20100611 Foxconn raises could change China

Foxconn raises could change China

Friday, Jun 11, 2010, Page 8

Hon Hai Group (鴻海集團) has announced two salary raises in a week for its Foxconn plant in Shenzhen, resulting in a total raise of 122 percent. The event has shaken the Taiwanese stock market, shocked Taiwanese businesspeople along the southern China coast and changed the environment for China’s export-­oriented processing industry. Many Taiwanese investors and other foreign businesspeople now worry that the era when China was a low-cost paradise has come to an end with Hon Hai’s massive salary increases.

Contract manufacturers rely on low labor costs to make relatively small profits. However, when a society has developed to a certain level, labor costs increase. This means that businesses cannot continue to rely on low costs alone to make a profit. The fact is that industries in coastal areas of China have experienced a series of collective demands for salary increases. Workers at Honda’s Chinese plants are striking for higher salaries and those at a Taiwanese-invested mechanical plant in Kunshan in Jiangsu Province went on strike last Saturday, demanding pay raises and an improved work environment. The number of workers on strike soon reached 1,000 and they have refused to leave despite efforts by the police to disperse them. Not until the company’s chairman promised to raise salaries and improve the quality of food and the work environment did the strike end.

Some people are guessing that Hon Hai’s highly unusual double pay raise may be the result of Chinese government pressure and others think China wants to get rid of Hon Hai and let a local Chinese company take over as the king of contract manufacturers. However, there is currently nothing to back up either viewpoint.

Hon Hai is the first company to react to the calls of Chinese workers for higher pay. In this context the raises are both a passive, defensive measure and an aggressive strategic attempt to deal with a new situation.

On the one hand, the raise counteracts the negative impact of the 12 suicides at Foxconn’s Shenzhen plant, as it may improve morale among workers and alleviate concerns that Foxconn is a sweatshop. Labor stability will probably be higher than before the problems began and production will also become more predictable, which will result in higher productivity.

On the other hand, Hon Hai sold its worker dormitories to the local government and then raised salaries to subsidize workers renting their accommodation from the government. This also means that the company has passed the hot issue of the workers’ leisure time on to the government and it no longer has to take responsibility for its workers’ lives. The initiative to raise salaries will increase public income and raise workers’ buying power, and that will help the company enter the 3C — computer, communication and consumer electronics — market. When a market leader such as Hon Hai offers such massive salary increases, it puts great pressure on other electronics companies and might even force competitors out of the market. In addition, the increased expenditure can be passed on to US, EU and Japanese companies so that it does not affect Hon Hai’s profits. The move could even turn out to be a crucial first step toward the transformation of China’s labor-intensive industries.

Another side effect of the big raise could be that some Taiwanese companies see more clearly the uncertainties of the Chinese market and decide to return to Taiwan to invest in automated plants. If that is the case, then Taiwan should thank Terry Gou (郭台銘) for such an unexpected gift.