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Apple/Foxconn probe overhauls electronics mfg

Posted: 13 Apr 2012 ?? ?Print Version ?Bookmark and Share

Keywords:contract manufacturing? compliance? labor issue?

IHS Inc. has highlighted the details of the Fair Labor Association (FLA) investigation citing serious workers' issues at contract manufacturer Foxconn, and its relationship with Apple Inc. The investigation underscores the serious risk to the public image of electronics brands lying in their $360 billion relationship with the global contract manufacturing industry. The effect is likely an increased focus on complianceas well as rising costs for electronics brands, the market research firm noted.

"Much of the press coverage of the FLA investigation has focused on the impact it will have on Apple's margins or on prices that consumers will pay for iPhone or iPads," indicated Thomas Dinges, senior principal analyst at IHS. "However, the real impact is on the overall relationship of electronic brands with contract manufacturers like Foxconn. Brands now realize that the biggest risk in dealing with contract manufacturers lies in the potential public relations disasters that can arise from worker's rights issues."

Foxconn is the world's largest maker of electronic components, headquartered in Taiwan but operating a number of large manufacturing facilities in China.

global electronics manufacturing

The FLA investigation has revealed serious workers' issues, which warrant increased focus on complianceas well as rising costs for electronics brands.

For electronics brands, the implications of labor issues are massive, given their fundamental reliance on the outsourcing of production to contract manufacturers.

The global electronics manufacturing business, consisting of electronics manufacturing services (EMS) and original design manufacturing (ODM) firms, generated about $359.8 billion in revenue last year. As brands have increasingly outsourced production, the contract manufacturing industry has undergone enormous growth in recent years, with revenue rising from $264 billion in 2006. While revenue is expected to dip this year, the industry continues its expansion trajectory in the coming years, with revenue expanding to $426.1 billion in 2015.

Contract manufacturing is now an essential part of the electronics industry, accounting for 20.2 percent of all manufacturing revenue in 2011.

"While the recent focus has been on Apple and Foxconn, the fact is that nearly all electronics brands make use of contract manufacturers," Dinges added. "Because of this, nearly all brands are at risk from negative headlines in their local newspapers that could arise from news of worker issues."

For electronics brands, the moment has arrived to ensure that the contract manufacturing partners of brands are in compliance with FLA rules. IHS expects more audits will take place that will uncover further issues. Brand original equipment manufacturers (OEM) will be forced to expand their operations that focus on supplier responsibility and compliance.

As contract manufacturers move to ensure compliance, contract manufacturers will expand their workforces and increase their pay scales in China, causing manufacturing costs to climb. Even so, given the small proportion of manufacturing costs compared to component expenses, this is unlikely to have a major impact on company margins or consumer prices.

Rising costs in China likely will spur contract manufacturers to seek alternative, lower-cost locations for manufacturing. But because of the extensive established supply chains and infrastructure in the country, China will remain the manufacturing engine of the global electronics industry.





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