Sweat-free iPads come at a price worth paying

Apple (AAPL.O) scores points for pushing to improve conditions for workers in China churning out its iPhones and iPads. But change was inevitable. Yes, Apple commissioned the probe of Foxconn. But the problems uncovered at the Taiwanese company's factories in mainland China were already well-publicised. Apple may have also jumped before it was pushed. It should now sidestep any crackdown on abuse by Beijing by prompting Foxconn - at long last - to comply with China's labour laws.


Macro labour market forces are also at play. Increasing wealth, a shortage of semi-skilled labour and rising dissatisfaction over income disparities have convinced Beijing that workers need to get a bigger slice of growth.

To date, China's export-led model of growth has relied on suppressing its currency as the trade surplus swelled, amassing $1.3 trillion in foreign reserves at the expense of workers' purchasing power. Amid growing public discontent, China's leadership is now trying to shift growth from investment to consumption. Along with the emerging shortages of semi-skilled labour, that has led to double-digit wage increases in some provinces.

Some China-based manufacturers are moving to cheaper countries like Vietnam and Indonesia. But high-tech factories such as Foxconn's are less portable than textile mills. China's efforts to lure component makers and create industrial clusters have given it advantages beyond cheap labour. And some companies have relocated only to find skilled labour in other developing countries even scarcer.

Foxconn makes 40 percent of the world's electronics on a thin, 1.5 percent margin. So Apple and other customers, like Dell and Hewlett-Packard - may have little choice but to absorb the added labour costs. Foxconn's size - and need to increase its payroll numbers - means that smaller competitors in China are likely to have to raise wages, too. If they don't, their workers will migrate to Foxconn.

Given its premium branding, Apple can probably convince customers to share the rising costs that will come as a result of the tighter China labour market, and the improved working conditions. Competitors with thinner margins may have no choice but to pass it along too. But labour represents less than 5 percent of overall production costs, so paying fairer wages in China will likely end up costing only slightly more. For consumers, the extra cost of sweat-free iPads is one well worth paying.