Apple, HP, Dell Face Rising China Costs: Report

 
 
By Nicholas Kolakowski  |  Posted 2010-07-06
 
 
 

Apple and other tech companies are facing rising costs in China for their devices, according to a new report in The New York Times. The combination of higher salaries, stronger Chinese currency and economic factors such as inflation could potentially drive up the cost of manufacturing the iPhone 4 and other devices, forcing Chinese factory owners to shift production to other areas of China.

The July 5 article paraphrases a manager at Foxconn, whose factory complex produces a number of Apple devices in addition to products by Dell and Hewlett-Packard, as suggesting the company would shift workers to cheaper parts of the country. But even that might not be enough, as rising wage costs threaten to eat into the relatively tight margins of Foxconn and other companies.

According to a June teardown by research firm iSuppli, each iPhone 4 costs Apple an estimated $187.51. That number, however, only accounts for the cost of the actual hardware; other expenses, including manufacturing and distribution, would potentially add to the per-unit tally for the next-generation device.

The cost of the iPhone 4 represents a marked increase from some previous iterations of the device; the Bill of Materials (BOM) tally for the iPhone 3GS, by contrast, was $170.80, while the iPhone 3G cost $166.31 in materials. However, the hardware costs for the original iPhone, released in 2007, reportedly totaled $217.73.

"The BOM of the fourth-generation model closely aligns with those of previous iPhones," Kevin Keller, a principal analyst for iSuppli, wrote in a June statement. "With the iPhone maintaining its existing pricing, Apple will be able to maintain the prodigious margins that have allowed it to build up a colossal cash reserve."

According to iSuppli, the most expensive part of the iPhone 4 is the LCD display, at $28.50, followed by the Samsung-supplied NAND flash memory, which costs approximately $27 for the 16GB version. The 4GB of mobile DDR (double data rate) SDRAM costs $13.80.

The iPhone 4 retails with a two-year contract for $199 for the 16GB version, and $299 for the 32GB version. While Apple states that U.S. purchasers can't secure an iPhone 4 without the two-year AT&T contract, other countries sell the device unlocked; in the United Kingdom, for example, the 16GB iPhone 4 costs $755 and the 32GB iPhone 4 costs $907, depending on the day's currency conversion from British pounds.  

While Apple builds a healthy margin for itself, the potential profit is much more razor-thin for the factories, leading some like Foxconn to also consider manufacturing many components in-house rather than trying to secure them from outside sources.

Foxconn already indicated that it would pass along its workers' salary increases to its customers. In an effort to deal with bad publicity surrounding an earlier rash of worker suicides, Foxconn announced in early June that first-line workers and supervisors who pass a three-month evaluation period will be apparently entitled to a salary of approximately $290 in October, representing a substantial bump-and potential extra costs for companies such as Apple and HP. "The time has come for the global food chain to face these issues," a Foxconn spokesperson reportedly told the Financial Times at the time.

How that will translate for American consumers, pricewise, remains to be seen.

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