Two recent trends are making it more expensive to make goods in China.
Wages, especially in the more developed southern part of the country, are going up as the country becomes more prosperous. Work in factories that pay less than a dollar-per-hour aren’t as attractive relative to other opportunities as they once were, and international scrutiny of conditions in Foxconn’s facilities in particular have forced further wage hikes.
Secondly, after years of keeping its currency cheap to promote exports, China is allowing the Yuan to appreciate, making it more expensive for foreign companies to do business there.
So, who does this affect, and how?
- Most gadget companies. If they can’t find somewhere else to cut costs, they will have to raise prices or see their (thin) profit margins collapse.
- Apple will suffer too, but not as badly, since it enjoys much fatter margins on iPhones and iPads; the company is thought to clear over 50%. On the other hand, it looks like Apple will continue to take the brunt of attacks over industry labour practices (as well as related issues such as conflict minerals).
- Gadget manufacturers like Foxconn are the most obviously affected. In theory, they should be able to pass the increased costs along, protecting their (razor-thin) margins. But this creates an opportunity for competitors to open up shop somewhere where labour is yet cheaper. Foxconn is trying to head this off with a new 800,000 worker factory in inland China, where wages are far lower than they are in Shenzhen.
- Developed world consumers have been spoiled by decades of increasingly powerful computers and gadgets for ever-lower prices, often even in nominal terms. The industry might find a way to cut costs elsewhere, but this is far from guaranteed.
- Chinese consumers. No mystery here: workers are being paid more, and their wages will go farther as the Yuan appreciates.
- Inland China, and poorer countries. If labour in southern China gets too expensive, the industry will simply move elsewhere. Obviously, Foxconn is already looking to do just that with its new plant. Another country or region (Africa?) could get a boost if the rising Yuan makes this move inadequate.
- Low-end gadget makers popular in China, like Lenovo, should come out ahead on this. They will take a hit on manufacturing costs like everyone else, but they stand to gain a lot from the extra purchasing power of Chinese consumers. A small bump in wages won’t help Chinese workers afford iPhones or other high-end gadgets, but it will give them more to spend on the computers and phones they do purchase.
- Google, could also be a big beneficiary. Obviously, the company doesn’t sell any hardware, so manufacturing costs don’t affect it. In addition, Google’s mobile OS, Android, is doing better (relative to the iPhone) in China than in any other country. If more Chinese consumers can afford the cheapest Android phones, that’s great news for the company’s mobile business.