Rising labor costs in China may lead to pricier electronics, manufacturing relocation
By Vlad Savov 
posted June 8th 2010 5:31AM
posted June 8th 2010 5:31AM
Vietnam, India and Indonesia are the prime suspects for taking production duties away from China, with some companies also apparently contemplating shifting to poorer regions within the nation. These changes are unlikely to perturb high-end electronics manufacturing in the short term, due to its more sophisticated infrastructure and supply chain, but the end consumer might still feel their effect in the form of higher prices. Inflation within China and a projected increase in its currency value are likely to drive up the cost of exports, so we'd advise buying what you need sooner rather than later.
[Thanks, Daniel]
And now, the Chinese will know what it's like to be American. Unemployed.
@CaryHiroyuki Tagawa
Increase pay then move the jobs elsewhere? That makes no sense. Atleast workers could feed their families on crap pay. Shit life > no life.
@CaryHiroyuki Tagawa
DEAR ENGADGET.
Oh Hai.
Can you PLEASE make it so we can sign into the site, not just the comment system, and select where we live, so that the datestamps on the posts and comments change in relation to whichever timezone the reader is in.
Rant done. Oh and thanks for the great Apple coverage yesterday, hope everyone cashed in the 3GS's in time (:
@CaryHiroyuki Tagawa
Seriously, this manufacturing cost raise could severely hit the tech market. I'm for fair wages, though.
@CaryHiroyuki Tagawa
somehow I would like to see nice payments in China more then I would like to see overweight Americans owning a phone, a smart phone, netbook, tablet, laptop, desktop a htpc and a home server and on top of it all 10 plasma/lcd-led 40"+ TVs in their homes
U ppl are all planet saving humanitarians only when U have benefits of it, stop being so selfish
downrank me lol I dont care, but U know its true
@CaryHiroyuki Tagawa
Dont think that this was a replay to your comment, I just saw few below yours that talked how this is a bad thing (prices going up I mean)
@nk I downranked you just for generalizing and overusing "U".
@CaryHiroyuki Tagawa
Raising wages doesn't necessarily mean loss of economic activity for China. Yes, raising wages does hurt the bottom line of the companies that operate and this might lead to relocation but things do not always have linear relationships. A rise in wages might not affect cost of producing something that much.
Say the workforce gets an increase in pay and this adds to the cost of producing an item which either the company has to adsorb or is passed onto the consumer. But in China the average savings rate is 30% (compared to the savings rate of USA at -3%) and if the pay raises, there is also a raise in savings. This amount of savings (including the rise in savings) is pooled together and reinvested in factories, infrastructure, training, and education. Investment in the same factories that got the pay raises leads to more efficient and more productive manufacturing processes, which in turn lowers the cost of producing an item. So an increase in pay *MIGHT NOT* (this is only an overly simplified analysis) impact cost of production that much.
@canonsburg
There's only one certainty I've learned of in economics: every pro has a con, and every con has a pro. All of these interact with each other in interesting and complicated ways; taking out a single thread pulls the entire fabric apart.
@canonsburg
who knows, it could just lead to better built products and less suicides
80% of companies that use labour in china can afford to take the hit anyway, its not like its much of a raise anyway, its like $50 per worker per month these companies can take that kind of hit...
@CaryHiroyuki Tagawa I think they probably understand the feeling better than you think.
Population/unemployment rate:
USA: 307,006,550 - Jul 2009 / 9.5% April 2010
China - 1,324,655,000 - 2008 / 4.2% March 2010
China - 55,635,510 unemployed approx.
USA - 29,165,622 unemployed approx.
USA as a nation would be feeling unemployed heavier than China, but on a personal level more people in China are experiencing unemployment.
Sorry my numbers aren't the most current.
@CaryHiroyuki Tagawa
Sadly, the Chinese won't know how to be American i.e. to get to pay a lower price for something they would pay digging their bank accounts for! How about this angle? Let me see the value of your motto - freedom of speech!
@boc
but an american that doesn't have a job still gets a check every month... if one out of a family of 8 works in america, then your would do better than a family in china where 6/8 people are working.
@Nimer55 Still gets a check? Hahahahaha!!! FU!! Not everyone gets unemployment checks.
@CaryHiroyuki Tagawa
If I have to pay extra $5~10 for the iPhone 4 in order to make someone on the other side of the globe feel better, I will do it. However, Apple better ensures me the extra $5~10 is spent directly on the workers, not some "admin" process. (or the government officials... you know what I mean)
@CaryHiroyuki Tagawa The cost of building new factories, training staff etc is likely to huge to be feasible.
