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Firms based in China must adapt
Sunday, May 30, 2010, Page 8
There has been much talk about the wave of worker suicides at
Foxconn¡¦s Longhua factory in Shenzhen recently. While it appears that the issue
has caused trouble for its founder Terry Gou (³¢¥x»Ê), what may become more evident
is that it also signals that Taiwanese companies operating across the Taiwan
Strait are facing growing challenges as China attempts to modernize its economy.
Over the past two to three decades, many Taiwanese companies have relocated to
China because of the lower costs of land and labor. Through the use of China as
the ¡§factory of the world,¡¨ these firms have been able to ship products to many
other countries and build up their businesses with great success.
Foxconn, known in Taiwan by the name of its parent, Hon Hai Precision Industry
Co, is not just one of these successful Taiwanese businesses; it is perhaps the
most successful one. It is also the world¡¦s largest contract maker of electronic
products, thanks to its ability to control costs and improve efficiency, as well
as Gou¡¦s stringent work ethic.
However, the same factors that have been key to Foxconn¡¦s strength and that of
many of its Taiwanese peers in China are now obstacles to further progress. They
seem to face a bottleneck in at least three ways.
First, many Taiwanese firms that have long relied on China¡¦s ample labor supply
and low wages are now faced with a severe shortage of migrant workers in some of
China¡¦s coastal provinces and a demand for higher minimum wages by some local
governments there.
Foxconn announced on Friday it would increase wages for its Chinese factory
workers and accelerate plans to start operations in inland provinces. This might
be the company¡¦s immediate response to the spate of suicides, but by doing so it
can help the company deal with the migrant worker problem in the longer term.
However, unlike Foxconn and other large companies, small Taiwanese companies
will continue to face problems under financial constraints.
Second, contract manufacturing has enabled Taiwanese companies to focus on
efficient manufacturing in their scale and price competition with rivals.
However, a major drawback of this business mode is the extremely small profit
margin compared with branded products. Without sufficient investment in brand
building, innovative design and technological research and development,
Taiwanese contract manufacturers will continue to find it difficult to exit from
this perennially low-margin business.
Third, like other multinational companies in China, it appears to be a problem
for Taiwanese firms to manage their employees there when their operations become
bigger. For Foxconn, a firm that employs more than 800,000 people in China,
personnel management is much more difficult than product management.
Moreover, businesses these days tend to emphasize a performance-driven,
discipline-oriented system within a cutthroat competitive environment. However,
businesses in China also have to pay extra attention to accelerating societal
and cultural changes as the country transitions from a command economy to a
socialist market economy.
Amid worries about a contagion effect from the recent spate of suicides at
Foxconn, the company and the local governments should take more steps to deal
with the problem responsibly, although there are no simple, short-term solutions
to a complex social problem like suicide. From a long-term perspective, however,
this mishap indicates that Taiwanese businesses are facing a dilemma about how
to transform their business mode to cope with China¡¦s changes.
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