Apple/Foxconn's Broader Implications

Based on sales of the new iPad and its stock price, Apple Inc. (Nasdaq: AAPL) seems immune to bad press. In fact, the Wall Street Journal reports today that Apple's market cap briefly touched $600 billion. But the Fair Labor Association recently added fuel to the fire around Apple's relationship with the EMS provider Foxconn Electronics Inc. (See: Key Violations at Foxconn's Apple Plants.)

It turns out that Foxconn overworks and underpays its workers.

Apple is only the biggest target in an industry that widely uses subcontractors. IHS iSuppli reports that EMS and ODM companies racked up an "astounding" $359.8 billion of revenue in 2011. As big and attractive Apple is as a target, the company isn't alone in patronizing EMS providers. Amazon, Dell, Hewlett-Packard, and NEC are among the other brands outsourcing their manufacturing. (See: Dell, HP & NEC Partner Flagged for Labor Practices.)

Last year, contract manufacturing accounted for 20.2 percent of all manufacturing revenue, according to IHS.

Though Apple hasn't lost its shine (yet), the FLA report is the electronics industry's "moment of reckoning," IHS said in a press release. "For electronics brands, the implications of labor issues are massive, given their fundamental reliance on the outsourcing of production to contract manufacturers."

Thomas Dinges, senior principal analyst of electronics contract manufacturing for IHS, said in the press release:

Much of the press coverage of the FLA investigation has focused on the impact it will have on Apple’s margins or on prices that consumers will pay for iPhone or iPads. However, the real impact is on the overall relationship of electronic brands with contract manufacturers like Foxconn. Brands now realize that the biggest risk in dealing with contract manufacturers lies in the potential public relations disasters that can arise from worker’s rights issues.

The FLA report has implications beyond the electronics industry, Dinges says. The entire manufacturing infrastructure in China will feel the effects of labor reform. Foxconn has already increased its wages, and other EMS providers are likely to follow.

However, "given the small proportion of manufacturing costs compared to component expenses, this is unlikely to have a major impact on company margins or consumer prices," IHS says. Moreover, the damage will be minimal, because of the extensive infrastructure the electronics supply chain has established there. "China will remain the manufacturing engine of the global electronics industry."