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What’s Good for Apple Is Good for Amazon

Asia's leading high-tech publication, DigiTimes, has reported that Amazon.com and Barnes & Noble have contracted with {complink 2125|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 {complink 11480|Amazon.com Inc.} and B&N receive the same kind of pressure {complink 379|Apple Inc.} 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.

37 comments on “What’s Good for Apple Is Good for Amazon

  1. arenasolutions
    February 21, 2012

    My husband is obsessed with Apple . . . loves everything Steve Jobs ever did. In his mind, Apple has been made the scapegoat in this whole situation, considering so many other industry leaders outsource to Foxconn. I can see where he's coming from, and hope other companies get the same light shed on any similar practices.

    On the other hand, I think that considering Apple has more money than God, it is in a unique position to lead the way in making a commitment to human rights.

  2. Barbara Jorgensen
    February 21, 2012

    @arenasolutions: I can see where your husband is coming from as well, and there is probably a lot of truth behind this perception. Apple is just the biggest target, not the biggest offender.

    As to Apple being able to afford it, I also agree. But I doubt Apple's shareholders will. I compare it to the way Democrates and Republicans view taxing the rich: Democrats say they can afford it; Republicans call it “socialism.”

    I've been watching too much Bill Maher.

  3. tioluwa
    February 21, 2012

    Well time will tell, but i really doubt Amazon will raise the kind of dust that Apple did.

    However, the move by Foxcon could be something to watch.

    If wages are going up, I think the only thing they can do is to downsize somehow, they can't pass the cost to their customers because they might loose them, they can't use low quality components because not all their customers would like that either.

     

  4. Wale Bakare
    February 21, 2012

    Considering the fact that Foxconn customers are top brands, i think they might probably be the ones who the increase in wages would pass to. Job cuts seem very unlikely where cheap labourers could easily be hired rather than fired. 

     

  5. diveanddig
    February 21, 2012

    I think it is very naive and arrogant to assume protests about the low wages paid in third world countries can force private companies in those countries to increase wages above the local prevailing rate. Where does this stop?  Bangladesh, India, Indonesia, etc, etc all produce most of the goods consumed in the western world. These changes need to come from within every country, and every company.

    In  total, the clothing and footwear business is huge when compared to the electronics business. Perhaps we can double or triple the price of all clothing so that the 99% of relatively rich living in the western world can transfer their 'wealth' to folks living on a small fraction of the income we pay our folks in poverty. Socialism sound so good in theory, but it has failed every time it has been tried throughout history. Too bad it has always ended in tragic failure that destroys the middle class and absolutely creams the lower class when the borrowing runs out. A prime example is the inevitable failure of our socialism security plan. The numbers count and the rhetoric is deceiving.   

  6. Barbara Jorgensen
    February 21, 2012

    I agree with your point as well, but with one caveat: Apple and Foxconn are both publically traded companies. It is true that private companies don't have to yield to any pressure, whether it is political, personal or politically correct. I know many successful private companies that have invested during downturn, added to their staff during recessions and are still around to talk about it. They defy the market.

    As a publically traded companies, Apple and Foxconn answer to their shareholders and the public stock market. If the protests were ineffective, how would we explain Apple hiring an auditor to inspect and report on its partners' facilities? And releasing how much it paid for those inspections? And its well-guarded supplier list?

    Likewise, if the protests were ineffective, how do we explain Foxconn's wage increases, and that Foxconn is trading down on the Taiwan stock exchange? Those are awfully big coincidences to be unrelated to protests lodged at Apple.

    Similar protests were lobbied aginst Nike, a footwear company, and one of Wal-Mart's clothing lines. In both cases, changes were made in the foreign factories that were contracted by Nike and Walmart.

    This isn't socialism, it's capitalism. As far as I know, Nike and Wal Mart are both big players in the apparel and footwear markets, and they are both publically traded.  They've also outlasted a bunch of competitors in spite of the changes that were made.

    Count me as surprised, but  the protests seem to be working.

