Page 2 of 5 Apple et al create new working class
By Jenny Chan, Ngai Pun and Mark Selden
By the mid-1990s, Beijing's Zhongguancun Science Park and Shanghai's Zhangjiang Hi-Tech Park became prominent technology powerhouses, building on foundations of industrial development and local government support (Segal, 2003; Zhou, 2008). Over two decades, the Chinese national economy underwent a transformation from one based on heavy industry, with guaranteed lifetime employment and generous welfare for urban state sector workers, to one that relies heavily on foreign and private investments and massive use of rural migrant laborers in light of export-oriented industries (Friedman and Lee, 2010; Kuruvilla et al, 2011).
Foxconn became China's leading exporter in 2001 following the country's accession to the World Trade Organization and further liberalization of international trade. It has maintained this position
ever since (Foxconn Technology Group, 2009: 6). Foxconn's expansion is intertwined with the Chinese state's development through market reforms, and it has followed the national trajectory from coastal to inland locations in recent years.
The Chinese state attempted to rebalance the economy by initiating the "go west" project, through which financial capital and human resources were channeled to central and western provinces (Goodman, 2004; McNally, 2004). Taking advantage of lower wage levels, the strategy was designed to stimulate employment and promote ethnic unity while obtaining foreign investment. Ross (2006: 218) concludes that in Chengdu, Sichuan's provincial capital, "it was impossible not to come across evidence of the state's hand in the fostering of high-tech industry".
The creation of a new rural migrant-centered industrial class by domestic and transnational capital, with the collaboration of the Chinese state at all levels, lies behind the growing protest, driven by multiple factors. Compared with older workers, this generation of employees, the vast majority being rural migrants born since the 1980s, has strong expectations of higher wages, better working conditions and prospects for career advancement (Pun and Lu, 2010).
From the mid-2000s, labor shortages  have driven up wages and strengthened workers' power in the market, although wage gains resulting from higher state minimum wage levels and strike victories have been undermined by inflation (Selden and Wu, 2011).
Foxconn, not unlike other foreign-invested factories, adjusts basic wages and recruits mostly teens and young adults to run the assembly lines. "Over 85 percent of Foxconn's employees are rural migrant workers between 16 and 29 years old", according to a senior human resources manager in Shenzhen (Interview, 14 October, 2011). By comparison, 2009 national data showed that 42% of rural migrants were between 16 and 25 years old and another 20% were between 26 and 30 (China's National Bureau of Statistics, 2010).
In recent years, Foxconn has adapted to local labor market changes to employ more male than female workers as fewer young women become available as a result of female infanticide  reversing the historical pattern of a feminized workforce in electronics. Company statistics show that male employees increased from 59 to 64% between 2009 and 2011 (Foxconn Technology Group, 2012e: 12). This labor is employed in a production network in which vertical integration, flexible coordination across different facilities and 24-hour continuous assembly bolster its market competitiveness. It manufactures hardware components and assembles products for a very large number of global companies, with Apple being its largest client (Chan, 2013).
The Apple-Foxconn business relationship
Apple, Foxconn and China's workers are at the center of high-tech production, but relations among them are highly unequal.
Apple Computer (later Apple Inc.) was incorporated in 1977 and is headquartered in Cupertino, California in Silicon Valley. In 1981, Apple, which had initially produced its own computers, started to contract offshore facilities in Singapore, along with onshore final-assembly contractors, to ramp up upgraded Apple II personal computers (Ernst, 1997: 49-52). From the early years, it outsourced most component processing, assembly and packaging to contractors, above all in South Korea, Japan, and China.
In 1982, Apple Computer president Mike Scott commented: "Our business was designing, educating and marketing. I thought that Apple should do the least amount of work that it could and ... let the subcontractors have the problems" (Ernst, 1997: 49). In the 1990s, Apple, Lucent, Nortel, Alcatel and Ericsson "sold off most, if not all, of their in-house manufacturing capacity - both at home and abroad - to a cadre of large and highly capable US-based contract manufacturers, including Solectron, Flextronics, Jabil Circuit, Celestica, and Sanmina-SCI" (Sturgeon et al, 2011: 236). Today, Apple retains its only Macintosh computer manufacturing complex in Cork, Ireland (Apple, 2013a).
If Apple's competitive advantage lies in the combination of corporate leadership, technological innovation, design and marketing (Lashinsky, 2012), its financial success is inseparable from its globally dispersed network of efficient suppliers based mainly in Asia. Pivotal to Apple's growth is effective management of production by its suppliers, including final assemblers.
Apple's 2012 annual report filed to the United States Securities and Exchange Commission describes a challenge to its highly profitable business:
Substantially all of the Company's hardware products are manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company's products (Apple, 2012a: 7).
Apple identifies the concentration of its manufacturing base "in single locations" and in the hands of "a small number of outsourcing partners" as a potential risk. However, analysts observed that, "because of its volume" - and its ruthlessness - "Apple gets big discounts on parts, manufacturing capacity, and air freight" (Satariano and Burrows, 2011). Group interviews with two mid-level production managers at Foxconn's Shenzhen industrial town reveal that during the 2008-09 global financial crisis,
Foxconn cut prices on components, such as connectors and printed circuit boards, and assembly, to retain high-volume orders. Margins were cut. But the rock bottom line was kept, that is, Foxconn did not report a loss on the iPhone contract. [How?] By charging a premium on customized engineering service and quality assurance. The upgrading of the iPhones has in part relied on our senior product engineers' research analyses and constructive suggestions (Interviews, 10 November 2011; 19 November 2011).
