"The Reuters report indicates that Foxconn has yet to transfer much of its higher costs to its customers, including Apple. Until it does, the margins will remain under pressure, analysts told Reuters"
Why is Foxconn not passing on the higher costs to its customers? Apple is obviously not feeling any pinch in its profit margins.
In addition the link below indicates that there might be further trouble for Foxconn.
This is a Foxconn problem that is connecting the contract manufacturer too closely to Apple. I believe Foxconn needs to get on these issues rapidly and Apple should be pressuring it hard to change the situation.
It can be suicidal for Foxconn to ask for profit sharing from Apple given that 45% of the service belongs to them but this seems like a logical step. After reading this story, i cannot blame Foxconn for a tight grip on its money. Apple and other such companies are equally to blame. With soring profits, if the supply chain is nearly inhumane then who to blame?
The company might just have to "transfer some of its added costs to Apple and other customers". Apple's huge profits show that the company is either overpricing its products or it is underpaying their production costs. But it might also be that Foxconn was making more profits that it should.
The solution is not profit sharing but cost-sharing is certainly necessary in this situation. A contract manufacturer must not subsidize the OEM's operation and when its costs rise, the increase should be passed on to the customer unless the contract expressly forbids this. And even when it does, the relationship between the two could be impaired by a heavy-handed "we-don't-care" attitude by the OEM.
Apple prices its products not just base on cost but other factors such as ecosystem (appstore, iCloud, etc.). I think it should absorb the cost, and not pass down to customers.
Anna, I think they have to share from the profit. Apple is a customer of Foxconn and if they increase the selling price, Apple may look for alternate sources. So I don’t think Apple may share a part of it.
I think this is a Foxconn problem. Foxconn accepted the risk when it concentrated so much of its business in Apple. The EMS business model should be balanced enough so that an upswing or downswing in any one customer or market can be offset by others. In this case, Foxconn isn't benefiting from Apple because Foxconn does not share in Apple's stock. It provides a service. If Foxconn hasn't passed higher costs on to customers, that is a problem, but I'm not sure it can be traced back to only Apple.
Correct. This is a Foxconn problem but is it possible that a Foxconn problem may eventually become a problem for Apple? Gross profit margins in the contract manufacturer business can be as low as 4 or 5 percent and there isn't that much room for a supplier to add on to its costs or allow the OEM to transfer additional costs to it. So, when a contractor's costs go up it would seem to make sense it would try to transfer some of these to the OEM.
In the case of Foxconn, though, the company has grown by offering the lowest pricing for its services. That, in my opinion, is the only reason it was able to grow so rapidly that its annual sales today now dwarf those of its next five competitors. It marketed itself as a low-cost provider and took advantage of its understanding of the Chinese environment to further reduce costs. OEMs signed on with Foxconn because it can assure the manufacturing scale and low costs they want.
In order for Apple to agree to take on the extra costs from Foxconn increasing wages paid to its employees, the two companies will have to sign a new contract. At that point, Foxconn's offer may not be as attractive anymore to Apple.
I agree there is not a lot of maneuvering room for any EMS in terms of profit margin. I doubt Apple will be able to find a cheaper alternative to Foxconn, though. Few EMS are as vertically integrated and those cost savings are considerable. Foxconn also is involved in a lot of other businesses it could trim if it is in such dire straits: the company is building shopping malls, for one thing. Maybe that's a higher-margin business, but there is such a thing as being too diversified. But Foxconn's problems will have an impact on Apple, and I believe it will take the form of higher prices all around.
"I doubt Apple will be able to find a cheaper alternative to Foxconn, though"
@Barbara: I don't think it's all about cost in this Apple's case. Foxconn has been there since Apple started producing iPhones and iPods. Part of the success that Apple has got is because of Foxconn. On papers it may just seem to be another EMS that Apple has a contract with, but I think it's a very risky move if Apple decides to make a transition away from Foxconn. There may be lots of factors that go against Apple which cannot be predicted in advance.
Prabhakar, this is like two sides of a coin. They want to get maximum profit at one end and other end they don’t want to shell out anything for other reasons.
Prabhakar, Apple has obligations only to its shareholders. It's not the company's job to protect suppliers. During negotiations, a supplier must look to present a case that is in its own shareholders' interest. Did Foxconn negotiate its contract with Apple with that in mind, that is, to maximize shareholder value? If it failed to make that case because it just wants to get the contract then the management has a problem.
Foxconn's increased costs will need to be reflected to Apple at the end of the day. It may not be ideal for Apple but that is the bitter truth. Apple will then have to pass the added cost to its customers. This may make Apple products a bit less desirable and less competitive, however Apple has already been reaping the benefits of really low costs of manufacturing for a long time now. The profits will take a hit but all in all the game will be a much fairer one for all those involved I think.
It's hard to sympathise with Apple who has banked $98B already !! I am sure it will survive. As a matter of fact, this development will heat up the competition and as result, the end users will benefit.
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.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
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.
To save this item to your list of favorite EBN content so you can find it later in your Profile page, click the "Save It" button next to the item.
If you found this interesting or useful, please use the links to the services below to share it with other readers. You will need a free account with each service to share an item via that service.
Tweet This