  7. stochastic excursion
    February 21, 2012

    On the one hand it's good to see the burden shared with other companies.  Flush with cash as Apple may be, it shouldn't be the only company doing business in China that bears the expense of treating workers with dignity.  On the other hand Barnes & Noble taking an additional hit on its margin, where it's already selling tablets at a loss, makes me concerned about the health of the one national storefront retailer of books in the US.

  8. Daniel
    February 22, 2012

    Barbara, its all business game. Who ever play with a better card can score more. Nothing is going to change with Foxconn or any other companies in China. If Apple is not interested for further business, other ‘n’ number of companies may in pipe line for extending the business activity with Foxconn. As long as demand is there and quality of works maintained, companies may approach them, where most of them are not bothered about labour condition and work environments.

  9. _hm
    February 22, 2012

    Protest is effective and working if employee at Foxxcon are feeling that way and are much more happy doing thier job and having good family life. EBN should travel to China and should conduct few interviews with this people.

     

  10. vimalkumarp
    February 22, 2012

     Nothing is going to change with Foxconn or any other companies in China. it is true. Same will be the case of child labout in countries liek India, Bangladesh, Pakistan etc. Sad but true that is the reality

  11. tioluwa
    February 22, 2012

    Is raising wages all that Foxcon has done in response to the protests? and were the protests just for pay raise or for the general conditions in these factories?

    Previous posts on this forum have argued that it takes a whole lot more than cheap labor to have the kind of edge these asian factories have, so if pay raise is all foxcon has done, is it significant enough to affect their pricing?

    The stocks could be affected by the general perception of shareholders, not really implying that the company is struggling.

    Is just an increase is staff wages all it takes to shake a company like foxcon?

  12. Barbara Jorgensen
    February 22, 2012

    @Tiouluwa: No, it's not just the wages. Apple has paid for a complete  audit of iFoxconn factories by the Fair Labor Association. These are by no means a solution to teh more prevalent problem. And we should be far from satisfied with this result. But Apple seems to have made some positiive progress within only a week or so.

    I also think Amazon and B&N should pressure Foxconn as well as every OEM that subcontracts with them. Then, I hope other factories follow suit. But it is a start…

  13. Barbara Jorgensen
    February 22, 2012

    @Vimal: There are problems everywhere–we in the US have some ugly practices that could use a spotlight as well. It would be better to lead by example–if Apple had pressured Foxconn year ago when it first forged the relationship. But it is possible that some positive will come out of this.

  14. vimalkumarp
    February 22, 2012

    Yes, you are spot on. It is better to take the bull by the horn rather than procrastinate. A wrong decision will set a bad precedence.

     

  15. Barbara Jorgensen
    February 22, 2012

    Yesterday, B&N released the Nook Tablet priced at $199. Today's WSJ reiterated that the investment required to develop the Nook is a contiuning drain on company finances. Here is the link

     

    :http://online.wsj.com/article/SB10001424052970203358704577237010877348218.html?mod=technology_newsreel

    Does anybody out there own a Nook? Wondering if you like it?

  16. dalexander
    February 22, 2012

    _hm, great idea! Fantastic suggestion. Barbara, EBN has a China based operation or am I mistaken? EBN's 60 Minutes with investigative reporter Barbara J. “Apple's Sweat Equity”

  17. Barbara Jorgensen
    February 22, 2012

    Alas, there's no EBN China anymore. When I was with EB, we did send a reporter to Hon Hai, and they at first refused to see him, even though arrangements were made months ahead.

    But I'll take my Flip and go hang out in front of the factories–no problem!

    🙂

  18. _hm
    February 22, 2012

    May be some freelancer working in China and having good acquintance with EBN Editor can help for this matter. It will be quite pertinent to know Chinese worker's problems and thier needs to be even more productive.

     

  19. Houngbo_Hospice
    February 22, 2012

    “But Apple seems to have made some positiive progress within only a week or so.”

    @Barb,

    This is a good start, but as you said that is not enough,  and pressure should continue on Apple and its contractors until the change really happens.  We might have to wait some months to assess what have been done to improve the working conditions of those workers.  

