China Ain’t Cheap No More – and that might be a good thing…

Foxconn, that beleaguered Taiwanese parts manufacturer, is apparently not making any money due to the fact they have had to – wait for it – pay higher wages! Whodathunkit? So what do they plan to do about it? Well, move to America of course! Yes, higher costs… but there might be some good in here too…

Let’s do a quick recap on Foxconn.

They have an 800,000 strong workforce in China. Recently, they had to implement lots of changes in their workplace – largely due to their excessively high workforce suicides, riots and industrial accidents. This made them a high-risk manufacturer and reforms were needed to improve safety and job satisfaction, which meant spending money on new safety measures and of course, higher wages for their workers as well as insurance and other technical liabilities that would otherwise not have been covered (such as higher-quality housing and healthcare). In short – the idea of Chinese labour being cheap? It isn’t cheap. Not anymore. In order to be seen as a promising new world power, China is having to do many things and one of those is to introduce wages and benefits that wouldn’t be seen as amiss in the Western world.

Why should we care? Because Foxconn make parts for pretty much every major tech-giant in the world. Apple, Microsoft, Amazon, Samsung, Sony, Nintendo… you name it, you can probably trace at least a few of their components back to Foxconn. The reason they have done this is because Chinese labour was cheap – dirt cheap, in fact. Foxconn made profits on the cheap labour, but it meant their parts were also cheap. Very cheap. And as such, the majority of companies in the world have been using them.

Not only that, but the rise of other manufacturing plants eager to get a hold of trained workers have been steadily chipping away at Foxconn. When others can provide benefits you are not, you have to stay competitive or risk losing the investment you have made in your workers by training them. Competition has happened. It is something that they simply cannot ignore any longer.

I mentioned that the word is out that Foxconn is planning to start factories in the United States as a result of the rising costs. This is obviously good news for Barack Obama, as he had promised to bring in a million new manufacturing jobs to the US jobs market. Likely there will be many incentives for Foxconn to do so – tax breaks and Government aid to cut through the red-tape of getting the factories up to scratch. Not least because Los Angeles and Detroit could also use the new jobs – Detroit mentioned more often, presumably because the once home of the Muscle Car and Motown has fallen on harder times of late and could use a good image update. But in all of this, the truth is the wages and benefits will have to be of American standards. A skilled workforce in a prosperous country like America won’t come cheap, and it won’t house ALL of the Foxconn parts manufacture. Foxconn have already got factories running in Brazil and are investing in São Paolo as well.

It’s a lot of words for an introduction to a very harsh reality we’re all going to have to get used to – our cheap tech? Well… it isn’t going to be cheap forever. And those rises may not be far off.

Nintendo have obviously stoked the flames a little when they noted that the parts needed for the Wii-U Gamepad (which I call the U-Pad) was the most expensive part of the Wii-U itself. The machine can currently in this early stage of its life match the PS3 for visual quality and the X-Box 360 for ease of use. When the technology inside the actual console unit is pushed harder, then you will see many wonderous things happen. But the fact remains that the reason the Wii-U is so expensive isn’t because Nintendo want it to be so. The parts they require to make it simply cost far, far more than they would have done a few years ago. The costs are being passed on to Nintendo and, subsequently, us. Nintendo even sheepishly admits it isn’t going to be making a day-one profit on the Wii-U as hardware, whereas with the Wii and Gamecube and previous machines, they did.

Nintendo have serious purchasing power. So don’t think for one moment Sony and Microsoft will get an easier ride for their components.

So, our games consoles are going to cost more. How much more? Well, that rather depends on certain elements such as where costs can be cut. Foxconn might consider that it makes too healthy a profit on their sales and will cut back by perhaps 10-20%. Sony, Microsoft and Nintendo might take a bigger hit. What is certain is that the inevitability of the rise of components costs is that our gadgets – smartphones, TVs, PC parts, consoles and heck, probably even more basic stuff like watches and microwaves will slowly increase in cost to reflect a harsh reality – China isn’t going to be fobbed off any more as a place to get cheap labour. Capitalism has entered China. In a big way. And even Brazil and São Paolo won’t likely take kindly to any insinuation that they can be just as cheap.

