September 30, 2012
Weekly Market Outlook
By Keith Schneider
Apple stock dropped almost 7% this week as major riots broke out in a manufacturing plant operated by Foxconn. It occurred in the city of Taiyuan in mainland China, and at its epicenter was the iPhone 5. The cause of riots was not the clamoring to get the latest Apple gadget, but rather working conditions in producing them. Sections of the plant remain closed and employees are now working under armed guard since the riots began.
It embroiled some 2000 plus workers and over 5000 police. The issues include low pay and excess forced overtime. However, to its credit, Foxconn did respond to worker complaints after a rash of suicides earlier this year by deploying netting to deter wannabe suicides. Mysteriously, throughout China, iPhones and iPads were not able to transit information about the riots. Rumors are that Apple CEO Tim Cook is working overtime along with the Chinese government to repair those glitches.
Let’s get real... Apple is enjoying its well-deserved dominance as the world's most valuable company based on a convergence of many things. It's fanatical attention to innovative design created the best user experience. Consumers are willing to pay a big premium for Apple's design as well the "cool" factor. Many of us still remember the great early TV commercials rooted in the counterculture that embodied Steve Jobs and made it the cool thing to buy. Whenever I bought an AAPL product, it always felt good, as I was supporting creativity and a buying an alternative to mainstream corporate America.
Apple's recent missteps regarding Google Maps, the exporting of jobs, and allowing the continued exploitation of foreign workers, all while pursuing dubious patent claims, is chipping away at its image. Many customers were outraged that they were forced to use an inferior map application made by Apple. Microsoft is still being sued for similar behavior when it installs its own internet browser whenever it sells Windows. What happened to "customers" and the "user" experience coming first?
Apple’s margins might not be threatened short term by the unrest at Foxconn, but expectations are that the riots will occur again. It's just a matter of when and not if, labor costs rise. Current estimates are that final assembly accounts for 7% of the $200 of what it costs AAPL to build an iPhone. Wages could easily rise by 30%. To add to the mix of possibilities is that the Chinese currency is due for a sharp rise which adds another risk to those fat margins. How much more in sales might AAPL lose as its "cool factor" slips? This bell-weather stock is certainly worth keeping a close watch on.
Don’t miss this week's video as we cover the big picture and the AAPL technical as well.
Have a Great Weekend.
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