Get Ready For A Big Squeeze In Consumer Electronics Margins

chart of the day, google, apple, microsoft operating margins

Apple and Foxconn will share costs in improving Foxconn factories to bring their labour standards closer to Western standards, Reuters reports. This is part of a much bigger trend of rising labour costs in China which will affect the entire consumer electronics industry.Foxconn and industry peers will have to improve labour standards not just because of activist concerns and media pressure (though that impact should not be discounted) but because of the macro phenomenon of broadly rising wages in China’s coastal regions. Furthermore, that impact is not likely to be strongly dampened by moving factories inland or to lower-cost countries because, unlike, say, textile, consumer electronics require a complex ecosystem of interlocking supplier relationships. So most of the production that is currently in the Shenzhen cluster should stay there even with rising supplier prices. 

What does that mean for Apple’s margins? Not much, actually. Apple is fabulously profitable. What’s more, it derives so many economies of scales from other aspects of its supply chain (e.g. raw materials) that the margin hit might not even be noticeable.

The problem is for everybody else in the industry, who have wafer-thin margins and will likely see them hammered. This increase in cost will hit them, which will mean either higher prices leading to lower sales and consumer satisfaction (especially considering the fact that, as Henry Blodget noted recenlty, carriers also want to lower subsidies), or lower profits or, most likely, both. 

Paradoxically, this development should be good for Apple as it will hurt its competitors more than it.

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