Tuesday, February 7, 2012

The end of cheap technology

Continuing from my previous blog discussing how Apple was able to gain a competitive advantage by manufacturing its products in China with the help of cheap labour. Apple is not alone in utilizing the cheap labour force of China to reduce their production costs and increase their margins, almost all electronics products are either completely or in part manufactured in Chinese factories. Companies like Foxconn manufacture products for companies which include Apple, HP, Dell, Intel, Lenovo, IBM, Sony, Motorola, Asus, and others.

The availability of cheap Chinese labour may soon be coming to an end. As the Chinese economy grows its citizens start to accumulate wealth they are going to start demanding higher salaries and better working conditions. As China starts to take a more active role global economics it will soon have to improve its work place standards. This transformation will take time but it is inevitable.

All this is going to increase the cost of production for companies that rely on the Chinese labour force, which in turn will be passed on to the customers.  
From the manufacturer’s side the change has already started. Foxconn is in the process of relocating thousands of workers away from its factory in Shenzhen where it raised the salaries of workers after a series of suicides, and protests. Foxconn is in the process of establishing new factories in Henan and Sichuan provinces where the labour costs are lower as compared to a large metropolitan city like Shenzhen.

Companies that have been relying on this outsourcing model need to realize that the seemingly endless supply of cheap Chinese labour will run out. Companies will have to adapt their supply chains to cope with the change.  The margins that were obtained through cheaper labour would now have to be found elsewhere.

Another possible scenario described is if China is unable to improve the working conditions in its factories, and provide higher wages to the worker then Vendor such as Apple, HP, Dell, etc may face pressure from consumers, and government over the conditions in the factories. Such pressure may force the vendor to set up their own factories in China and other locations in which they can better monitor and supervise the working conditions and provide wages that are competitive for the region. Motorola Mobility is an example of one such company that has building its own factories in China and the worker there will be Motorola employees.

A worst case scenario as described in the ZDNet article would be if companies reduce their product cycles and we as consumers may try to use the products for much longer than they were designed for resulting in countries dependant on China for their technology to become “techno-Cubas” much like the Cubans have kept automobiles from the 1950’s and 1960’s due to the trade embargoes against them.


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