Foxconn Offloads Management of Employee Housing; Are Wage Hikes an Aggressive Move Against Competitors?

The following is my latest post on Digital East Asia.

Global media attention over Foxconn Technology Group (PINK: FXCNY | (part of Hon Hai Precision Industry Co. Ltd.TPE: 2317) has gradually subsided, after the company aggressively raised wages and efforts at curbing the suicides have taken effect. Foxconn management hasn’t stopped adjusting their strategy though. Xinhua News Agencyreports (link in Chinese) on June 25 that Foxconn has offloaded the management of its employee dormitories in Shenzhen to two local property management companies.

According to Xinhua, Foxconn employs 450,000 people in Shenzhen, of which 220,000 live in company dormitories, and 230,000 live in rental housing near the production facilities. By exiting the management of the dormitories, Foxconn has largely relieved itself of the responsibility of any future suicides at these dormitories. Foxconn is clearly in the process of reversing its prior strategy of providing a closed environment for workers – its sites are basically self-contained towns, complete with dormitories and recreational facilities.

Another Chinese newspaper, Economic Observer, also has an interesting article (link in Chinese) on Foxconn’s two wage hikes. The article claims that the first hike, raising Foxconn’s mainland China employees’ wages from RMB 900 (US$132) to RMB 1,200 (US$177) per month, was largely planned to match the anticipated minimum wage increase of the Shenzhen government – in other words, this hike had been in planning for some time, and it was not originally in response to the suicides, but Foxconn made the most of it PR-wise.

What was really surprising though, was the second wage hike just a few days later, from RMB 1,200 (US$177) to RMB 2,000 (US$295), this time specifically for Shenzhen employees. According to the reporters’ sources, this decision was made by Chairman Terry Gou individually, and had not gone through senior management discussion. The thinking behind the move is threefold:

  1. First of all, Gou does indeed plan to move production away from Shenzhen and to cheaper locations inland – it is rumored that he will only keep the Apple production site (employing less than 100,000 people) in Shenzhen, and move the whole production of mobile handsets (non-Apple brands) elsewhere. Therefore, the impact of the hike is much more limited compared to if Foxconn would maintain its current scale in Shenzhen.
  2. Secondly, Foxconn is trying to maximize its short-term opportunity to re-negotiate contracts / pricing with its clients, thanks to the high profile suicides which is putting pressure on these high profile global brands. The second wage hike would therefore serve as an additional bargaining chip at the table, again from a PR perspective.
  3. Third and perhaps most importantly, the hike is an aggressive strike at Foxconn’s major competitors. Foxconn has the financial muscle and the scale to quickly relocate, but many of its competitors are concentrated in the Pearl River Delta region. Foxconn’s second wage hike has started a chain reaction where workers are demanding higher wages, thereby dealing a heavy blow to competitors. As we’ve already discussed in a previous post, economists are speculating whether the end of the Pearl River Delta’s traditional growth engine – low cost labor – is here. Foxconn is in a position to accelerate this macroeconomic shift, to its own benefit.

Still, the second wage hike is a bold gamble. It’s clear that Terry Gou is aggressively reassessing his firm’s strategy to maintain its leadership position in electronics manufacturing. Perhaps an even bigger question is, should Foxconn try to move up the value chain, and try building its own end-customer brand, the same way HTC has reshaped its corporate strategy? Otherwise the company seems likely to always face the issue of razor-thin margins, which would prompt it to try to squeeze its labor force as much as possible – this is perhaps the root of its struggle.


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