The Financial Times is today reporting that global contract manufacturer Foxconn has imposed recruitment freeze across most of its factories in China because of production slowdowns involving Apple’s iPhone5. The current freeze is in effect until at least the end of March. In its reporting, FT indicates that hiring has stopped for both the iPhone and iPad production lines in Shenzhen and Zhengzhou. Both iPhone and iPad component parts plants in Taiyuan and Chengdu is additionally mentioned. FT attributes this hiring freeze as an indication of weakening demand for Apple products. The fact that this announcement is timed after the Chinese Lunar New Year holiday, when migrant production workers typically do not return to factory jobs is being taken as an indicator that headcount reductions could be more pronounced in the coming weeks.

Naturally, Wall Street investors responded negatively to this development.  Of late, Apple stock has been rather volatile as many investors have bailed from the peak highs of just a year ago. The spin seems to be that Apple’s supply chain is communicating a general slowdown in production orders and output volumes, which resonates as negative news.

Supply Chain Matters is of the view that this announcement of a hiring freeze at Apple’s prime contract manufacturer has more to do with responding to a broader strategy that is underway.  The supply chain community is well aware that direct labor costs have been accelerating across China for a number of reasons. Increased social pressures among China’s workforce to seek gains in China’s wealth coupled with increasing tensions over labor and social responsibility practices have led to a more an active and vocal workforce.

Foxconn had already indicated that it would aggressively invest in more robots and factory automation across its production facilities to increase productivity. It is no secret that Apple has boatloads of cash, much of which is tied up in non-U.S. accounts. One of the smart uses of some of that cash is supporting increased investments in factory automation, allowing Apple products to be produced in multiple geographic regions. Foxconn earlier announced an effort to support more open union representation across its factories in China.  We interpreted this move toward more open union representation and an active worker voice as an effort to ease some of the tensions that will surely come over the coming months, also signifying the laying the groundwork for increased factory automation.

Thus, we believe these announcements are signs of broader strategies at play within Apple’s supply chain, strategies that will continue to unfold in the coming weeks. Rumors persist of potential new Apple products in the pipeline, including a lower cost iPhone with a greater range of sizes and colors, a potential launch of an electronic watch line and Apple’s possible entry into televisions. These are all signs pointing to the need for increased factory automation and longer-term shifts in factory sourcing.

Watch for even more announcements in the coming weeks.

Bob Ferrari