Apple's Manufacturer is Raising Wages. Are Prices About to Increase?


Following a series of worker suicides, Foxconn International Holdings Ltd. raised wages for employees at its factory in southern China where the iPod, iPhone and other consumer electronics are manufactured. The company announced earlier this year that it would likely pass some of those additional costs to clients and a report from Reuters last week cited a Citibank analyst in announcing that the price increase would happen this month. Will increased manufacturing costs affect the retail prices of some of your favorite electronics? Analysts disagree.

If the Reuters report is true, wrote analyst Daniel Tello, who blogs about Apple at Deagol's AAPL Model, in an email, then negotiations between Apple and Foxconn's parent company, Hon Hai Precision Industry Co. Ltd., have probably been underway for for some time now. It's likely that Apple would have taken any additional costs into account when they rolled out their latest batch of iPods last month, he wrote. Even if they didn't, the falling cost of materials could offset increased manufacturing costs. "So definitely no effect for consumers, and probably a net positive for Apple's margins when component cost declines are taken into account," he said.

"Foxconn has timed this perfectly going into the holiday season," countered Dennis Hildebrand, an analyst who is frequently cited by Fortune. Hildebrand believes this story is only just beginning and, because "Foxconn is very powerful," will "be gargantuan."

"If Apple is forced into raising prices to protect margins, it won't happen until Apple's" second quarter, which runs, roughly, from January through March, Hildebrand wrote in an email. "Apple will protect the holiday quarter at all costs."

Apple's customers are incredibly loyal, noted Rajesh Ghai of ThinkEquity LLC. A price increase in the second quarter wouldn't scare many of them away, he suggested. "AAPL has significant brand equity with customers who are likely to be insensitive to a small price increase if any," he wrote.

And where would angry consumers turn anyway? Horace Dediu, an analyst and former business development manager at Nokia, pointed out that Foxconn manufactures parts for a number of electronics companies in the United States. "Apple is a tiny part of the overall order book so Apple's products will not be at a disadvantage if competitors also raise prices," he wrote in an email.

Aside from Hildebrand, who also suggested that Apple might consider using its large supply of cash to build its own manufacturing facilities overseas and sidestep Foxconn altogether, all of the analysts I reached out to for an opinion seemed to believe that Foxconn will raise prices, but consumers will only see a small price increase if any.

"No worries -- you're not going to suddenly have to pay $1,000 for the low-end iPad," Henry Blodget, editor of Business Insider, told me over email. "If anything, the impact will likely be that the price of the iPad will not decline quite as fast as it would have if Foxconn kept paying slave-wages."

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Nicholas Jackson is a former associate editor at The Atlantic.

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