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Could the iPad see a "China wage" price increase? Some analysts think so. They say that many products including consumer electronics and clothing may become more expensive as Chinese workers are paid more.

Many workers in China today don't make enough to properly support their families. That is slowly changing, though, thanks to internation scrutiny on companies that manufacture in China.  (Source: East Day)
Improvements in working conditions may give firms just the excuse they need to bump prices

According to The New York Times, increases in the labor costs of manufacturing in China may lead to price increases in the U.S. and abroad.

The issue of Chinese workers' wages has been brought into the media spotlight following a string of deaths of workers at Foxconn's facility that manufactures the iPad and iPhone.  Most of the deaths were suicides, but at least one worker has reportedly died of exhaustion after being forced to work long hours.

Foxconn, which manufactures numerous computer motherboards and much of the world's top electronics -- including Nokia cell phones, iPads, iPods, iPhones, and motherboards for gaming consoles (the Wii, Xbox 360, and PS3) -- responded by offering employees up to a 30 percent raise, plus an additional performance-based raise.

Those raise increase the average plant worker's salary to 2,000 renminbi (China's currency) — about $300 USD.  Those increases, combined with appreciation of the renminbi currency may have a ripple effect resulting in rising manufacturing costs for a variety of retail products, including clothing and electronics.

Dong Tao, an economist at Credit Suisse, "For a long time, China has been the anchor of global disinflation.  But this may be the beginning of the end of an era."

In the short term, these cost increases remain relatively small compared to corporate profit margins.  For example, the new Foxconn wages are estimated to raise the cost of labor on the base model iPad by roughly 0.7 percent of the unit's cost, or approximately $3.50.  Apple makes approximately $200 in profit per iPad sold, though.  And while much of that profit goes to Apple's design and engineering costs, the company still is stockpiling cash each quarter.

The ripple effect is already being witnessed.  Honda announced it will also raise its average pay at one of its southern China plants to $300 USD.  And Beijing announced that the minimum wage would be bumped 20 percent to 960 renminbi, or about $140 USD.

As costs rise, some predict manufacturers will bump their prices.  A $50 price increase on the iPad, justified by improved Chinese worker conditions, would both make the company look good in the eyes of some and increase its profit margins.  Such increases, while distasteful to some, may soon become reality.

Ultimately, whatever the ramifications, the salary increases in China are long needed.  A long-standing shortage of jobs versus job-hunters has caused wages to sink dangerously low over the last decade.  Workers in the country have found it hard to support their families and pay for proper medical care.  Now that wages are rising employees may finally be able to afford the essentials.

Some manufacturers will likely flee to cheaper countries -- Bangladesh or Vietnam -- but others will likely remain in China.  After all, wherever they go, companies will eventually face these same issues.  As Marshall W. Meyer, a China specialist at the Wharton School at the University of Pennsylvania, comments, "There is no way out."



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I would understand...
By quiksilvr on 6/8/2010 11:17:35 AM , Rating: 5
If it was a serious cut in profits (5% or higher) but at 0.7%, this seems ridiculous. Their products are already ridiculously overpriced as it is (to be fair, they have improved from the prices they had last decade).




RE: I would understand...
By gamerk2 on 6/8/2010 11:32:48 AM , Rating: 2
How are the products overpriced? "Everything is worth what people will pay for it", after all...


RE: I would understand...
By hughlle on 6/8/2010 11:53:46 AM , Rating: 1
well in that case you need to jsutify the price difference between competitors. many phones are out there that retail for a HECK of a lot less than the iphone, and a good number are better, so as such regardless whether people buy the iphone, it's still overpriced for what it is in the face of it's competition. the only argument for them not being overpriced is that you are happily paying for the name value of the product.


RE: I would understand...
By callmeroy on 6/8/2010 12:12:10 PM , Rating: 5
No you don't.

The other guy is absolutely correct...the market itself its the single largest factor in prices.

It may seem very harsh, very basic and even "cold" but if people are paying a high price for a product then that *IS* the justification for the price.

If the market doesn't bare the price, that is a product simply has dismal sales at a certain price point, than the the justification does NOT exist to leave the price at the level and as such the price is adjusted lower.

