Wage Hikes in China Threaten Electronics Industry
Business + Economy

Wage Hikes in China Threaten Electronics Industry

Hewlett-Packard and Dell Inc are keeping a close eye on a big jump in wages for workers that assemble Apple Inc's iPhone in China, and could be forced to nudge up prices for their own products if labor costs keep rising. Major contract manufacturer Foxconn Technology Group -- which counts Apple, HP, Dell, Nokia and Motorola Mobility among its major clients -- last week raised wages for its workers in China by 16-25 percent, the third hike since 2010.

The wage increases reflect a rising trend across the Chinese electronics manufacturing industry and could pressure already wafer-thin margins at the likes of HP and Dell. HP Chief Executive Meg Whitman said rising wages in China could eventually have a ripple effect across the world electronics industry. "If Foxconn's labor cost go up, their product cost to us will go up," she told Reuters in an interview on Wednesday. "But that will be an industry-wide phenomenon and then we have to decide how much do we pass on to our customers versus how much cost do we absorb."

Dell, which on Tuesday reported a 18 percent slide in quarterly profit, said it was also keeping an eye on wages in China. "It's not clear to us how that will play out in terms of our costs," Dell Chief Financial Officer Brian Gladden told Reuters. "It remains to be seen how that flows through the overall supply chain. We will continue to watch that." But Gladden said labor costs are a "very, very small piece" of the total cost of its products.

To companies like HP and Dell that specialize in creating ultra-efficient supply chains and cutting costs to preserve razor-thin profit margins, any rising expense can be trouble. "HP and Dell's PCs could cost a bit more. Those companies have been trying to pass on extra costs. It may or may not work. Their products aren't as differentiated as Apple's," said Shaw Wu, an analyst at Sterne Agee in San Francisco.

Apple's main manufacturer of iPads and iPhones, Foxconn is already in the spotlight because of its poor labor conditions, with reports of employees committing suicide. Foxconn's February wage hike was announced days after Apple said a U.S. non-profit labor group had begun an "unprecedented" inspection of working conditions at its main contract manufacturers, including Foxconn. Foxconn's wage increase comes as Chinese electronics manufacturers face higher costs to attract workers.

The government of Shenzhen, a freewheeling boomtown bordering Hong Kong, announced in January it was increasing its minimum wage by 13.6 percent despite warnings from factory owners the move could deal another blow to exporters already reeling from a sharp drop in Western orders.

Taiwan-based Foxconn said the pay of a junior level worker in Shenzhen, southern China, had risen to 1,800 yuan ($290) per month and could be further raised above 2,200 yuan if the worker passed a technical examination. It said that pay three years ago was 900 yuan a month.