It’s not just Foxconn, obviously. But considering the size and wide reach that Foxconn has, it’s perhaps one of the most interesting case studies to take on. Because it has been the centre of many a scandal in the world in recent years. From under-age workers to riots, suicides, industrial accidents and the looming threat of being cut off by some of their most extravagant customers – Apple, Samsung and Nintendo amongst others – Foxconn has had serious problems with its global image, and people are aware of it. The media reports on it regularly, because it’s rarely without some problems. Indeed, I note that currently they claim to have 800,000 workers. However, earlier in the year, media outlets were reporting that Foxconn had 1.2 million workers. Whichever way you slice it, whatever the margin for error, that demonstrates there is an impressively serious talent drain happening. It may not be that big but even give or take a couple hundred thousand, it’s still a serious issue for them. And for us. Because less labour and tighter labour controls means they can demand better wages. Which pushes the costs to Foxconn up, which pushes the costs to those who buy the parts up which inevitably pushes the costs to us up.

Will Foxconn really settle in the U.S., with all the laws and regulations that they will have to commit to? Perhaps. I doubt it will be in the huge way people are hoping for, but I suspect they will because it does them the world of good in terms of image and in terms of getting friendlier with certain companies both old and new. It’s easier and more preferable in this modern world to want to do business within your own country, and Microsoft would likely welcome the opportunity to do business with a company with an actual physical manufacturing foothold in the States. It does everyone a great Public Relations service. Similarly, the investment in South America isn’t as coy as you may think; it brings more value and trade to those parts of the world, which means other businesses can establish a foothold there and flourish. Everything in this world is connected, everything has a part to play. Even the most cynical of moves may have a sensible motive behind them.

But in increasing their expenditure, by actively investing and being seen to invest in South America and the United States, the current short-term reality remains. Money is being spent, and they need to make that money back so their investors can sleep soundly at night. Add to this the aforementioned labour costs and… well… you can’t really help but wonder who is picking up the tab. And if we can’t see who is picking up the tab, I think that we should expect that to be us.

HOWEVER… I don’t think this is a bad thing either. Not as earth-shatteringly harsh as you may think I’ve made it out to be, anyway.

For a start, that PR nonsense has a very serious point to it. By being seen to invest in other countries and upcoming economies ensures that it remains an attractive company to do business with, especially in the wake of all the drama they’ve had the past few years. In doing so, they will be bound tighter by International Trade Laws. Perhaps not a surprise that China is one of the worst countries in this regard due to their ability to make and therefore clone pretty much everything you can think of. Foxconn won’t be able to participate in that if it does business elsewhere and has footholds in other parts of the world. It will have international standing and therefore, leave it much more prone to legal challenges. It will HAVE to behave and do things better, because otherwise they will be hit with lawsuits and be forced to pay out more, and more, and more. Until it either learns or goes bankrupt.

Likewise, it might even slow the pace of the technological world down a notch. I’ve said I can’t understand why we’re pushing for a next-gen when most of this generations most incredible pieces of software are coming out in the twilight year or so of these machines current lives. If the costs are raised, this would be a serious wake-up call to our console-making giants that the cycle of just pushing hardware for the sake of it might no longer be monetarily sensible. It might mean we get to keep our machines longer – and therefore, the machines will have more pulled out from them. We won’t have the current worry of so many to get these amazing examples out to the market before Sony and Microsoft reveal their new hardware. We, the consumers, will likely benefit from a longer generational cycle with more software and better use of the hardware being pushed. If they have to start being selective, then they’re going to have to be sensible. Which means luxuries like the PS3’s Cell chip will no longer be viable. Too difficult, too complex and not enough being pulled from it to have any noticeable benefit for Sony themselves, except perhaps to stand out a little.

