Foxconn Looks to Southeast Asia for New Investments
Sumith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple's (NASDAQ: AAPL) main supplier Foxconn is planning an investment of almost $10 billion in one of the largest emerging economies in South- East Asia, Indonesia. The investments will allow it to draw upon a cheap labor market and a vast duty free zone.
The company was compelled to look into other Asian labor markets to hedge against rising wages and labor unrest at its factories in China.
How much pressure the firm is under right now can be gauged from its performance during the January - March period. The firm, which manufactures Apple products such as iPads and iPhones, had a profit margin of just 0.9 percent during this period.
Are the apparent problems and rising costs at its supplier a worrying sign for Apple? Well the answer seems to be no. Apple enjoys a very high profit margin Vis a Vis some of its competitors and can easily hold on any rise in supply costs from Foxconn. Foxconn is a major supplier not only to Apple, but also to companies like Hewlett Packard (NYSE: HPQ), Dell (NASDAQ: DELL), Nokia (NYSE: NOK), and Amazon (NASDAQ: AMZN).
So an increase in supply costs from Foxconn is bound to affect all of these companies across the board.
Unfortunately the effect would be more aggrieved and even devastating for Apple's competitors. Lower margin companies will get hit much harder by higher supply prices than higher margin companies. When you're running off a high revenue, low margin business model, even the slightest bump in the cost of goods sold can absolutely annihilate your bottom line. This problem is compounded when you sell a commodity product where consumer purchase decisions are made primarily based on price. Conversely, companies that enjoy large profit margins and strong brands benefit from a healthy buffer that allows them to absorb small to moderate increases in supply costs without sacrificing dollars on the bottom line.
Apple is in a far better position due to its huge net margin to absorb any cost spiral from Foxconn.
The Taiwan based supplier will start building a plant in October near Jakarta to assemble 3 million handsets a year initially and later on will look to expand operations further.
The investment is a win - win opportunity for the company and Indonesia, as the country gets a huge investment boost which will help it climb up the value chain into high value manufacturing while Foxconn on the other hand gets access to a Southeast Asian duty free zone with a huge consumer base.
As the company faces more and more heat due to the shoddy working conditions and labor unrest in China, it has no other way but to increase the wages and spending for its workforce in China. That’s when Indonesia begins to look more and more attractive for the company. According to some studies, the wages in Indonesia are one of the lowest in Asia. This is augmented by the fact that many footwear and textile firms have relocated from China and Vietnam in recent years. Monthly wages hover around an average of $113, which is only a third of China's. However one cannot count out the possibility of rising labor costs in the future.
The investment comes as good news for Apple and its competitors, who source from Foxconn. Diversifying the manufacturing process will help them hedge against problems effecting a particular country (China in this case).
Another factor which works well for Indonesia is the manufacturing cost, which taken on a monthly basis is only 60% of China's.
The Indonesian government is also making all efforts to pitch the country as an investment destination for the supplier. The government may even include tax breaks to clinch the deal if needed. It offered such breaks in certain sectors like telecom to shore up investments earlier.
Also helping the economy in the right direction and making it favorable for investments is the increase in its sovereign credit rating to investment grade.
There were also reports of Foxconn executives visiting Indonesia recently to assess the country as well as potential industrial sites.
Although one must add that it won't be all smooth sailing for Foxconn and Indonesia. There are infrastructure and land acquisition problems apart from the currency volatility which will also play on Foxconn executive's minds before they commit any invetsment.
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