What Will AAPL's Profit Margins Be? Just Ask Foxconn... And Discover A Stunning Development In China-US Wage Parity

Tyler Durden's picture

In just over an hour Apple will report earnings which are expected to be a sole silver lining among the otherwise dreary retail landscape of the fourth quarter. However, those curious for an advance glimpse of what AAPL's margins may be are advised to look no further than its chief supplier - Taiwanese mega contract manufacturer FoxConn, with over 1.2 million employees on the mainland. The reason Foxconn may be of interest is that as Reuters reports, as a result of soaring wages on the mainland, and in its ongoing strategy to keep worker compensation as razor thin as possible, the fabricator is now actively looking to expand outside of China. Among the places considered? Indonesia of course. And, drumroll, the United States! In other words, from the perspective of Foxconn, US labor now has greater wage competitiveness than China.

From Reuters:

Beset by rising costs and labour unrest in China, Chairman Terry Gou told employees on Sunday that Foxconn is considering diversifying away from its manufacturing heartland. The world's largest contract maker of electronic goods has little choice if it's to protect margins and stay ahead of peers who have adapted the Foxconn playbook into their own success stories.

 

"The U.S. is a must-go market," said Gou, speaking at the group's annual party on Sunday to mark the end of the Chinese year. Many customers and partners have asked Foxconn to open shop in the U.S., Gou said, with an eye on advanced manufacturing much closer to their home base.

 

At the same time, Indonesia will be a top priority this year as a potential production base with attractive costs and skills. That would tie in with Foxconn's deal to design and market phones in the country with BlackBerry Ltd as the Canadian company seeks to reverse its decline in the smartphone business.

 

"Foxconn has no choice but to do it," said Danny Lee, a fund manager of Mega Financial Holding's fund unit. "China is no longer a manufacturing hub for companies worldwide, especially so for the PC industry."

 

In the U.S., Foxconn businesses like flagship unit Hon Hai Precision Industry Co Ltd, Foxconn Technology Co Ltd and FIH Mobile could take advantage of geographical proximity to open up new deals with partners like Apple as they develop new gadgets.

 

"I think they're looking more closely at the U.S. in order to move closer to some of their biggest clients. Obama is also really pushing to return manufacturing to America and boost employment opportunities," said Kuo Ming-Chi, an analyst at Taipei-based KGI Securities.

This is indeed a stunning development: recall that we asked, rhetorically, back in May 2011 "With China Forecast To Reach Wage Parity With The US In Five Years, Is A New Manufacturing Golden Age Coming To The US?" Or some time in early 2016. Well, nearly 3 years later, we get the first proof that wage parity may indeed be coming, and much faster than previously expected.

Is the Fed to thank for this imminent manufacturing renaissance? Recall what we said in 2011:

the more the Fed exports inflation, paradoxically the faster the US manufacturing job base would see a long overdue renaissance. Which certainly means that the Fed will never stop with its monetary easing stimulus until such time as labor costs in the two countries, on whatever subjective metric is dominant, finally hit parity. The only question, as noted above, is what will China do in the interim as it realizes the Fed has put it in check - will China focus on developing its middle class, with an outcome being the mirror image of the current Nash equilibrium, in which the Chinese middle class would buy from the US, or will China defect before the "export country" to "consumer class" transition is complete and everything falls apart.

It is quite possible that while China was napping, the Fed's exporting of wage inflation just succeeded to get the US to relative wage parity with China - something most considered impossible as recently as 5 years ago. However, if indeed true, this means that the Chinese response will only have more urgency now that it suddenly may find itself competing with workers from places such as the US.

In the meantime, if Foxconn's margins have indeed collapsed as the above would seem to suggest, watch as they pass through these rising labor costs to its marquee clients. Like Apple. For the answer if this indeed happened, we will know in just about an hour.