Plus keep in mind that one of those raises is a merit raise based on parameters that we are not to. It could be something so high that only a small percent qualify. So it won't really raise costs that much. Basically it's a PR stunt set up because the blogs etc keep putting the blame on wages (ignoring the room and board which is probably in addition to the actual $$$$ which is at minimum wage or slightly higher).
@kineticdamage
there are still plenty of developing countries to take over once China gets too expensive.
@tobsmonster2
It makes no sense? That is precisely what happened in the US, genius. Manufacturing got too expensive, so it moved to poorer countries like China. The same will happen there as their standard of living increases. DUH
@CaryHiroyuki Tagawa They increased by 30%..first 20% then an additional 10% (or other way around). Then for some they could increase up to another 66% depending on performance.
@Nimer55 That's true and I guess sort of what I was thinking as well. On an individual/family basis, unemployed Americans have it better than unemployed Chinese.
@Charlik A lot of governments for developing countries offer big incentives to manufacture in their country. Things like tax free business zones, exemptions from various legislation, and even footing the bill for some infrastructure costs.
It may be in the millions or billions, but It's not as expensive as you think. Put it this way, how long would it take a company like Apple or Microsoft to recoup a couple billion?
Ah,
@potretr
That's what she said.
capitalism at its fines, Companies will just pack up and move to the next 3th world country that can produce their goods at slave prices .
@Complex And of course that part of the story gets ignored, and instead people fret over where they'll be paying more for their gadgets because the people who make them now get treated slightly less inhumanely.
@Complex
Ethics vs Increased product price, Which one will we choose?
@Complex I don't think there is another country like china, where the government is large enough and oppressive enough to have this work (large scale slave labor)
@Complex
Need to drink some coffee before you post this early in the morning... "fines" and "3th" don't apply in your comments, more like "finest" and "3rd", respectively. But I see where you are going...
@NeatOman
It was never slave labor, you moron. They're being paid, they get all living expenses paid, and, oh yeah, they're choosing to be there.
Was any part of your little 'opinion' based on reality?
@Wesscoast And remember to check the Big Mac Index before comparing Chinese wages to American buying power. China can get a Big Mac for about a third of what we pay in the US.
@icecreamsocialist
This is very true. People in the USA are so accustomed to viewing everything through American eyes. The cost of something in America may differ vastly from another country. People forget to take into account purchasing power parity (PPP). If you compare the GDP of USA and China you see that the nominal calculation (as converted in US$) gives $14,256,275,000,000 for USA versus $4,908,982,000,000 for China using the 2009 IMF estimates (Source: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29) but if you calculate the GDP using PPP it gives you $14,256,275,000,000 for the USA and $8,765,240,000,000 for China using 2009 IMF estimates.(Source: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29)
As you can see there is a huge difference when measured in PPP and most people don't take into account of this difference.
@Complex
They will eventually move back "home" after the US or whatever country they were originally in, is at the bottom.
@Complex - Exactly!
See how it work Republican types? The very predatory capitalist system that you defend and support with your votes would gladly take your tax payer funded bailouts and then FIRE YOU AND SHIP YOUR JOBS OVER SEAS IN A NANO SECOND!! You are a DUMB ASS if you vote Republican PERIOD!!
@NeatOman Uganda is a wartorn country with many homeless children, they could easily become the next china.
Does anyone realistically think that margins are so tight on these electronics that the $20 a month wage difference is really going to make a difference in a company's bottom line?
Apple, one of Foxconn's major customers, has demonstrated time and again that they charge often three times what a product costs to actually manufacture.
The market will pay what the market will bare.
The only question might be if Steve Jobs and Michael Dell might have to rent a smaller island for their vacation that fiscal year.
@Ducman69 And not that I'm some pinko commie, but these guys are still working well below minimum wage in Western countries, so lets be realistic here.
Its the same kind of nonsense as a big Houston oilfield company here outsourcing an entire department to India even though profits were very healthy.
@Ducman69
Do you know how much software costs to produce? Obviously not. Otherwise you wouldn't make ignorant statements about how "Apple always charges 3 times as much as things cost to manufacture." Just because the physical pieces cost $100, doesn't mean you can sell it for $100. Even in the US, factory workers in 3 years would be lucky to make what software engineers make in 1.
@Ducman69 Exactly my thought. The same is true not only for electronics, but also for all sorts of other products.
For example, some shoes from Nike, made in China cost in the USA say $150. The cost of manufacturing and designing the shoes is perhaps some 20% of the price. The rest is marketing, the sheer profit of the maker and the sheer profit of the distributors and retailers. Yes, that is what constitutes the price of products in Europe and USA.
