THE AGREEMENT of Foxconn Technology to improve the lot of its 1.2 million workers in China who make Apple’s iPads and iPhones is a signal that China is losing its title as the world’s lowest-cost producer of everything.

It is not a pure economic argument, but an ethical one too that is gaining momentum following Apple’s unprecedented decision to allow the largest investigation ever into a US company’s operations abroad.

After years of squeezing the profit margins of contract manufacturers making the gadgets beloved by consumers worldwide, the time is drawing nearer when big brand names may have to forgo some of those profits to overcome criticism that their products are built on the back of mistreated Chinese workers.

“The time of low costs and cheap labour in China has come to an end,” says Jay Huang, chief financial officer of Taiwan’s Wintek, a maker of touch panels for Apple and other brands with annual revenues last year of some $3 billion (€2.3 billion).

“People think the market should offer cheap products; in the past they came at the cost of cheap labour in China and workers’ rest time and welfare. But now we all agree that things have to improve and, as an ethical manufacturer, we must improve the welfare of employees.”

Wintek has boosted amenities for its workers, including the installation of video conferencing to call their families. Another Apple contract manufacturer, Pegatron, has reorganised some workers away from single-task jobs into multiskilled teams.

In a landmark agreement last week, Apple and Foxconn agreed to tackle violations of conditions among the Chinese workers assembling the iconic gadgets of the American firm.

Taiwan’s Foxconn, which also makes products for Dell, Hewlett-Packard and Sony, agreed to the changes after the independent Free Labour Association surveyed three plants and 35,000 workers.

Foxconn, whose subsidiary Hon Hai Precision Industry is the main assembler of Apple products in China, will hire tens of thousands of new workers, eliminate illegal overtime, improve safety protocols and upgrade workers’ accommodation and other amenities.

Apple is not the first big brand to respond to criticism over how its products are made. Nike made sweeping changes in the 1990s after being rocked by similar criticism.

China’s economics and policy direction now suggest workers are a more powerful force, though. Labour shortages and double-digit wage inflation give workers more choice. They are more likely to jump to another job to secure higher pay. The government has pledged to lift migrant factory workers wages to ease wealth inequalities in the country.

In response, many manufacturers are shifting to cheaper inland regions to keep costs down.

“What makes it different this time is that there are more internal reasons,” says Zhigang Tao, professor in the Faculty of Business and Economics at the University of Hong Kong.

“In the past they were foreigners such as US labour groups who flagged awareness of China’s labour rights; but now the bigger driving force is from inside China – a rising yuan, social harmony and wealth redistribution.

“China has to change from low-cost and pollutive production to further its development.

“It’s a turning point for the whole country. It’s also part of the overall strategy to change to more domestic consumption and less exporting.”

It remains to be seen how much major brands will give up so that their contract manufacturers can afford to upgrade conditions for workers.

Critics say there is often a gap between the rhetoric of high-flying corporate social responsibility and actual practices on the ground.

“In the past, there has been a brief moment of exposé and outrage around revelations and promises are made, then everything goes back to business as usual,” Thea Lee, deputy chief of staff for the US AFL-CIO labour union group, says.

Hon Hai’s results show it produced a profit margin in 2011 of 2.94 per cent, down from more than 9 per cent in 2001. Analysts say the profit margin on Apple contracts is possibly as much as 4 per cent.

HP chief executive Meg Whitman, for one, recognises that Foxconn may have little room for manoeuvre on cost.

“If Foxconn’s labour cost goes up . . . that will be an industry-wide phenomenon and then we have to decide how much do we pass on to our customers versus how much cost do we absorb,” she said in February.

Meanwhile, contract makers are looking for solutions. In two factories, Pegatron staff work in a group and rotate through multiple tasks rather than doing a repetitive task on a traditional conveyer line.

“The pay is higher because of the multiple skills required in a worker, but then the productivity is also higher,” says Charles Lin, chief financial officer of Pegatron, which also supplies Taiwan’s Acer and Japan’s Toshiba.

As well as the video conferencing, Wintek has added new entertainment facilities in worker dormitories, including weight-training machines, pool tables, table tennis and audio facilities.

It has even increased food choices, for example Western-style breakfasts.

Small contract firms that lack a big backer like Apple will be under less pressure to take action on wages and conditions.

“Market chatter is that Apple is paying for Foxconn’s pay rise this time; it’s like a marketing fee for Apple because it cares a lot about its environmentally caring image,” says Ming Chi Kuo, an analyst at KGI Securities in Taipei.

“For smaller component suppliers who don’t have Apple paying the bill for pay rises, they face big cost pressure.”

In a country with a minimal social safety net, many Chinese workers are solely focused on pay. They take jobs that offer the chance for a lot of overtime, even if working conditions are not great.

“I think we will more see improvements in working conditions as workers have better choices,” says David Lee, a sourcing expert with Boston Consulting Group, “but the main thing that attracts Chinese workers is pay.

“People are much more focused on how much money they can bring home, rather than living conditions and working conditions.”

That is very much the view of one Foxconn worker.

“We are here to work and not to play, so our income is very important,” Chen Yamei (25), from the southern province of Hunan, said outside the Longhua plant in the south of China last week.

As for working conditions, she had no complaints. “My brother owns a little factory here and the conditions are terrible.”