"We do know that there's labor issues in general in China," Kay says. "It's clear from the suicides, it's clear from strikes that have occurred, so whether or not this particular strike was minor and cleaned up quickly or major and ongoing, we know there is an issue there. It's not just Foxconn but it's the Chinese manufacturing system in general that's in question."
He expects Foxconn and other manufacturers will increasingly deal with worker complaints, which have drawn interest beyond its borders. "As labor gets more entitled it demands more in terms of work hours, work conditions and wages and it adds expense to the bill of materials," he says.
It's not just cheap labor that makes China the center of manufacturing, Kay says. China first lured manufacturers to its coast with tax breaks and investments in infrastructure such as roads and electricity. Lax labor and environmental laws also help draw electronics makers, because they didn't have to spend money to make sure that these things were done right, Kay says.
"But then it became self-fulfilling, which is I'm sure what the Chinese had in mind. Once everyone was already there, like in Shenzhen, that's where you had to be because you need to be near your suppliers and your suppliers are all there," Kay says.
But recently, some companies like Hewlett-Packard and Acer have moved their factories to China's interior where it's cheaper to operate. Employees are not the biggest or only expense, Kay says.
"The labor input to many electronics is only 1 percent and so if your labor costs twice as much or half as much it would be the difference between a half a percent, 1 percent and 2 percent, so it's not a real big number in terms of the bill of materials cost for an electronics item," he says.
"The economics of making an iPhone are such that there has to be a tremendous distillation of value in China and then delivered to the United States so that somebody here can buy a really nice iPhone for $700 list," Kay says. "I feel like there's a tension there that is ultimately not sustainable but I don't know what the resolution is."
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