After Foxconn’s shock announcement this month that it would more than double base pay for some of its workers, analysts have been pointing out that consumers are unlikely to feel much impact.

“We frequently have double-digit percentage swings in the price of D-Ram [chips] or [LCD] panels, and those are the ones that matter,” says Kevin Chang, analyst at Citigroup. “The impact from the recent labour cost changes is going to be minimal.”

That is because Chinese labour accounts for just over 3 per cent of Foxconn’s total cost of goods sold, and for an even lower percentage of the final retail price of products such as Apple’s iPhone.

But inside China, the labour woes that have shaken the country’s main export manufacturing hub are pushing crucial changes on its economic map, and Foxconn is at the forefront of those adjustments.

“The labour cost increases will be dealt with by increasing productivity, passing on to customers and moving production to inland China,” says Manish Nigam, head of Asian technology research at Credit Suisse. “And the relocation within China will be the most important force.”

The move away from the coastal locations of the Pearl and Yangtze river deltas, still China’s main manufacturing hubs, to other locations is not new.

Some Taiwanese contract manufacturers started diversifying their locations on the mainland as early as a decade ago, and many now have factories in scattered provinces such as Jiangsu, Sichuan, Shandong and Liaoning.

That can make a big difference. In Jiangsu, wages are 86 per cent of the level in Shanghai, according to a research report from Credit Suisse. In Shandong and Shanxi provinces, where Foxconn already has big manufacturing facilities, the wage levels are 82 and 76 per cent, respectively. In Chongqing, the metropolis in central China, wages are 61 per cent of Shanghai levels.

Chongqing is the new frontier for the electronics industry. HP, which announced as early as 2008 that it was building a new manufacturing site there, is expected to start production next year. All its major manufacturing partners have followed.

Foxconn, as well as Quanta Computer and Compal, the world’s largest and second-largest contract manufacturers of laptops, have set up shop in Chongqing. Their moves, in turn, have convinced key component makers to come too.

“In Chongqing, we will soon have the entire ecosystem in place,” says Edmund Ding, spokesman at Hon Hai, Foxconn’s parent. Foxconn produced the first laptop from its Chongqing plant on May 18.

Two years ago, Foxconn already had plants all over the country, but was struggling to convince some customers to migrate away from its most established locations.

“In the most developed locations, people know that there’s plenty of skilled labour available which you can take on board quickly and which allows you to ramp up big orders quickly,” says Mr Ding.

That confidence was absent when technology demand returned after the financial crisis last year.

But now, increased outsourcing by several branded technology companies is adding to the momentum.

Dell told analysts this month that it would outsource as much as 80 per cent of its production this year, up from 43 per cent in 2009. Lenovo plans to increase outsourcing to 55 per cent from 35 per cent last year.

Foxconn, with about 1m employees, has about 35 per cent more people than all its competitors in electronic manufacturing services combined, and has already identified the next frontier. It is in talks with the local government in Zhengzhou to build its next mega-plant there.

In Zhengzhou – the capital of Henan, China’s centrally located and most populous province with close to 100m people – the company can expect not only lower wages but also hopes to negotiate more favourable deals over land and taxes.

Different from other inland provinces, Henan does not have any meaningful electronics manufacturing presence yet. But it has been one of the main sources of migrant labour flowing into the coastal manufacturing hubs.

“If we create a new hub there, people can get employment right at home, meaning they don’t have to leave for Shenzhen any more. This creates a win-win situation,” says one person familiar with the talks.

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