A Contrarian View on The Apple/Foxconn Labor Situation

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A Contrarian View on The Apple/Foxconn Labor Situation

A few weeks back when the New York Times wrote a story regarding workers making iPhones and other devices in China who aren’t being treated very well, I wondered, this is a story? In other words, is there a person on the planet who doesn’t know that working conditions in China are far worse than they are in the US?

And I absolutely respect the right of the New York Times to run such a story – I just think it shows a broader agenda of being anti-capitalist, and anti-business. After all, we in the US have been buying Chinese products made by people in poor working conditions for decades. Why write this story now? Let’s stop for a moment and consider that if conditions in China are so poor for workers, then why are they working? In other words, they must be worse off – likely far worse off if they don’t have their Foxconn jobs.

The end result of this piece however is that wages across the manufacturing sector – starting with Apple will increase.

The problem is if you are truly worried about Chinese workers you should be concerned to see this happen because as costs for workers rise, the cost of automating gets a better return on investment. In other words if it may have taken seven years to pay back a robotics investment just a few months ago, now it may take just four years.

And guess what… When robotics becomes more prevalent, there will be less jobs meaning many of these workers will have to go back to living in conditions they escaped by working at Foxconnin the first place.

It is worth pointing out that in the US , minimum wage laws have made the ROI on self-scanning equipment at supermarkets better so guess what… There are less people working. The same sort of thing will happen in China.

Of course the situation is not so cut and dry as more and more manufacturing is moving to China meaning workers will likely have steady work for some years.

It’s worth pointing out that what will happen as a result of higher wages in China is Mexico and other countries will become a more logical place to manufacture. As I pointed out last year call center jobs in the US have been increasing because wages in India are rising – but in that case it is the free market working.

Seeking Alpha has an article out today which describes how Apple has made a brilliant move by increasing the wages of its workers because its margins are the highest in the industry. In fact their net margin is 24% while the next highest computer makers are HP and Dell at 5.6% followed by Nokia at around 4.4% and Amazon at 1.3%.

The point they make is the rest of the industry will be squeezed by this move.

The challenge with this line of thinking is if the cost of an Apple product is about twice that of a non-Apple product (of course this isn’t always the case) then these other companies can raise prices and still be far cheaper than Apple.

So while we can applaud the fact that workers in China will be faring better, lets keep in mind that abruptly changing things like inputs costs in the manufacturing sector could have far-reaching implications like inflation for the markets where Chinese good are shipped as well as the potential for more robotics to be used to eliminate the workers altogether.

To get a sense of what I mean, see how Kiva Systems robots operate - Amazon just purchased the company.



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