  20. Houngbo_Hospice
    February 22, 2012

    “But I'll take my Flip and go hang out in front of the factories–no problem!”

    Hi Barb,

    You are doing a great job writing and talking about that situation. No need to hang in front of the factories. I hope, those workers understand that people around the word care for them and will be fighting for them with whatever means they have.  

  21. Barbara Jorgensen
    February 22, 2012

    @Hospice–thanks for your kind comment.  Sometimes it's hard to be so far away from the action, but you are right: workers are getting a lot of attention from organizations such as the New York Times, NBC news, and little old EBN. And it seems to be helping.

  22. Barbara Jorgensen
    February 22, 2012

    @hm–excellent suggestion. We are working to get more coverage and visibility in Asia/Pacific and China. I used to know a number of people based in Taiwan and Hong Kong, but they have moved back to the US. Like the US government, businesses need to forge ties and find common ground with a country that has been “hidden” from us for so long.

  23. itguyphil
    February 23, 2012

    There's always a moral argument when it comes to customer-vendor relationships like this one. Apple is being put on a stage to be made an example of (I hope that's proper English). But it is a very tentative media topic and how they handle it can make a huge difference for alot of other companies downwind.

  24. Eldredge
    February 23, 2012

    If Foxconn charges its customers more, OEMs have two choices: pass the rates on to consumers, or take less of a profit margin themselves.

    There should also be a range of options between – sharing the cost between lower margin and cost to consumer, and requiring other parts of the supply chain to share in the cost.

  25. elctrnx_lyf
    February 23, 2012

    Generally consumer companies have to find the right mix of enginnering and manufacturing investments to actually operate the business with good profits. If the overhead increase because of increasing wages then it will definitely impact the price of the products but at the same time they have to compete with low cost products also.

  26. garyk
    February 23, 2012

    I think it's time for a US Contract Manufacturer or any other other country other than CHINA to get involved with Barns & Noble, Amazon. Or we should stop buying from Amazon. Why do we want to put Book Stores out of business?? My grand kids still like to go to B & N.

  27. Barbara Jorgensen
    February 24, 2012

    Readers: I'm posting this for a reader that contacted us via e-mial–Barb

    People of conscience consider the ethical component of their purchases. 

    In the US before the Civil War, opponents of slavery bought at “free shops” which sold goods made without slave labor.  More recently, we boycotted imports from apartheid South Africa, often paying more, or even doing without the offending products.  When Jack Welch's was chief at General Electric, civilized people wouldn't buy a GE light bulb to keep from falling down the stairs.  Those who buy Kindles are almost by definition educated, and they are far from poor.  I would hope enough of them would share my belief that it is better to pay somewhat more to insure that the Kindle is made under decent and safe working conditions, especially since the product is far from a necessity.  If so, the bean counters at Amazon, whether or not they have any morals, will realize that it makes economic sense to do the right thing.

  28. Barbara Jorgensen
    February 24, 2012

    @garyk–I'm with you there! If B&N spins off the Nook, which has been discussed, both businesses may continue to thrive.

  29. jbond
    February 27, 2012

    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.

  30. bolaji ojo
    February 27, 2012

    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.

  31. Barbara Jorgensen
    February 27, 2012

    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.

  32. TimKarr2000
    February 29, 2012

    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.

    🙂

  33. Barbara Jorgensen
    February 29, 2012

    @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?

  34. TimKarr2000
    February 29, 2012

    Barbara:  Actually, you CAN get beer at Amazon.com:  http://www.amazon.com/Around-World-Beer-Bucket-Beers/dp/B0039ONR6S/ref=sr_1_15?ie=UTF8&qid=1330543695&sr=8-15

    …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:

    http://www.amazon.com/American-Muscle-Car-Complete-n/dp/B004XYABQ2/ref=sr_1_2?ie=UTF8&qid=1330544080&sr=8-2

    I hope that helps you out.  🙂

  35. Barbara Jorgensen
    February 29, 2012

    I love this job. I learn new stuff every day 🙂

  36. Anne
    February 29, 2012

    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.

  37. Anna Young
    February 29, 2012

    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.

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