SAN FRANCISCO Apparel makers, toy companies and other manufacturers wrestling with rising wages in China now face new pressures after Apple Inc and main production partner Foxconn agreed to improve worker conditions at plants making its iPhones and other gadgets.
In a major development for the way Western companies do business in China, Apple said on Thursday it agreed to work with Foxconn -- an affiliate of Taiwan's Hon Hai Precision Industry -- to curtail hours, substantially improve wages, and hire tens of thousands to compensate for the reduced hours.
With enviable profit margins and the ability to call the shots with suppliers, Apple's move to better labor conditions is not expected to force it to raise prices.
But Apple's move may indirectly force more labor-intensive manufacturers in the world's second largest economy -- like clothing makers -- to spend more on wages and accept lower profits.
"As a result of electronics companies raising wages, that's going to impact the entire manufacturing sector," said Paul Martyn, vice president of Supply Strategy at BravoSolution.
The Apple-Foxconn agreement could affect costs for other manufacturers who contract with the Taiwanese company, including Dell Inc, Hewlett-Packard, Amazon.com Inc, Motorola Mobility Holdings, Nokia and Sony Corp.
But with labor accounting for only a fraction of those companies' costs, they are expected to face limited pressure to raise their own prices or sacrifice profit margins.
After decades of aggressive expansion in China, cheap labor no longer looks limitless and steadily rising wages have become a major concern of U.S.-based companies heavily dependent on Chinese labor.
Better wages paid in China's electronics industry have already been rippling out to less complex manufacturing sectors, like clothing, shoes and toys, where labor is a bigger proportion of overall costs.
Best Buy Co CEO Brian Dunn said he is keeping an eye on rising wages in China, but argued that whatever margin pressures the electronics retail chain faces would be felt by all.
"Whatever plays out there will be unilaterally applied across whoever sells these goods," he told Reuters in an interview on Thursday.
WINNERS AND LOSERS
Apple's new plan to hire tens of thousands of workers, clamp down on illegal overtime, improve safety protocols and upgrade worker housing is expected to eventually fuel even more pressure to improve wages across the manufacturing industry.
"Apple and Foxconn are obviously the two biggest players in this sector and since they're teaming up to drive this change, I really do think they set the bar for the rest of the sector," Auret van Heerden, head of the Fair Labor Association, told Reuters.
Compared to the costs of microchips, sensors, high-end displays and other components that go into a laptop or smartphone, labor is only a tiny part, believed by some analysts to be no more than 5 percent of the cost in the case of Apple's iPhone.
Dell told Reuters in an email the company was pleased Foxconn is improving its labor practices but, "We won't speculate how the reduced overtime and higher wages will affect Foxconn's costs."
In consumer electronics, changes in component prices and the launch of more profitable products tend to mask or offset rising wages for products sold by companies like Hewlett Packard, Dell and Motorola Mobility, analysts say.
"Wages in China have been increasing significantly for years and that hasn't had any effect on retail prices," said Brad Gastwirth, co-founder of ABR Investment Strategy, an independent research firm. "And there are other trends happening -- the shift to Ultrabooks and other better-margin products that are helping offset higher labor costs."
Apple's decision comes after the Fair Labor Association said it had unearthed multiple violations of labor law, including extreme hours and unpaid overtime, disclosing its findings from a survey of three Foxconn plants and over 35,000 workers.
Apple had agreed to the probe by the independent FLA in response to a crescendo of criticism that its products were built on the backs of mistreated Chinese workers.
Shenzhen, a major manufacturing hub in southern China, increased its minimum wage by 13.6 percent in February despite warnings from factory owners and exporters already reeling from slow U.S. and European demand.
China's largest contract manufacturer, Foxconn is in a strong position compared to its smaller rivals but it would still be difficult for the company to get customers like Apple, HP and Amazon, which makes the Kindle Fire tablet in China, to bear the brunt of higher labor costs.
"If Foxconn tries to increase prices, Amazon could go to other major contract manufacturers like Quanta, Wistron, Pegatron or Inventec to see what they could do for the company," said Mark Gerber, director of technology research at brokerage Detwiler Fenton.
To make up for rising wages, manufacturers most sensitive to labor costs, like apparel makers or toy makers, may cut corners on the products they produce, BravoSolution's Martyn said.
For example, higher wages in electronics manufacturing could eventually spill over to factories making plastic toys and force U.S. fast-food restaurants to use lower-quality trinkets in their promotions aimed at kids, he said.
"We may see a reduction in the diversity of products offered or a reduction in quality," Martyn said. "We may see more defects as a result of changes in some of these sectors like apparel and toys."