In 2009, in the wake of recession, the Chinese government froze the minimum wage across the country. Foxconn accommodated Apple's and other corporate buyers' squeeze while continuing to reduce labor expenditures, including cuts in wages (mainly overtime premiums) and benefits (Interview, 9 November 2011).
Foxconn's operating margins - the proportion of revenues remaining after paying operating costs such as wages, raw materials and administrative expenses - has declined steadily over the past six years, from 3.7% in the first quarter of 2007 to a mere 1.5% in the third quarter of 2012, even as total revenues rose in the same period with the expansion of orders (Figure?1). 
By contrast, Apple's operating margins peaked at 39.3% in early 2012 from initial levels of 18.7% in 2007. The changes indicate Apple's increased ability to pressure Foxconn to accept lower margins while acceding to Apple's demands for technical changes and large orders. Foxconn's margins are constantly squeezed by technology giants including, but not limited to, Apple. As Foxconn expanded its plants in interior China (and other countries), expansion costs and rising wages further impacted revenues.
Figure 1. Operating margins: Apple and Foxconn compared, 2007-2012.
Data from January 2007 to September 2012 were non-consolidated results for Foxconn. Starting from Q4 2012, Foxconn announced consolidated results. Source: From Q1 2007 to Q3 2011, see Bloomberg (2012); From Q4 2011 to Q3 2012, see Wikinvest (2013) for Apple; From Q4 2011 to Q3 2012, see Foxconn Technology Group (2012a; 2012b; 2012c; 2012d).
Twelve major business groups within Foxconn compete on "speed, quality, engineering service, efficiency and added value" to maximize profits (Foxconn Technology Group, 2009: 8). "Two 'Apple business groups', iDPBG [integrated Digital Product Business Group] and iDSBG [innovation Digital System Business Group], are rising stars in these past few years", stated a Foxconn Chengdu production manager,
iDPBG was established in 2002. At the beginning, it was only a small business group handling Apple's contracts. We assembled Macs and shipped them to Apple retail stores in the United States and elsewhere. Later we had more orders of Macs and iPods from Apple. In 2007, we began to assemble the first-generation iPhone. From 2010, we also packed iPads, at the Shenzhen and new Chengdu facilities (Interview, 6 March 2011).
iDPBG currently generates 20% to 25% of Foxconn's business. To increase its competitiveness, Foxconn Founder and CEO Terry Gou established iDSBG in 2010 when the company won the iPad contracts. iDSBG now primarily manufactures Macs and iPads, contributing 15% to 20% of company revenues. "Approximately 40 percent of Foxconn revenues are from Apple, its biggest client" (Interview, 10 March 2011).
Dedrick and Kraemer (2011: 303) find that computer companies currently "engage in long-term relationships" with their main contractors but sometimes shift contracts to those who can offer better quality, lower cost or greater capabilities. Foxconn's vice president Cheng Tianzong told journalists, "Some major clients are very concerned with the Foxconn employee suicides, but many of them are our long-term partners. So it doesn't affect Foxconn's orders" (quoted in Zhao, 2010).
However, soon after the spate of suicides at Foxconn's facilities in spring 2010, Apple did "shift some iPhone and iPad orders to Pegatron to diversify risks", according to a Foxconn commodity manager at Chengdu's factory (Interview, 13 March 2011). Apple has tightened controls over Foxconn by splitting contracts with another Taiwanese-owned firm, Pegatron. This diversification demonstrates the power asymmetries between Apple and its manufacturers as Foxconn and others seek to retain market position as producers of the iPhone and iPad.
Apple (2013b) obtains products and services "within tight time frames" and "at a cost that represents the best possible value" to its customers and shareholders. Figure?2 (below) shows the breakdown of value for the iPhone between Apple and its suppliers.
Apple's strength is well illustrated by its ability to capture an extraordinary 58.5% of the value of the iPhone despite the fact that manufacture of the product is entirely outsourced. Particularly notable is that labor costs in China account for the smallest share, only 1.8% or nearly US$10, of the US$549 retail price of the iPhone. This ineluctable drive to reduce costs and maximize profits is the source of the pressure placed on Chinese workers employed by Foxconn, many of them producing signature Apple products.
While Apple and Foxconn together squeeze Chinese workers and demand 12-hour working days to meet demand, the costs of Chinese labor in processing and assembly are virtually invisible in Apple's balance sheets. Other major component providers (such as Samsung and LG) captured slightly over 14% of the value of the iPhone. The cost of raw materials was just over one-fifth of the total value (21.9%).
Figure 2. Distribution of value for the iPhone, 2011.
Source: Adapted from Kraemer et al. (2011: 5).
Representatives from Apple and other major clients regularly monitor onsite quality processes and production time to market. A mid-level Foxconn production manager recalled: "Since 2007, Apple has dispatched engineering managers to work at Foxconn's Longhua and Guanlan factories in Shenzhen to oversee our product development and assembly work" (Interview, 29 November 2011).