Folks make no sense to me -- they complain left and right about the cost of something yet the sales figures indicate people are flocking to the stores and laying out the cash for the product (oh wait silly me this is America...laying out the CREDIT for it).....


RE: I would understand...
By lightfoot on 6/8/2010 12:40:24 PM , Rating: 4
The problem here is that Apple is trying to tie the price increase to the wage increase.

"What the market will bear" has nothing to do with your manufacturing costs.

It might be fair to say that the iPad was underpriced due to persistent shortages of the product. However, that is entirely different from saying that you have to raise the price to cover the additional manufacturing costs. Using the wage increase to push a $50 price increase is simply dishonest.


RE: I would understand...
By gamerk2 on 6/8/2010 12:49:47 PM , Rating: 2
quote:
"What the market will bear" has nothing to do with your manufacturing costs.


Are you clueless? Items like this have a minimum price below which no profit can be made. Unless you are willing to gain market share at the cost of profit, all sales must be above that point to make a product economically viable. As such, increased cost of construction leads directly to higher cost of sale. Simple market economics.

I note: The reverse is NOT true; if lowering price does not lead to an increase in sales, the justification of lowering prices due to lowering cost of production is not there. [Hence, the fatal flaw of Supply Side Economics, and why it DOESNT WORK!]


RE: I would understand...
By lightfoot on 6/8/2010 12:56:52 PM , Rating: 3
Clearly you are the one who is clueless. Not all products are successful in the marketplace. Products that can't be sold for a profit stop being manufactured. You can't simply jack up the price based on a product's excessive manufacture cost and expect people to continue buying it.


RE: I would understand...
By Solandri on 6/8/2010 2:06:07 PM , Rating: 2
quote:
Are you clueless? Items like this have a minimum price below which no profit can be made. Unless you are willing to gain market share at the cost of profit, all sales must be above that point to make a product economically viable. As such, increased cost of construction leads directly to higher cost of sale. Simple market economics.

No, GP is right, "what the market will bear" is completely dependent on how much value the product gives the buyer. If it provides $400 in value to him, then the market will bear $400.

The opposite is the manufacturing cost - how much it costs you to produce the things. Say it's $200.

The market price is where the two meet in the middle (for multiple buyers and multiple manufacturers).* Depending on the balance of supply and demand (and strength of competition), the two curves intersect at a value in the middle. Whether or not a price drop will increase overall revenue (or a price increase will reduce overall revenue) depends on the shape of the two curves. It could very well be that despite an increase in production costs, the point of maximum revenue is still at the same price point.

*It should be pointed out that frequently, you are better off selling items at below your manufacturing cost. The obvious example is if you have obsolete technology. Better to ditch your inventory now at 90 cents on the dollar, than to hang onto it for another year and only get 10 cents on the dollar. Another example is to build market share and brand awareness, followed by an increase in price once you become established. Yet another example (one I don't particularly like) is the razor blade model. You sell the razors below your manufacturing cost, and you make the money back by selling replacement blades. Video game consoles and injet printers follow this model.

quote:
I note: The reverse is NOT true; if lowering price does not lead to an increase in sales, the justification of lowering prices due to lowering cost of production is not there. [Hence, the fatal flaw of Supply Side Economics, and why it DOESNT WORK!]

Can you post some examples of situations where lowering the price does not increase sales? The only cases I can think of are 100% market saturation - everyone is already buying what you're selling. And trivial items, like pencils, where the buyer doesn't really care whether he's paying 10 cents or 20 cents (but the store selling them will care whether they're buying $1,000 or $2,000 of pencils, so there's still a price influence).

Merely identifying one specific condition under which a theory doesn't work does not invalidate the theory. If the theory works for 99% of situations, then it's still a valid theory. You just have to be careful about the exceptions. That's why free market capitalism works in about 95% of the cases - individual benefit aligns with most overall benefit to society. But you need to watch out for the exceptions (tragedy of the commons, prisoner's dilemma) - where individual benefit aligns with lesser or least benefit to society.


RE: I would understand...
By gamerk2 on 6/8/2010 3:31:09 PM , Rating: 2
quote:
Can you post some examples of situations where lowering the price does not increase sales?


