At Foxconn, success and tragedy linked

Irene Jay Liu and Fox Yi Hu
01 June 2010

As the world’s largest gadget maker, Foxconn’s revenue of US$60.8 billion last year nearly equalled the combined sales of its top nine competitors in the world.

Its titanic force of 900,000 mainland workers helps forge Foxconn’s dominance in the industry of contract electronics, but a spate of suicides has called into question the company’s reliance on cheap labour.

The massive workforce under military-style management at Foxconn reflects the country’s struggle to evolve from “early capitalism” marked by labour-intensive growth, said Hu Xingdou, a professor of economics at Beijing Institute of Technology.

“Foxconn’s management style led to its business success, but the spate of suicides also shows such management is a failure,” Hu said.

The company’s evolution from humble start-up to the world’s largest contract electronics maker is a tale with twin narratives – a story of meteoric growth and outsized influence in China, and in recent years, a harsh portrait of factory life.

Terry Gou founded Foxconn in 1974 in Taiwan with a few thousand dollars (either US$3,000 or US$7,500, depending on divergent company reports) and a belief “that the electronics products would be an integral part of everyday life in every office and in every home”. And Foxconn became the company that offered capacity and price to lure the world’s top companies, including Apple, Dell, HP and Sony.

Foxconn seized on China’s move into the global economy, becoming the country’s largest exporter and the unequivocal worldwide leader in electronics manufacturing. Until 2008, the firm’s double-digit expansions drove growth in the industry, dubbed the “Foxconn effect” by analysts.

Foxconn’s production costs are among the lowest of the industry’s top 10 producers.

While many of its competitors struggled with deficits or plummeting profits last year, Foxconn increased its profits by 37 per cent, mostly through cost-cutting. From 2008 to last year, Hon Hai Precision Industry, Foxconn’s anchor company, saw relatively flat revenues, but its net income grew from US$1.7 billion to US$2.4 billion, mostly by cutting the percentage of revenue devoted to the cost of goods from 91.38 per cent to 90.48 per cent.

The second-largest group, Singapore-based Flextronics International, saw a percentage of sales used for production of 95.36 per cent last year. Flextronics had revenues last year of about US$31 billion – roughly half of Foxconn’s.

Migrant workers jostled to apply for work at Foxconn early last year, even when other factories in Shenzhen were cutting jobs or facing closure.

“Foxconn gave us confidence when other factories laid off workers in the financial crisis,” said a 21-year-old Foxconn worker, who declined to be named. “Only Foxconn was hiring at that time and it attracted lots of applicants, including me,” the assembly-line worker said.

The company employs roughly 900,000 people on the mainland, with about 425,000 working at two of its plants in Shenzhen, the site of 13 apparent suicide attempts since January, resulting in 10 deaths. Another worker, 19-year-old Rong Bo, jumped off a building and died on January 8 at a Foxconn plant in the northern city of Langfang in Hebei province.

Company officials and critics say its sheer size is a challenge to fostering a happy and productive work environment. “A team of 900,000 workers is very difficult to manage,” Foxconn founder and chairman Guo said in response to the suicides.

Company spokesman Liu Kun said this month: “To be honest, as a company, Foxconn has taken on too much social responsibility. We are not only running a factory, but we also have to take care of the daily lives of more than 400,000 people.”

Hu, the professor, said the labour-intensive growth model adopted by Foxconn and many other mainland factories must be abandoned to help the nation upgrade its industries and move up the value chain.

“Foxconn is very famous but it only makes products under others’ brand names without independent technology,” he said. “Such factories need only low-skilled and low- educated workers. The sheer size of their cheap labour force helps them succeed.”

Electronics makers relying on labour-intensive production typically share just 5 per cent of the profit generated by the sale of their products, the professor said.

As the number of deaths has risen, Foxconn has stepped up its efforts to address the crisis, including adding thousands of psychiatric and recreational support staff, fencing off high-risk areas and stringing netting between buildings to catch people trying to jump. On Friday, company officials said it would increase the wages of mainland workers by an average of 20 per cent.