So, saying that cheaper manufacturing allows us to buy cheaper products is just a big, fat lie. Cheaper manufacturing means larger profit margins, not cheaper products.
We have to remember one fundamental thing from the lessons of economy: prices of products are not determined by the cost of manufacturing. Prices are determined by the supply and demand, not by costs. If you can not provide costs lower than what your customers are willing to pay, you are out of business.
So, in conclusion, it is OUR willingness to pay that determines the price. Our willingness to pay may be affected by many factors, but it usually fits the supply and demand laws.Labor costs do not have anything to do with prices.
@Ducman69
I agree with most of that, but with electronics, you have to factor in the research and design, most of which is done in the developed countries. Which is why most products (xbox, ps3) lose money or break even for a year or two before bringing in profits.
@d3sc3nd3ncy Something that a lot of folks forget is licensing of patents etc.
Someone ranted about the markup on a 3g ipad being $130 when the actual antenna supposedly only costs $20. Well for all we know there's $100 per unit licensing to be allowed to put that part in the ipad.
@Ducman69
"Apple, one of Foxconn's major customers, has demonstrated time and again that they charge often three times what a product costs to actually manufacture."
What about the salaries of hardware engineers, software engineers, HR employees, accounting staff, company executives, legal support, and retail sales representatives? Where do you think their pay comes from?
How about development computers, development software, and prototype samples? Do you think Apple receives ALL of that for FREE?
Comments like these are the reason why I hate Engadget's increasing attempts to cover business news and, even worse, politics. Hell, some of the articles sound like an editor took a user comment and turned it into a 500-word PR stunt.
Engadget, please stick to what you do best: gadget news and reviews. Leave labor costs to the news channels who know what they're actually talking about.
@Ducman69 It depends on if the item is particularly labor intensive or not. It's actually kind of funny, because if you go to China there are really basic items that cost an exorbitant amount compared to very intricate and complex items that took a lot of labor to manufacture-like something made of a big lump of steel is exorbitantly expensive, whereas some insanely intricately hand carved item made out of stone is cheap-because the labor of the person who made it was cheap, the labor to have it shipped to the store was cheap, and the store's employees wages are cheap. But the price of steel is international so even though it's not labor intensive it's crazy expensive.
I don't think most electronics are super labor intensive but they're not really made of particularly expensive materials so I think the labor cost is actually a fairly substantial component to something with a lot of tiny parts like the iPhone. Disassemble one and reassemble it while timing yourself and you'd have a good idea of how much labor time went into assembling it-then multiply that by the wages of the country it's made in.
At any rate, the inflation rate in China is already pretty high so I think the real issue is that it's going to drive inflation through the roof in China. It might not be a big deal for us that the labor costs on a $500 iPad went up a little bit, but on cheaper stuff the Chinese buy themselves the additional labor costs are gonna make it harder for people to buy normal goods. I'm not sure if it's for the good either since there's still a lot of people in China whose jobs pay even worse than the Foxconn jobs and this seems like it's gonna move a lot of jobs away.
I also don't think that it's fair to constantly feel that companies making money is somehow evil. Foxconn, like most companies, probably put most of it's earnings into building out new factories and all the support structures (since they're basically mini cities) to build more iPhones and hire even more workers. It's not like they spent the earnings on hookers and coke, lol. So cutting their earnings also means cutting into their China expansion plans. If everyone in China had a sweet job that wouldn't matter, but there's still plenty of people who don't even come close to making $170 a week.
Good Morning Vietnam!
don't buy sooner if you don't need or want it.
and if it's tech, it will always be cheaper later. if it's refined steel it'll be cheaper. if it's plastic it will be cheaper.
I could live with that
Vietnam? Yay, more early pictures and leaks! LOL
We were talking about low salaries and employee abuse in China and that's why we asked them to increase salaries?
Why we move the job to lower salary countries then?
Ahaaa, we need to complain about low salaries in those countries. That's why...!!!
Indeed, the takeaway should be "Buy your products at slave labor prices now! There may be a temporary reduction in said slave labor while the slave drivers relocate to areas more favorable to profitable slavery."
And of course prices will jump sky high since no one is making any money. Poor giant tech conglomerates ;-(
Apple only made a record high $3 billion in profit for Q1 2010. Where else can they make cuts, given such cuthroat market conditions? Better find a country even more open to substandard labor practices than China! Nowhere else to turn! Steve is already buying all of his black turtlenecks at Goodwill!
Decades of research have only shown that minimum wages increase inequality...
I hope the entry level price of an iPad doesn't go up to $500 US as a result of the increase in minimum wage.