It’s in all the headlines. “Protesters Confront Apple Over Foxconn Conditions”, “Apple’s Foxconn Electronics Manufacturer Blamed for Chinese Child Slave Labor”, “Apple, Foxconn and the Human Cost of Electronics Manufacturing in China”, those are just a smattering of media reports that all say basically the same thing, that Apple is responsible for China’s labor laws, Foxconn’s working conditions and that it would be a cinch for them to relocate assembly to the United States or an enlightened assembly manufacturer not named Foxconn. So, is this true? Is Apple responsible for Foxconn’s working conditions? What alternatives does Apples have? Are they alone in their behavior? And what about those 30+% profit margins they’ve been generating? How can they justify such high profits while allowing ‘slave labor’ conditions?
As I’ve written in a previous article, let’s take a look at some other companies using Foxconn to assemble their products; Amazon’s Kindle, Sony’s Playstation 3, Nintendo’s Wii, Microsoft’s XBox 360, Acer, Asus, B&N’s Nook, Cisco, Dell, HP, Intel, IBM, Lenovo, Motorola, Nokia, Samsung, Panasonic, Sharp and Vizio. None of them seem to be taking heat for using this subcontractor except Apple. But why do any of them use Foxconn? Why not use another company in China or make the product domestically?
The reason for this is that quite frankly, there is no alternative vendor that can compete with Foxconn. They can get an assembly plant up and running faster than anyone else in the world, fully staffed and ready for manufacture. In the electronics industry, getting product to market on a timely basis is the key to being successful. All these manufacturers are getting a very competitive price, excellent quality control and that fast turnaround of huge product quantities so why should they switch? It would make them uncompetitive.
Beyond that reason, most of the component electronics contained in all these products are made in East Asian countries. You want to set up your assembly lines close to your suppliers to lower your shipping costs. Also, productivity is much higher in Chinese factories than it would be in the USA or other western countries. Young girls are the most efficient at these tasks and they will not do this kind of work in western countries at those ages. China’s infrastructure is excellent, so it is easy to move product from one area of the country to another.
Now let’s take a look at profit margins. Do you know what Microsoft’s profit margins are running? Yup, they’re 30+%, just like Apple’s. People forget that Apple creates both hardware and software while PC manufacturers are hardware only and buy their software and OS from Microsoft. So when you buy that PC, you’re not paying a 5% margin on the entire computer but just the hardware. MSFT is still getting their 30+%, no different than Apple. On top of that, margins are lowest on the least expensive computers because the biggest factor in the purchasing decision is price, so price is the driver to determine margins. But if you buy a high end PC, the margins are higher for the manufacturer because price is no longer the main decision driver. Apple has never positioned itself as a low end product and has never sold on price, so it would be expected that their margins would not be as tight.
What kind of margins do you think Louis Vuitton handbags have? How about a cup of Starbucks coffee? What about that sweater at Nordstrom? Let me tell you, they’re all far above 30%.
The last factor is working conditions. Can Apple really affect working conditions at a Chinese company? They can have an influence but it is not their company so that influence is limited. The only real leverage they have is to take their business elsewhere, but there isn’t an “elsewhere” whose working conditions are substantially better than Foxconn’s or that can offer the same price, quality, productivity and set up time. Apple’s leverage is severely limited; all they can do is address specific problems as they become aware of them.
That’s my take, and I’ve worked in China so I’m pretty aware of different factory conditions. Labor laws are not the same as they are in western economies. There is no OSHA and the laws that do exist can be worked around in various ways. Conditions at Foxconn aren’t any worse than at other assembly houses and in fact are better than most. So why is it always about Foxconn? They’re the 800 lb. gorilla so they’re the one that everyone is going to holler about, it’s as simple as that. For the labor laws to be enforced or expanded, the local and national governments are going to have to make the proper changes but it’s not something that can be done from the outside.