The following is my latest post on Digital East Asia.
After Doug’s piece reviewing the year’s events atFoxconn Technology Group (PINK: FXCNY | (part of Hon Hai Precision Industry Co. Ltd.) TPE: 2317), I wanted to comment on some of the broader implications for the Chinese economy and the Chinese worker.
CHANGING ECONOMY – CHANGING WORKFORCE
I want to call attention to a series of recent articles in Chinese media. The first comes from economist Andy Xie’s latest column (link in English) on Caing.com, the hard-hitting Chinese economic news outlet. Mr. Xie’s basic argument is that the Foxconn suicides, and the Honda worker strikes, signify that the new generation of Chinese migrant workers – unlike previous generations – are no longer content with income levels that cannot sustain an urban way of life. While their fathers’ generation were culturally willing to accept low wages to support their families back home, the new generation is more individualistic in their dreams and aspirations. In turn, Mr. Xie argues that the wage increases that have occurred en masse in recent years will drive the collapse of the growth model of the last two decades in the Pearl River Delta region – economic growth fueled by aggressively suppressing labor costs.
The logical question, if we accept Mr. Xie’s point of view, is what’s next? The new cover story (link in Chinese) of New Century weekly, the publication under Caing.com, is on this very topic. The lengthy article first argues that unlike its smaller counterparts, Foxconn is actually relatively well-positioned, in that it has turned the incidents and the wage hikes into a bargaining chip to renegotiate with its clients. In the face of the huge media scrutiny, it would be really hard for a western company to say “we won’t accept your modest price increases, which were caused by the wage hikes to prevent employees from killing themselves.” In the case of the smaller manufacturers, they have lower profits (due to smaller scale), and less bargaining power.
TRANSFORMATION: FROM LABORERS TO INNOVATORS
The much talked about shift of production to inland areas or to cheaper countries such as Vietnam is not exactly feasible either, at least in the short run. While western and central China have much cheaper labor costs, they are geographically far from both the suppliers and the markets (in the case of electronics, the export ports). That means extra costs and time to ship components and finished goods around. While in the long run the whole industry value chain will be migrating to lower labor cost areas, that transition takes time. This is why it’s not entirely surprising that Foxconn has told the Wall Street Journal that it “will expand ‘extensively’ in China, both at its existing locations and in new ones, dismissing recent media reports the firm might pull out of the country.” (Perhaps not exactly contradictorily, the above New Century article states that there is a temporary hiring freeze for Foxconn in Shenzhen, since May 29.)
The New Century article ends with a discussion on how manufacturing in the Pearl River Delta region will undergo transformation. Similar to Mr. Xie’s viewpoint, it forecasts the end of the current business model, and sees analogies to the past growth transitions of other Asian economies such as South Korea and Taiwan. Essentially, China will have to move up the value chain, competing on innovation as opposed to cheap labor.
Personally, I feel that while these articles offer interesting analyses and insightful takeaways, the actual development will be painful. It does seem that China is at a very precarious stage of growth – on the one hand, it has strong incentives to keep doing what has made it successful in the past few decades, especially in light of the global recession; on the other hand, it is clear that the old model is getting out of date and perhaps creating more problems than wealth for society. Add to this the myriad political complexities (central and regional governments have different interests, for example, which stifle the implementation of a national policy), the social grievances, the lack of welfare and the host of other issues, and suddenly it’s really hard to be bullish about China’s near-term prospects. The next decade will be an incredibly important and tough transition for China, and perhaps in future history books, the Foxconn suicides will be one of the signature events that mark the end of an era and the beginning of a more prosperous future.
Related Digital East Asia posts include:
- FOXCONN SUMMARY: Chinese Authorities Seek to Quell Rampant Speculation on Suicides – June 14th, 2010
- Foxconn Suicides May Impact the Bottom Line; Company Suspends Stock Trading as it Announces Wage Increases – June 8th, 2010
- The Chinese Internet Rumor Mill is in Full Swing as Stories of More Deaths at Foxconn Spread– May 28th, 2010
- Foxconn Suicides: A Solemn Timeline – May 28th, 2010
- A Solemn Count Goes Up Again – 11th Suicide Jump at Foxconn Warrants More Questions – May 25th, 2010
- 10th Suicide in 2010 at Foxconn; Incidents Finally Begin to Gain Wider Media Coverage – May 22nd, 2010
- An All Too Familiar Story: 9th Suicide Jump at Foxconn this Year – May 16th, 2010
- Suicide Jump Number 8 at Foxconn This Year – May 12th, 2010
- Another Death at Foxconn; That Makes Five in Just 4 Months – May 8th, 2010
- Third Death at Foxconn in 3 Months; Should Apple, Sony, Nokia and Others Be Concerned? – March 30th, 2010