Chasing cheap labour in a global economy is easy at first, but becomes harder over time. Every supplier of goods and services wants the lowest cost base and the highest margin and cheap labour will always be a major factor. Managing costs has become somewhat of an art form in this connected world and often work simply flows from one low cost center to another in search of cheap labour. Today components may have to be source from one specific place or a limited number of options. All the various components may be sourced from many countries and then merely assembled in another and then transported and sold in the most profitable markets.
So the New York Times today reports on changing situation and aspirations of China and the potential impact on gadgets such as Mobiles and the iPad. China’s labour costs are rising and being fuelled by worker shortages, a booming Chinese currency, worker unrest, inflation is rising so is the cost of housing and consumer affluence. Wages in China since 2005, have risen by over 50% and now are under extreme pressure to rise significantly again. China’s currency has also appreciated against the US dollar since 2005, and is now expected to rise about 3 to 5% a year for the next several years.
You can see the same on many Asian countries and what was cheap a few years ago is no longer the case. China labour will and can be moved from areas such as Shenzhen to cheaper and more rural areas, but the same issue slowly reappears. It’s no different in India where centres such as Bangalore, Pune and Chennai are stating to look unattractive and new cities are opening up and becoming attractive.
As we about to fly out to India again to our digital content factory in Pune and the in Coimbatore we note that the labour rates vary significantly between the two. We will also visit our team in Bangalore which is different again. There are so are many other factors that influence what one do where and the overall mix. Ability to recruit, transport infrastructure, the right raw skill set and much more effect the ability to migrate work between different cost bases. Someone was talking to us only last week about moving to Vietnam and setting up a factory there. Someone else trains their operators in the city then equips them to operate from their villages. The common factor is the cost of people and the fixed cost of doing business in a location. If you want Arabic digital conversion the cheapest place today is probably Cairo, but it is not the best place to do English or European languages as the cost base is geared to deal with other issues such as the lack of effective Arabic OCR software.
All, manufactures and service providers, chase the elusive cheap ticket but must face the reality of their business needs and stability.
The ultimate challenge is to manage the margin, and whilst companies such as Apple can accommodate rising costs within their ‘fat’ 60% margin, others making personal computers, mobiles and other electronics may not have the same levels of fat. Commodity services such as digital conversion also live on tight margins and have started to change as prices that have flattened or even dropped. There again these may start to come under pressure to rise sharply as digital demand starts to surge and capacity remains constrained.
It was interesting to read in the NYT article about the breakdown of the iPhone 4’s expensive component costs. More than a dozen integrated circuit chips accounting for some 60% of the cost of a single device. It’s claimed that Apple pays, Samsung some $27 for flash memory and $10.75 to make its applications processor; German chip maker Infineon receives $14.05 a phone and the gyroscope, by STMicroelectronics, costs some $2.60. It is claimed that the total bill of materials on a $600 iPhone is $187.51. The assembly in China is the cheap part with workers being paid less than a dollar an hour today to assemble and package the iPhone 4. However rising wage demands directly will continue to impact cost and logistics is only cheap when it is in bulk.
The most interesting point is that counties such as China and India no longer want the low end assembly and service work. “China doesn’t want to be the workshop of the world anymore,” says Pietra Rivoli, a professor of international business at Georgetown University. India is already maturing as a workforce and aspirations and wages are growing fast. The question is will the West pay more or simply flow to the next cheap source of labour?
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