China's Cost Increases — As Captured by the

Even though regular readers of Spend Matters and other procurement and supply chain publications are all too familiar with the issue, the China price is starting to rise once again (the last time the "China price" was such frontline and frequent industry news was when China changed its VAT rebate program during the low cost country sourcing (LCCS) heyday). But procurement and supply chain geeks like us are not the only ones reading the headlines about the changing China sourcing game -- and how a way of life built around a glut of cheap imports made possible through Chinese economic and monetary policy could change going forward. No, the masses are starting to pay attention as well, as witnessed by this detailed article in The New York Times that takes the example of the iPhone 4 to show how China price increases could reshape not only where we buy from as professionals, but how much we can afford to buy as consumers.

The story notes that the component and cost breakdown of the new generation iPhone does not yet reveal "that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones." In an effort to maintain as close to current cost structures as possible, "Desperate factory owners are already shifting production away from this country's dominant electronics manufacturing center in Shenzhen toward lower-cost regions ... even deep in China's mountainous interior."

The NYT nails the total cost components of the iPhone on the head when it notes that despite a relatively low direct labor cost of approximately 7%, according to "some estimates ... analysts say most companies in Apple's supply chain -- the chip makers and battery suppliers and those making plastic moldings and printed circuit boards -- depend on Chinese factories to hold down prices. And those factories now seem likely to pass along their cost increases." In other words, even though Apple won't see much of an increase in the final assembly costs of the iPhone as part of its contract with Foxconn, Foxconn is certain to pass along the price increases from its sub-tier suppliers. Accordingly we could see the "total bill of materials on a $600 iPhone" of $187.51 (according to iSuppli, cited in the article) increase materially in the coming quarters and years. As will the costs of other items manufacturing or exported from China as well.

Jason Busch

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