The Breakdown

Explaining Southern California's economy

This is where Apple pays Chinese workers $2 an hour to make iPhones

 

It's actually starting to build: the Apple backlash. A decade ago, the company was almost bankrupt. Today, it has a market cap of $481 billion, almost $100 billion cash in the bank, and a share price that some analyst think could go to $1000 by 2015, if not sooner.

Those numbers come from Apple's astonishing growth — around 40 percent since January of last year — and its equally astonishing operating profit margins: 30-plus percent. But what enables that growth and those margins is two things: cheap Chinese labor; and customers who are willing to pay a premium.

The video above is from a February 22 broadcast of ABC's "Nightline." The news program got an inside look at Foxconn, the "iFactory" in China where workers are paid less than $2 an hour for a 12-hour shift. More than a dozen of these workers have committed suicide, although it's unclear whether the working conditions drove them to it or whether Foxconn's facilities employ so many Chinese that suicides are going to be inevitable, as a percentage of the employed population.

In a review of Steve Jobs' biography, Moe Tkacik at Reuters labels Apple stuff a "ripoff" — from the Chinese laborer's point of view. Whether the stuff is unworthy of the high price tag is up to consumers who want to buy it. But it's hard to argue that Foxconn hasn't been the centerpiece of Apple's ascent. In fact, Apple's business is SO important to Foxconn that Foxconn's parent company, Hon Hai Precision Industry, trimmed its margins to keep Cupertino (and especially new CEO Tim Cook, the supply-chain master) on board.

Check out the spread between Apple and Hon Hai's margins here at Bloomberg. That differential — and it's a big one — is one of the main things that's made Apple the world's biggest company.

One wonders is there's really any turning back for Apple or China, at this point. Apple could defensively force Foxconn to raise wages and improve working conditions, given that the company very loyal customers don't like the idea that iPhones and iPads derive their perfect esthetics and overall apptastic-ness from postmodern sweatshop conditions. Sure, a steady $2 an hour is improving the lot of many Chinese, young and old. But wouldn't $4 an hour, or $8, or $10, radically improve that same lot?

It might, but it might also put Foxconn out of business. And reduce Apple's profits. Regardless, a real test for this relationship — and American consumer tolerance for it — is looming, in the form of the much-anticipated Apple TV set. Manufacturing TVs is a cutthroat business in Asia. Apple wants to charge something like $5,000 to reinvent the genre. The only way this idea fits into Apple's pricing model — and there's nothing more important to Apple than pricing — is if the margins are substantial, based on Apple's sacred pricing strategy.

It's worth noting that the company can't make up revenue losses on TVs as easily as it can on iPads, which have lower margins than Apple laptops but are ultimately expected to sell far better. People might buy a new iPad every two years. They'll replace the TV every ten.

There isn't really anything that's likely to slow Apple down at this point. It may not make the $1000/share dream target, due simply to slowing growth. But it can always try to double iPhone and iPad sales in all markets. However, a backlash, coupled with rising labor consciousness in China, could represent a long-term question mark. There's no way for Apple to transform Foxconn into a factory complex that adopts American-style labor practices. And for the time being, that isn't in its interest. 

But building products and businesses this way...one wonders if it's really the American way. Even if it's clearly now the Apple Way.

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