But Li Qiang, executive director of advocacy group China Labour Watch, says these measures do not address the biggest issues facing workers – an overwhelming workload and Foxconn’s high-pressure, military-style environment.

“People are expected to act like machines for 12 hours a day,” Li said. “The working environment is sterile; people don’t talk to each other. It is especially difficult to change the culture because it is such a big company.”

Foxconn workers in a computer assembly department recently told China Labour Watch: “We are extremely tired, with tremendous pressure. We finish one step every seven seconds, which requires us to concentrate and keep working and working. We work faster even than the machines. Every shift [10 hours], we finish 4,000 Dell computers, all the while standing up. We can accomplish these assignments through collective effort, but many of us feel worn out.”

Li said: “If they want to be serious about improving conditions at the factory, they need to reduce the workloads of the employees. But that would cost them money.”

Li acknowledged that the conditions at Foxconn’s factories are as good, if not better, than many other mainland factories. But as the nation’s largest exporter and the manufacturer of high-profile products such as the iPhone and iPad, the company has become a symbol of the larger struggle for factory workers’ rights. Last year, a Foxconn employee committed suicide after being accused of stealing an iPhone prototype. He told friends and family that he had been beaten by the company’s security staff.

In 2006, a British newspaper reported allegations of abusive employment practices at Foxconn. Apple launched an investigation and concluded that most of the accusations were unfounded, but revealed that Foxconn frequently violated the overtime guidelines in Apple’s code of conduct, which limits normal work weeks to 60 hours and requires at least one day off each week. In its 2006 report, Apple wrote: “The supplier has enacted a policy change to enforce the weekly overtime limits set by our code of conduct.”

The 60-hour, six-day work week limit has also been established by the Electronic Industry Citizenship Coalition, a group that counts among its members Apple, Dell, HP, Sony and Foxconn, which joined in 2008.

But history shows that the industry’s efforts to monitor itself in this area have had limited results.

Four years on, it appears that Foxconn remains frequently out of compliance with Apple’s code of conduct and its own overtime rules. Employees describe work days that far surpass overtime guidelines. Foxconn employees frequently reported only one day off every two weeks, until a policy was enacted this month enforcing the six-day workweek.

Apple, Dell, HP and Foxconn declined to comment on efforts to curb violations of the overtime limits.

Apple has made little headway on this front, according to its own audit of suppliers. At 60 of 102 facilities audited last year, Apple found records that indicated workers had exceeded weekly work-hour limits more than 50 per cent of the time. Similarly, at 65 facilities, more than half of the records reviewed indicated that workers had worked more than six consecutive days at least once per month.

These rates of non-compliance were virtually unchanged from a company audit in 2008.

In dealing with Foxconn, however, companies may have limited leverage to push for compliance, because there are few companies that have the capacity to handle high-volume orders, particularly in the handset industry.

“I think it would be difficult for companies to offload a lot of the business to other companies,” said Pacific Crest Securities senior analyst Andy Hargreaves, who tracks the consumer electronics industry, including Apple and Dell. “Nobody else is at quite the same scale, or even close, as far as I know.”

Improving working conditions could impact the bottom line as well, Hargreaves said. “Foxconn is in a position that if it had to increase wages to workers or improve the environment for workers, the cost will flow through. And these companies won’t have any options to defer those costs.”

In Shenzhen, Foxconn wields significant influence far beyond the boardroom. Besides employing hundreds of thousands of the city’s residents, Foxconn contributes more than 10 billion yuan (HK$11.4 billion) to the city’s tax revenue, mainland media report.

This month, a Reuters reporter was harassed by Foxconn security guards for taking photos of the factory exterior from a public street. Police intervened, but told the reporter of filing a report: “You’re free to do what you want. But this is Foxconn and they have special status here. Please understand.”

Hu, the professor, said large companies like Foxconn enjoyed favourable government treatment because they were the main contributors to local tax revenues.

Family members of one deceased Foxconn employee, Ma Xiangqian, say they have received little help from law enforcement. They said that Ma’s body had suspicious injuries to the head and legs but police have denied access to autopsy reports and unedited security camera footage.

Foxconn declined to comment for this story.


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