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Hon Hai stock falls on 70% wage hike
BALANCING ACT: Chairman Terry Gou said the pay increase was meant to
'safeguard the dignity of workers,' but shareholders were concerned it could cut
into earnings
BLOOMBERG AND AFP , TAIPEI
Tuesday, Jun 08, 2010, Page 1
Shares of electronics giant Hon Hai Precision Industry Co
(鴻海精密) dropped the most in a year in Taipei trading yesterday after the company
announced another large-scale wage hike at its Shenzhen, China, factories
following a spate of suicides.
The flagship of the Foxconn Technology Group (富士康), Hon Hai plunged 5.6 percent
to close at NT$117.50 in Taipei, the biggest drop since May 12 last year,
underperforming the TAIEX, which fell 2.5 percent.
Foxconn International Holdings Ltd (富士康控股), a Hong Kong-listed affiliate,
tumbled 5.5 percent before trading was halted, pending the release of “sensitive
information,” the company said.
Hon Hai expects Foxconn's shares to resume trading today. Starting October, base
salaries at the Shenzhen factories will rise nearly 70 percent to 2,000 yuan
(US$290) a month, Hon Hai said in an e-mailed statement late on Sunday.
Foxconn, the world's biggest computer components maker which also makes products
for Apple, Dell and Nokia, only last week hiked pay for its Chinese assembly
line workers by 30 percent with immediate effect.
This followed criticism that it salaries were too low for the price level in
Shenzhen, giving its staff no choice but to work overtime.
“The wage increase will reduce overtime work as a personal necessity for some
employees and make it a personal choice for many workers,” Foxconn said in a
statement.
Hon Hai chairman Terry Gou (郭台銘) is scheduled to meet investors at the company’s
annual shareholders’ meeting tomorrow in Taipei.
“The pay raise will put pressure on other companies that are currently cashing
in on China's cheap labor. The era of cheap Chinese labor is over,” said Mars
Hsu, a Taipei-based analyst with Grand Cathay Securities (大華證券).
He estimated the pay raise for workers could boost Hon Hai’s monthly production
costs by NT$2 billion (US$61.5 million).
That would account for nearly one-third of Hon Hai's profits, which totaled
NT$17.9 billion in the three months to March.
Gou said the wage increase was meant to “safeguard the dignity of workers.”
“We recognize our responsibility as a global leader in electronics manufacturing
and take this responsibility very seriously,” he said in a statement.
“We are working diligently to ensure that our workplace standards and
remuneration not only continue to meet rapidly changing needs of our employees,
but that they are best-in-class,” he said.
Foxconn said salaries at plants in other parts of China would be calculated
based on local prices and social security requirements.
Apple chief executive Steve Jobs last week defended conditions at Foxconn,
saying it was “not a sweatshop.”
“You go in this place and it's a factory but, my gosh, they’ve got restaurants
and movie theaters and hospitals and swimming pools. For a factory, it’s pretty
nice,” Jobs told a conference in California.
Allen Lin, an analyst at Taipei’s Concord Securities (康和證券), said Apple might
help Foxconn get over difficulties caused by the wage hike by passing some of
the extra costs on to consumers.
“As part of such efforts, Apple is likely to alter its pricing strategy. Apple
has so far tended to lower prices after its products have been on sale for a
while,” he said.
However, Allen Pu, who rates the stock “add” at Fubon Financial Holding (富邦金控)
in Taipei, questions whether Foxconn could pass on the price increase.
“We don’t know if clients like Apple will accept” Foxconn raising prices, he
said.
The median of 17 analyst estimates compiled by Bloomberg is for Hon Hai to post
earnings of NT$12 a share this year. The salary increase could cut that value by
36 percent, Citigroup wrote in a report yesterday.
Deutsche Bank AG estimates the raise could cut forecast earnings per share next
year by 8.6 percent to 26 percent, Taipei-based analyst K.C. Kao wrote in a
report yesterday.
In related news, Minister of Economic Affairs Shih Yen-hsiang (施顏祥) yesterday
encouraged local companies to reduce their presence in China, as higher salaries
in China would make business harder, the Central News Agency reported.
Taiwanese firms should move high-end production back to Taiwan from China, while
moving low-end activities to Southeast Asia, Shih was quoted as telling the
National Association of Industry and Commerce.
“Maybe it's time for the plants to move their production lines to Southeast Asia
or some other areas where the cost is lower,” the minister said.
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