Tuesday, February 14, 2012

The long term problem in low cost

Repetitive jobs at Foxconn
Repetitive Jobs at Foxconn

Apple stock is growing really fast and its earning keeps breaking records. However, it is currently famous for labor abuse problems in Chinese factory. The society is requesting the new CEO, Tim Cook, to react quickly to resolve this problem. This problem becomes more important when the cost of manufacturing in China has increased recently. This cost increase puts a new pressure to Apple, Foxconn and other hardware manufacturing companies to strike the balance between low cost and good publicity.

Manufacture in China

Foxconn is one of main manufacturing companies in China that compete to get contracts from all global electronics brand: HP, Dell, Apple, IBM... They are competing to earn a very small profit margin. If they could improve the operational efficiency by 10%, that would be a very big profit return for them already.

They seek these efficiencies by pushing their employees coercively, making them work 10-12 hours per day, giving them too small benefits, hiring teenager workers and applying military techniques to force people to work as if they were robots. These techniques work to some extent and it keeps the manufacturing cost to be very slow for Foxconn.

In some recent research on the new iPhone 4 release, the manufacturing cost per iPhone has a very tiny part from China. The biggest cost per iPhone was the flash memory coming from Samsung, which costs 27$, and the cost to assembly everything in China is less than 2$ per phone.

Different contributions from different suppliers

Therefore, keeping the cost low is a compulsory task for Foxconn to earn profit. Apple and other global electronic companies also think the same.

However, time has passed by, and things change a lot recently. This makes the decision to go for low cost in China has to be reconsidered.

Recent changes in China

China’s main competitive advantage over the last decade was a low cost manufacturing system that attracts lots of global companies to put their factories in. However, it does not want to keep this advantage in the long term.

The government has worked over recent working policies to make sure that labor rights are maintained, and also try to push companies to produce high end products like cars, rather than seeking for small profit margin. The value of the Chinese currency has changed as well, which makes import and general labor cost increase significantly.

China has become the third largest labor cost in Asia

China becomes the third highest labour cost in Asia

These things make the tasks of keeping the cost low in China becomes more difficult, require companies like Foxconn to react and become more coercively to push their employees even more, to earn back their lost profit due to policy and economy changes.

Many evidences gathered from news reports (Johnson, J. 2011) showed that there are 17 suicide happening inside Foxconn since 2007. It is a big number for people to consider the responsibility of the company and its partners. This lead us to one of the main problems for these global electronic companies: publicity.
Publicity of companies

People recently criticize Apple for the poor benefits of their workers, although Foxconn should be responsible for his own employees. This is damaging the reputation of Apple in the long term. One former Apple executives admitted that Apple knew about labor abuse before but then they ignored it.

To make this problem even worse, the CEO of Foxconn admitted “Managing One Million Animals Gives Me A Headache” (Blodget, H. 2012). What kind of CEO think and talk about their employee as animals? These things raise the general awareness about how Apple deals with their suppliers.

Apple is just one of the companies using Chinese factories to keep the cost low. However, due to its visible and good fame in the publicity recently, news and media start criticizing their responsibility over the problems.

Although it is a common sense in capitalism to keep the cost low and a high margin profit, Apple is now under a serve criticism from the news to treat their employees so badly. So, Tim Cook, has to take steps toward solving this problem, by releasing supplier list and joining a fair-labor monitoring organization.


- LeClaire, J. 2012, Apple CEO Addresses Reports of China Labor Abuse, NewsFactor, viewed on 13/02/2012, http://www.newsfactor.com/story.xhtml?story_id=81945

- Love, D. 2012, Former Apple Exec: We Knew About Worker Abuse In China and Ignored It, Business Insider, viewed on 12/02/2012, http://articles.businessinsider.com/2012-01-26/tech/30665750_1_foxconn-apple-labor-abuses

- Devonshire-Ellis, C.2011, China Now Has Third Highest Labor Costs in Emerging Asia, China Briefing, viewed on 11/02/2012, http://www.china-briefing.com/news/2011/01/19/china-near-top-of-the-list-for-wage-overheads-in-emerging-asia.html
- P.K, 2011, Slicing An Apple, Economist, viewed on 14/02/2012, http://www.economist.com/node/21525685

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