|Apple's China audit seen raising both costs, wages|
By Chris Oliver, Dow Jones Newswires
Friday 02 March 2012
iPhone price increase likely as labour conditions improve in Chinese factories.
As auditors examine working conditions at the Chinese factories that make products for Apple Inc., industry analysts agree on one outcome: Your iPhone is going to cost more in the near future.
Sanford Bernstein analyst Alberto Moel in Hong Kong, who last autumn visited a Shenzhen factory where Chinese workers assemble some Apple gadgets, says the independent Fair Labor Association's current audit of Apple suppliers will very likely urge workplace improvements, inevitably meaning higher costs for Apple.
"In the end, it's a 'win win' for everybody except the end-consumer, who will probably end up paying more," Moel said.
Apple's decision to audit its contract manufacturers followed recent outcry among some of the company's customers concerning labor conditions at the Chinese factories that assemble many of the tech major's most popular devices.
Of particular focus is Foxconn Technology Group, a Taiwan-based company with separately listed units in Hong Kong and Taipei that make handsets and computer devices for many of world's leading tech brands.
The company, China's largest private-sector employer, became the focus of international attention after an outbreak of worker suicides at one of its mainland Chinese plants over a 10-month period in 2010, prompting local protests.
In mid-February, a 30-member team of inspectors from FLA, a Washington-based monitoring organization, began conducting checks and employee interviews at Foxconn's factory in the southern city of Shenzhen, with the results of the audit due out later this month.
Moel wouldn't speculate in detail about what the FLA's findings would be, but said that iPhone retail prices could eventually rise by $10 or more per handset, reflecting the cost to improve working conditions under what has been a "free ride" for global consumers until now.
Currently, Apple's newest model iPhone, the 4S, usually retails for $199 with a two-year carrier contract, or as much as $849 without one.
Other analysts agreed that prices for Apple products could be headed higher.
Nomura said higher labor costs will raise the cost of manufacturing handsets by 2% for Foxconn.
Although seemingly small, the wage hike can have a huge impact on earnings, with the hike cited as among reasons for Nomura's downgrade in February on Foxconn International Holdings Ltd., the Hong Kong-listed unit that makes handsets for brands other than Apple, reversing a prior view to buy the shares.
Nomura is forecasting an earnings drop of 40% in the 2012 fiscal year, with Foxconn International already set to hike wages at its China factories by 20% on average this year, effective by the end of the first quarter, in compliance with previous guidance on wage increases by the Fair Labor Association. Not An Issue For Apple
Rising labor costs have already been budgeted into higher production costs for Apple, according to Nomura's Peter Liao in Taipei, who said that, unlike other smartphone brands, Apple has been able to lift prices with little damage to its market share.
"Apple has brand premium, but not other smartphone makers," said Liao, adding that Apple's profit margins on the iPhone were envied throughout the industry.
There was some evidence that smartphone rival Samsung Electronics Co. was also able to raise prices while retaining its appeal to customers, but the results were less encouraging for Taiwanese handset maker HTC Corp. after it unveiled a price-hike last year.
Liao said it wasn't clear how much Apple would need to raise prices to protect its profit margins, citing factors including new Apple-developed technology that may reduce overall costs of production.
The so-called "anchor company" of the Foxconn Technology Group--Hon Hai Precision Industry Co., which for the most part handles the company's Apple account--may also have ways to help keep costs down.
Hon Hai plans to shift 60% of its Apple production, including much of its iPhone and iPad assembly work, to plants located near the inland Chinese cities of Chengdu and Zhengzhou by June.
Nomura said the lower wage levels at these cities, along with other issues related to scale of production, should lead to savings and helped prompt Nomura to raise its recommendation on Hon Hai last month to a buy rating. Bad But Not Worse
Meanwhile, Sanford Bernstein's Moel said his own impressions of the huge complex in Shenzhen run by Foxconn were of working conditions that ranked well in comparison to those offered by rival electronics employers in the region.
During the October visit, he noticed job seekers lined up to file employment applications, a likely sign, he said, that the sprawling industrial complex has a reasonable reputation among workers in spite of the suicides of 2010 and subsequent labor disputes.
In commissioning the FLA to carry out the audit, Apple is probably comfortable with the overall labor conditions at the plant and believes that the audit won't prove too damaging, Moel said.
It is even likely, he said, that Apple will encourage Foxconn to act on the auditors' recommendations, in the expectation the monitoring group will call for marginal improvements.
Still, Moel said, some of these could entail higher production costs that will require sacrifices on Apple's part.
"Foxconn will say 'OK, fine, we'll fix them, but you pay for them; you have to allow me more profits so that I can meet those requirements,'" Moel said.
And it wouldn't be the first time--Foxconn installed expensive ventilation equipment and automated part of the production process at its Chengdu plant in response to a consultant's report commissioned by Apple to look into an explosion last year that left three workers dead and others injured.
Moel said the Foxconn group has plenty of room for improvement and is only about half as efficient as other leading global manufacturers in terms of worker time to unit output.
"Hon Hai has to either pass on those higher [labor] costs to its customers such as Apple, or work on its productivity. It looks like it will do a mix of both," Moel said.