Apple (NASDAQ:AAPL) competes with Motorola (MOT), Nokia (NYSE:NOK) and Research in Motion (RIMM) in the mobile phone market. A recent New York Times article reported that Apple’s manufacturing costs were increasing due to rising costs in China, where Apple’s popular iPhone is assembled. Factors driving the rise in Chinese manufacturing costs include worker shortages and unrest, in addition to inflation, housing cost increases and the strong yuan.
Soaring labor costs are likely to squeeze Apple’s iPhone margins more than we forecast. However, we don’t see this margin decline impacting Apple’s stock value. Our analysis follows below.
Increasing Labor Cost Squeezes Margins…
The New York Times reported that Chinese labor costs have been rising by 10% a year since 2005. But labor related to final assembly constitutes only 7% of the iPhone’s input cost. This implies that the iPhone’s overal input cost has been rising at an annual rate of 0.7%.
But Won’t Hurt Apple’s Stock
We expect iPhone gross margins to decline from 61% in 2009 to 39% by the end of the Trefis forecast period. Increasing labor cost could depress gross margins by an additional 1%. This translates into a limited 1% downside to our $296 Trefis price estimate for Apple’s stock.
Disclosure: No positions