-priced brands. They still do. But the Kindle Fire and the Nook might not be as attractively priced as they were before.
Eventually, other EMS companies will follow Foxconn's suit and raise wages as well. Their OEM customers will begin to feel pressure from their shareholders. OEMs will either seek to cut costs or look elsewhere for cheaper labor. And the Great Outsourcing Cycle begins again.
But that is the price we pay for change. What's good for Apple has to be good for Amazon -- and everyone else. That's the new cost of doing business in China.
Anne, Amazon should have the same pressure that is applied on Apple but this is not happening. The most visible company right now is Apple and that is where most of the comments have been concentrated.
There is no doubt that Amazon would have the same kind of pressure Apple experienced with Foxconn as regard the supply chain. The working conditions at Foxconn for Amazon's production can not be different from the condition for Apple, the same workers will be involves.
...and you can get ALL kinds of muscle car and truck parts there too. If you would like to just "ogle" them (like a plate of cheescake, as Bolaji has said), you can always pick up the following video series that is all about American muscle cars:
@TimKarr--Glad you are still reading us! I do agree that Amazon's profit is coming from the sales of merchandise rather than the devices. Their Q4 sales were up 35%, so the strategy is working. But will it continue to work if the Kindle's prices go up considerably? That's the danger of the Foxconn relationship. I think that is unlikely to happen, actually, because there will always be an older version of the Kindle that will be sold for less than the latest version. As long as people can shop, (and you can do that on the oldest Kindle) there will be a revenue stream at Amazon.com.
BTW: Do they sell beer and muscle cars on Amazon.com?
Barbara: While Amazon may be selling the Kindle Fire at a loss, I am sure that they are making up the difference on the back end. It is a good strategy - take a loss on the front end to get the Kindle Fire into as many hands as possible, and then sell numerous downloads to these same people. It sounds like a win-win situation to me.
But then again, this opinion is coming from one of those beer-drinking, muscle car driving, etc. readers.
Bolaji: It certainly would make sense for Amazon and B&N to sit back and let Apple lead the charge. B&N is struggling with its business model and Amazon, as we have said, is selling hardware at a loss. There is always an upside and downside to being "king:" you dominate the market and call the shots, but you also have the biggest target on your back. That's Apple.
I believe Adidas and Reebok got some spillover from the Nike controversy some years ago, but like Amazon and B&N, nobody will remember that in years to come. Nike was the biggest name and got the blame, but they also get the credit now that things have settled down.
Barbara, Apple is not the only company manufacturing currently with Foxconn or in China yet it has garnered the most negative PR. As you noted, other companies could be next in line. Will this happen, though? Years ago, it was Nike alone that faced calls for boycott. Perhaps others will continue to fly under the radar while Apple tries to burnish its image.
Barbara, I own the Nook color and love it. You can basically do everything that the tablet does, just cheaper. Yes the tablet has a few extra features and apps, but you can use the browser on the Nook color and view videos and browse the web also. I ultimately got it to read on, but I can get on Facebook or read the news on it also.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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