But most of all, we send far too many of our gadgets to the landfill anyway. Many of these parts aren’t even recycled by us, and much of their innards end up being exported to third-world landfills where youths scavenge for saleable parts midst sometimes quite dangerous materials. Cheap technology has meant we replace our phones every year, TV’s on average are replaced every two to three years now. Microwaves every three years. These devices have a much longer technical lifespan; a microwave oven can last up to ten years in good conditions. A smartphone could last up to five years treated well enough. But we don’t let them even get close to their real default lifespans. We throw away so we can buy a newer one, a prettier one, a nicer-branded one. There’s often no other real difference other than aesthetic value and/or the want for the latest hardware. We are a wasteful society, exacerbated by how cheap things have become. £30 microwave? Nah, let’s get rid of that one. There’s a nicer branded one on sale for £49.99! It’s got to be better, right? I mean, it was more expensive and is a better make! And it’s a SALE! We must simply get this while we can!

Hell, even I’ve had that line of thought in the past. I don’t think there’s much shame in admitting how wasteful we are, and that really we can all do something about it. But if costs rise, that will force our hand. We will be less likely to be wasteful if things rise by a percent or two above inflation. We will make good use of what we have. And this will arguably mean better conditions for the workers too, as they will not be pushed so hard as to keep up with unreasonable demands. Full circle? Damned right.

I know we don’t all want to accept that rising costs are good because truth is, they’re not always good. Mostly they are bad. Above-inflation energy price hikes, higher taxes, paying more for the everyday essentials. But those things are all legislative. Recycling is a personal choice and we often do it badly, often doing stupid things like believing the Toyota Prius and its international sourcing of elements like nickel and tin and aluminium and stuff from the four corners of the world somehow makes it environmentally friendly just because it uses a little bit less petrol. Many of the gadgets we buy now however are luxuries and we take them for granted. We replace when something new and shiny comes out. Far too quickly, without any thought for the actual impact of what we are doing. Perhaps making them a little bit more expensive will remind us all that really, our own hunger for cheap technology and gadgets is perhaps the most destructive force in the world to date. It means more pollution from shipping and manufacture to more landfill when some of the recyclable parts have to be disposed of. For all the talk of carbon footprint, we rarely look into the actual realities of how much pollution and waste goes on. We don’t think about the human cost. We don’t think much about it at all.

We could all do with being less wasteful. And there’s probably no better way of reminding us of that than simply having things be more expensive because that’s how the market just is. To learn the true cost, and learn to enjoy and appreciate what we have when so many are working day in and day out for you to have that shiny PS Vita or 3DS in your hands. To slow down and remember how lucky we actually are in so many cases to have games consoles, and TVs, and smartphones. This isn’t an environmental message – it’s just, I think we should be more aware of the value of things we have. I save money for my luxuries whilst others take out cash loans for their gadgets. That’s the way I was raised. Don’t rent, save up and buy. Don’t borrow, save up and buy. I understand why others do it. But it is wasteful and you’re paying often far more for something that you’ll probably have thrown out before you’ve even finished paying the damned loan off!

Some may find the idea of paying more abhorrent. Some may even argue that this will end up with weaker economies. It might. But at the current rate? It’s a bit artificial anyway and eventually someone is going to run out of money. And the truth is all those millions of iPhones and Galaxy S3’s you see in the news and media will be replaced next year anyway. Something new will come along. They will either send their phone off to some company that pays for it (and ships some of it off itself after stripping what they think is valuable from it) or, like half of the world, they will leave it lying around until eventually it finds it way into the bin. And then in landfill. Somewhere. Good for the economy? Perhaps. But terrible for the world and the workers making all those parts on short notice to fill demand.

There is no easy solution to some of these problems. But we are a wasteful society, and so many upgrades are unnecessary. Perhaps the good thing is that we might realise how good what we have really is and adjust accordingly.

Because we really have never had it so good…

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One Response to “China Ain’t Cheap No More – and that might be a good thing…”

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