I meant "profit" there; There are situations where reducing price to increase sales does not create a higher profit.


RE: I would understand...
By Steve1981 on 6/8/2010 4:55:57 PM , Rating: 2
quote:
Hence, the fatal flaw of Supply Side Economics, and why it DOESNT WORK!


Sorry, but it would seem that you don't actually understand the theory of supply side economics.

The theory doesn't expect by cutting taxes, companies will feel generous and cut product prices.

The theory is that by reducing taxes and over-regulation, you reduce barriers to produce. If it is easier and more rewarding to produce, more people will, increasing competition, and in turn innovation and economic growth.


RE: I would understand...
By callmeroy on 6/8/2010 3:31:50 PM , Rating: 2
True enough...but I still don't see a "problem" either way.

The math is still simple to grasp

Price point too high = sales are sluggish

If manufacturing costs warrant ability to lower prices and make profit, then lower prices = (hopefully) increased sales

***IF MANUFACTURE COSTS STILL DO NOT** allow product to be sold at lower cost ---- product ceases to exist (be sold).

What's the problem or dilemma?

As a business its YOUR problem (the business) to make the product financially viable (manufacturer costs and all!) for ME (the consumer) to think its a fair price to buy it...

You can't do that..ok well your product fails then. End of story.


RE: I would understand...
By Shadowself on 6/8/2010 7:27:32 PM , Rating: 2
quote:
he problem here is that Apple is trying to tie the price increase to the wage increase.


Apple is doing no such thing, and at this point in time no one else is either.

This is pure speculation by some analyst.

It may come true. It may not. Manufacturers are just as likely to not have prices fall as fast as they have historically for consumer goods. It is just as likely that new items will be introduced at new price points and then have those prices come down more slowly in the future.

The $50 price increase is just some blogger's guess as to what Apple might do.


RE: I would understand...
By carniver on 6/8/2010 12:43:35 PM , Rating: 3
Righttttt, so the labour market dictated the workers who chose to work there themselves must not have been underpaid.


RE: I would understand...
By TheDoc9 on 6/8/2010 12:45:17 PM , Rating: 2
I was taught the same thing in business school, don't worry though. It's totally wrong. The only thing high prices do is line the pockets of the businessman. People 'flocking' to the stores could be justified by any number of reasons and I can guarantee you the high price isn't one of them.

It's psychological, perhaps we should say that manipulation through advertising allows people to justify the high price.


RE: I would understand...
By callmeroy on 6/9/2010 11:38:34 AM , Rating: 2
I don't know what you are saying because I think you are disagreeing with my earlier post but yet I'm not disagreeing with you.....???

Let me try to translate that: No kidding all high prices do is line the pockets of the businessman (what made you think I was implying anything differently?) -- that's what business is about after all...maximizing your profits.

Perhaps I poorly worded my prior post and instead of "justification" the more accurate point would be the word "incentive". What INCENTIVE is their to lower prices if people buy them at the current price point EVEN when people heavily complain its "expensive"?

There's zero incentive (justification?) from the business side to lower the price.

Again its a very simple concept that the world market place is founded on a daily basis year in and year out. Why this is hard for some on these boards to comprehend completely escapes me.


RE: I would understand...
By flatrock on 6/9/2010 4:32:38 PM , Rating: 2
I can think of three incentives.

1) A lower price would likely appeal to a greater number of consumers, and since the development costs you invested stay fixed, your effective cost per unit goes down as volumes go up.

2) High profit margins encourage lots of competition which will eat up some or your customer base and can actually make your profitible product far less profitible at the same price.

3) Apple makes a lot of their money selling software and media to those that buy their devices. The more iPads they sell, the more they make from iTunes and the Apps Store.


RE: I would understand...
By sleepeeg3 on 6/9/2010 2:56:40 AM , Rating: 2
Exactly. The invisible hand adjusts prices and wages to reflect what people and employers are willing to pay. People can blog all day long about the conditions at Foxconn or China, but raising the wages will also raise prices and eventually the economy will adjust so the workers are making the same effective wage as they were before. This is why minimum wage laws do little except hurt workers in nations that have them, because they have to compete globally.

