Labor Shortage Forces Apple Manufacturer Foxconn To Move Further Inland Into China

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Less than two weeks ago, shares of Apple slipped after an announcement by iPhone manufacturer Foxconn that it was freezing hiring at several Chinese factories ignited concerns about falling demand for the Cupertino-based company’s devices. As it turns out, there were several other possible reasons for the freeze, including the glut of workers returning after breaking for Chinese New Year and Foxconn’s focus on implementing robotic workers.

As the robot initiative points to, Foxconn’s concern is not too many workers, but too little. Bloomberg Industries reports that Foxconn and several of its competitors, including Quanta Computer, Pegatron, and Wistron, are opening plants further inland in China because of labor shortages in the southern coastal province of Guangdong, a main manufacturing hub.

Over the past two years, Foxconn has doubled its China workforce to 1.2 million and it now needs to find workers in other parts of the country to meet manufacturing demand, says Bloomberg Industries analyst Jitendra Waral. Moving inland won’t save the company money because wages in western Sichuan province and central Henan, where Foxconn makes iPads and iPhones, have jumped 120 percent over the last six years due to economic growth and are now similar to those in Guangdong.

Last May, Foxconn chairman Terry Gou said that the company will double the minimum salary in its Chinese manufacturing bases by the end of 2013. The company initiated pay raises after 11 employees of its Shenzhen factory committed suicide in the first half of 2010. But the move was more than just a public relations ploy: migrant laborers, which Foxconn has relied on in its Guangdong factories, are opting to stay put in their home provinces of Sichuan and Henan thanks to dramatic wage increases due to economic growth.

Furthermore, China’s working-age population (people aged 15 to 59) was hit with a rare decline in 2012, decreasing 3.45 million to 937 million, according to the National Bureau of Statistics, which also predicts that the decline will continue to 2030.

Despite the increase in capital expenditures for manufacturers, consumers probably don’t have to worry about seeing an increase in retail prices soon. As analyst Horace Dediu notes, Apple has maintained iPhone pricing stability for over five years. But while Apple enjoys high margins for its products, it looks like Foxconn’s slice is going to get even thinner. Foxconn is already making do with extremely slender margins of about $8 per iPhone.

Despite paper-thin margins, however, being part of Apple’s supply chain is still desirable, Edison Investment Research analyst Dan Ridsdale told the Financial Times in September: “Apple suppliers make much higher margins than the rest of the industry, and because Apple only has one leading model of phone, the suppliers are in all of the 200 million or so devices that Apple will sell. In contrast Samsung will have many more models and suppliers will be in some but not others of these.”