Apple Corporation released iPhone 4 on June 24, 2010 and sold more than 1.7 million units in the first three days. To prepare for the launch of the new product, Apple contracted with the Danshui Plant No. 2 to assemble the new iPhones. Danshui Plant No.2, a contract manufacturer in southern China that assembles electronic products for companies wishing to save on labor costs, received a one-year contract starting on June 1, 2010 with the Apple Corporation to assemble 2.4 million iPhone 4s. In the first three months of the contract it became obvious that the plant was unable to assemble the expected 200,000 iPhones per month and was operating at a loss. Although the plant is ...view middle of the document...
2 was operating at a loss of $672,000.
Based on the current operating report, the plant is missing the targeted production line with a shortfall of 10%. Even with a 90% production rate for the first three months of the contract, the plant is not meeting the expected $100,000 profit budget and is operating at a loss of $672,000 (over the expected $90,000 expected profit budget based on the 90% production rate). Based on current modeling, this is a significant loss of profits. Danshui Plant No. 2 needs to formulate an aggressive production schedule and profit modeling for the remaining 9 months of the contract to meet the contract required, to avoid significant profit losses during the term of the contract, and satisfy the Apple Corporation to gain future contracts.
Based on our analysis of the situation, we feel that the number one cause of the shortfall is the labor problems facing the Danshui Plant No. 2. Although the plant has raised the wages by almost 30%, it cannot find enough qualified workers to hire. Although this figure is higher than originally budgeted by the plant, it is still not enough to compete with its competitor, Foxconn, where starting wages for skilled labor have increased by 35%. Even with the current wage increase, the Danshui Plant No. 2 will need to ramp up the production for the remaining nine months to gain profitability. This may be a challenge for the plant as the plant was built based on a cheap semi-skilled labor field, meaning that current workers may not be skilled enough to perform the complex tasks required to assemble the new iPhone 4.
Another issue, which is also partly based on the skilled labor issue, is the fact that the Samsung flash memory is easily damaged by heat if not properly handled during the installation. One thousand flash memory units were damaged in August due to mishandling. Although the Samsung heat shield installation fixed the problem and the subsequent Apple revenue recovery covered the costs of the heat shield, there was still a significant loss of production in the first three months due to the flash memory issue.
It is obvious that Apple, based on the fact that the plant had assembled computer hard drives and was able to obtain semi-skilled workers at a cheap price, trusted Danshui Plant No. 2 with the new iPhone 4 contract. Although the labor cost was attractive to Apple, it revealed a major weakness for the plant. How does the plant justify paying wages of less than one dollar per hour, and expect to find skilled workers expected to perform the 140 steps to assemble the new iPhone 4? Even with the current almost 30% increase in wages, it cannot fulfill its current production schedule per month.
To overcome this issue, the plant should consider a breakeven analysis to realistically determine the actual number of qualified workers needed to meet the production schedule and the highest percentage of wage increase it can provide them while still remaining...