China's unemployment rate: 4.2%
US unemployment rate: 9.7%

Socialists will try to demonize corporations by saying they "outsourced" jobs to other countries, when the reality is Americans are losing their jobs, because they were too lazy. They voted in politicians who established that it's not worth working for anything less than $8/hr and setup costly welfare programs for anyone who can live off less.


RE: I would understand...
By callmeroy on 6/9/2010 11:41:15 AM , Rating: 2
Actually you know that 9.7% rate for the US isn't really the "TRUE" rate....that's the rate the government is telling us and is enforced by most national media...the "real" rate after you take away the BS government adjustments is much closer to 18%.


RE: I would understand...
By omnicronx on 6/8/2010 12:12:22 PM , Rating: 2
By the same account, being overpriced is subjective. What may be overpriced to 95% of the population may not be overpriced to the remaining 5.

I think its kind of hard to argue that Apple price points are just not doable for a large percentage of the population, and thus one can make the case that to the average person, Apple products are overpriced..

Then again, when it comes to the iPhone, you can't really make this case, at least when subsidized. It is definitely comparable in price to other phones of the same or less caliber.


RE: I would understand...
By omnicronx on 6/8/2010 12:14:30 PM , Rating: 2
Taking things further, just because something is overpriced, does not mean it won't be successful ;) There are many niche markets that would be considered overpriced to the average person. Apple has made their livelihood proving this.


RE: I would understand...
By Solandri on 6/8/2010 2:20:02 PM , Rating: 4
quote:
How are the products overpriced? "Everything is worth what people will pay for it", after all...

He's committing the error all of us make at some time. He is taking his perception of how much the product is worth, and generalizing it to the entire population. I don't mean any disrespect by this - I agree with him that the iPhone is overpriced. But that doesn't mean other people think it is.

Essentially, what it boils down to in the iPhone case is that there's a social value to being chic and trendy. Tech people like the OP and me (who have little or no social lives ^.^) put very little value on this. To us, the iPhone's value is determined almost entirely on its features, capabilities, and ease of use. So to us, it's overpriced - its value to us is less than its price. To other people, the iPhone also has additional value in its chicness and trendiness. This puts it over the line - its value to them is more than its price. So to them, it's fairly priced, and they will probably continue to buy it despite a price increase.

I personally don't put much value on being chic and trendy, but I don't deny that it's a real force in the market. Entire industries (e.g. fashion, jewelry, etc) are built on it.


RE: I would understand...
By BigToque on 6/8/2010 12:01:42 PM , Rating: 2
I bet the increase will be more than .7%


RE: I would understand...
By omnicronx on 6/8/2010 12:06:22 PM , Rating: 2
RE: I would understand...
By Hiawa23 on 6/8/2010 4:11:54 PM , Rating: 2
I find this kind of funny cause right after they announced the raises for the sweat shops, Apple fans rejoiced saying they did this out of the goodness of their heart. K......

I knew there would be some announcement about price increases in the near future. Greedy....

Some say their overpriced products are worth the price if someone pays it. Well, I think they are not worth it & given this bad economy where most are watching every penny, I can't see buying any Apple product, of which I don't own anything by them, so to me their products are over priced, & now they are raising prices, LOL. I could see em raising pices if they started losing money but their profits are crazy as it is, & I am not against any company making every nickel they can get, but, I am not contributing to it. I am sure many will...


RE: I would understand...
By frobizzle on 6/9/2010 2:12:00 PM , Rating: 2
FoxConn should just offer an incentive to their employees...an anti suicide bonus.

"Those of you that do not kill yourselves will receive a most honorable bonus. Please note: If you receive a bonus and then kill yourself, you will have to return the money."


RE: I would understand...
By flatrock on 6/9/2010 4:21:13 PM , Rating: 2
quote:
If it was a serious cut in profits (5% or higher) but at 0.7%, this seems ridiculous.


Before you get too irate, notice that the 0.7% was of unit cost. Also the $200 "profit" is most likely only subtracting off the parts and assembly costs and doesn't cover development costs or things like marketing and shipping.

It probably does represent a 5% or more cut in actual net profit.


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