Foxconn Laboring Under Increased Costs
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After becoming the target for a number of labor groups and attracting a ton of unwanted media attention to both itself and its main customer Apple (NASDAQ: AAPL) Foxconn, the main supplier for both iPads and iPhones, has altered a number of their practices to improve conditions for their employees after a visit from Apple CEO Tim Cook. A recent report by Reuters is highlighting the troubles Foxconn can and will have in adjusting its labor practices to meet the demands of labor associations.
The main pressure is coming from the Fair Labor Association, who wants Foxconn to reduce work hours by almost a third by 2013 for millions of workers working in Foxconn plants across southern China. Foxconn’s response has been to put in place plans to reduce overtime to less than nine hours a week from the current 20. Since Foxconn’s attitude towards their labor is pretty mercenary, so is the attitude of many of their workers. Labor issues like this are predicated on the tenet that factory work is inherently exploitative. But, in reality, it is no more or less exploitative than the individual wants the relationship to be.
China’s labor pool is becoming more and more skilled and with it capable of demanding higher wages per hour or the demand for their work over more hours of their day. The idea that it’s inhuman for a person to work a 60 hour work week should be laughable to anyone that runs their own business where the time can run far beyond that, especially in the beginning.
Foxconn’s response to this will be to continue the path of automation. They are becoming a leader in robotic assembly and have even come under fire for shifting part of their business away from building iPads to building the very robots that will obviate the need for a human to build another device. For this they have gotten criticized as well; for eliminating the very jobs that were considered sub-human in the first place.
Labor issues in frontier and emerging markets always look exploitative to those from the outside. In Vietnam, the family farm community structure is still strong enough that if the factory work is too demeaning young Vietnamese walk off the job and go home. They have a far lower tolerance than many Chinese do, from what I’ve seen here and heard directly from business owners.
Foxconn’s approach borders on the classic sweatshop, preferring to provide the minimum and getting something close to that in return. The company operates on razor thin margins of less than 1%. Whether the costs of recruitment and training are lower than the marginal increase in pay of experienced workers is unknown, but ultimately it should be their choice. Other companies do their business differently. Singapore’s Flextronics (NASDAQ: FLEX), for example, is a company that began much like Foxconn but whose approach to labor retention is different. Better? Unknown, but Flextronics has one of the best post Chinese New Year labor retention rates in the world, routinely seeing as many as 98% of their workers return after the month-long hiatus, where other companies routinely see attrition rates nearing 50%.
So while attempting to improve working conditions, Foxconn is having to now deal with a shortage of quality labor; many of its workers have quit Foxconn to seek better paying work elsewhere. The market ultimately provides opportunity. Foxconn’s short-sighted approach to labor is causing them recruitment problems. Recruitment posters are now common and they are exhorting their current staff to recruit new employees while, of course, offering more pay and better amenities.
Moreover, they are having to expand again beyond China. A $10 billion investment in Indonesia was recently announced to access one of the cheapest labor forces in Asia. Indonesia’s labor costs 40% less than China’s; according to the Japan External Trade Organization (JETRO). It will start construction of the plant in October and once completed it will be used to assemble 3 million handsets a year and increase output later. Investment in Indonesia will also give access to the Southeast Asian duty-free zone with twice the number of consumers as the United States.
Indonesia has been upgrading its economy from a raw commodity-based one into higher value manufacturing. Its GDP is currently the highest in ASEAN at 6.5% annually. The government has been offering tax breaks of up to 10 years to attract investors for machinery and telecoms. Internet and smartphone usage in Indonesia is very high given its per capita GDP. These tax breaks and the increase in Indonesia's sovereign credit rating to investment grade coupled with one of the lowest monthly wages has been attracting record levels of foreign direct investment including from South Korea's LG Electronics.
Speculation is rising that Foxconn’s relationship with Apple is driving their bid to buy a major (9.9%) stake in Sharp Electronics in order to facilitate the introduction of an Apple TV. At this point it’s all rumors and innuendo. For Foxconn, beyond their building millions of iGagdets, their business with Hewlett-Packard (NYSE: HPQ) and Sony is under serious pressure as both companies are dealing with rapidly shrinking consumer products markets.
Lenovo is rapidly going after HP’s PC business and winning, while Sony is at least nine months from the next generation Playstation into shrinking console sales with nothing compelling on the horizon save Microsoft’s (NASDAQ: MSFT) desire to merge the industry-leading Xbox into their home/mobile ecosystem strategy. Foxconn will gladly shift their capacity to produce iPhone 5s and mini-iPads as opposed to cheap HP laptops and the higher margin mix of production should be accretive to their bottom line, regardless of who produces them.
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