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.