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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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RE: I would understand...
By Solandri on 6/8/2010 2:06:07 PM , Rating: 2
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.

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
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.

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