Print Edition: Foxxcon: China’s Foxy new model?

Foxxcon has been the portal access for critics to review China’s producing power and how the new powerhouse of global economy is keeping its vast labor force happy – although categorically improving workers’ condition and human rights practices are not necessarily on the agenda of neither the observer nor the perpetrator. After breaking the siege of the suicide scandals, the assembler of Apple products reported a 16% net growth in profit of 2012. In the same year, China’s GDP growth reached 7.8%. How is China influenced by the Foxxcon story when “reshoring”, aging labor force and other challenges are endangering the future of the “world’s factory”?

Image courtesy of Foxconn © 2010, some rights reserved
Image courtesy of Foxconn © 2010, some rights reserved

Before 2010, the “Reshoring Initiative”, a private project to empower US-based manufacture, was laughed at both because outsourcing dominated the mainstream of global production, and that in the midst of an economic downturn it was considered commonsense to move manufacture to developing countries. However, in a short 3 years, leaders of manufacturing industries have begun to think the other way. In May 2013, a YouGov survey indicated that a third of Britain’s makers want to source more components from UK companies; In September, a Boston Consulting Group’s survey found a similar percentage of large US manufacturers, including Apple, Google, General Motor, who were moving part of their production back to north America. The current of exploring production in home country is also confirmed by a rapid decrease in China’s annual GDP growth. Some suggest that the new technologies emerged and matured in the past 2 years, such as new precision-robotics and 3D printer, provided foundation for such shift. Company executives also want to move their commodities quicker to retail and to ensure the quality of production. Others found that the rapid wage inflation means China’s low-cost comparative advantage is ebbing, and that consumers in their home country start to feel willing to pay more for “home-made” products.

However, neither Terry Guo, CEO of Foxxconn, nor the politburo in Beijing need to be overly worried. The current Foxxcon portfolio includes such electronic giants as Apple Inc,, Cisco, Intel, IBM, Lenovo, Microsoft, Nokia, Sony Ericsson etc. Apple, whose reliance on mass labor in the streamline cannot be understated, only occupies 40% of Foxcconn’s producing power. With the support of local government and, sometimes, schools and universities, Foxcconn can temporarily bump up its capacity by at least 10% in matter of days. When talking about “global production”, size and ability matter. Meanwhile, “reshoring” would take too much time and money to re-model production plans in labor-expensive North America and in Europe. And at the moment, replacing the versatile human hands is either too expensive or not yet possible.

New technology is not exclusive to the west. Foxxconn’s embracive attitude to new technology and pragmatic approach to improving current machinery meant that it could bring visions of the Silicon Valley to reality on massive scale. This helps to demonstrate their strength to its Japanese and Finish clients. What they lose in production for Apple quickly made up by new demands from Sony and Nokia. The company executives also made a monumental move in 2012 to acquire 10% stake of Sharp Corporation in Japan and 50% of its LCD production. It’s focus and effort on innovation also what made Amazon’s Kindle possible. China is learning from it.

Meanwhile, in the National Laboratory for Aeronautics and Astronautics at Beihang University, China’s largest 3D printer is operating to create metallic components for its ambitious space-programs and technologically demanding commercial-aircraft project. The President, Xi Jinping, is determined to transform its economy with the newfound confidence in innovation and the inward circulation of technology and consumption. Since taking office in early 2013, he and Li Ke Qiang, China’s premier, took more foreign trips than the previous administrative team combined. The patterns of visit also shifted as the BRIC countries and new market economies were being prioritized. Subsequently, there are more large ports for shipment as well as flights to Latin America and to India. On board these flights, entrepreneurs and manufacture executives are coming to China to investigate it’s still vast production force. Indeed, China cannot yet compete with US or Europe in terms of innovation, but maintaining competitiveness among smaller economies requires less technology breakthrough. How much have Indian and Brazil outsourced to China cannot be overlooked while making the speech about “reshoring”.

The real problem, rather, seem to lie with China’s labor force itself – as it is, and will continue to be the basis for its economic model and unlikely to change until it catches up on innovation.

Today, almost all demographic studies arrive at the conclusion that the aging population will have a negative impact on the quantity and quality of labor supply in China. The reduced quantity is highly likely to impact measurement of human capital, labor productivity, industrial structure and potentially slow down the process of productivity enhancement. In real terms, this means an 11% reduction in labor force by 2050. Yet the decade after will still have more people retiring than youngsters entering the workforce. There is no denial of the real impact from the rapidly changing demographic landscape, but would this mean the end of “world’s factory” for China? Chinese economists and politicians were set to find a smooth landing for the new generation.

For Foxxconn, 15 suicides in 2010 brought in dozens of labor regulations and free seminars on labor laws for its employees. It pushed Foxxconn to expand beyond Shen Zhen, the first base for Foxxconn in Mainland China and Deng’s experiment ground for his monumental economic reformation. Today, there are more than 30 cities in China has at least one Foxxconn factory. Its Zheng Zhou site in Henan province gathered more than 600,000 workers in just 2 years. Shen Zhen exemplified a lot of the concerns from changing demography: since the 1980s, the vast number of migrant worker was effectively the pillar of its success. While the first generation migrants are aging, the second generation (since early 1990s) settled and brought their pension-age parents to the city. The city is estimated to have over 300,000 people over the age of 65, and 760,000 before 2020. With an inflating property market and an influx of mass manufacturing companies, the available workforce started to shrink. Naturally, factories like Foxxconn felt limited. Its sudden but decisive move to explore labor markets further in land is supported by the raising level of education across the country and the benefit of building new factory in order to accommodate new technology.

This is perhaps when China’s new model coincides with Foxxconn’s desire for a securer labor base in the country. China is compensating a smaller workforce with improvement in the quality of human capital, higher level of skills and higher work intensity. First, study shows the average length of education for new working age population between 2000 and 2010 is 10.3 years. The elderly population who left workforce in the same period only received 4.4 years of education. The Chinese education system, largely exam-based and highly intensive, is excellent for producing skilled labors. Consequently, the country could navigate better in the age when operating electronics and machinery outweighs low-skill jobs. Foxxconn, for instance, is famous for its taste in enlisting school and university students in the months leading to Apple’s new product launch. “Education is the future” is less of a slogan when even the manufacture-based employers favor applicants with more qualified training. Lastly, the changes in the scale of labor supply not always mean decrease in real labor quality. The adaption of new technology and machinery usually means increase in productivity for each worker. The problem is less with the fact that China’s labor market is aging, but rather when will the aging labor force becomes so substantial that not even new production technology could make up the lost. On the other hand, the uncontroversial conclusion would be that the young and more educated generation can and will need better wage, working environment and social security.

Soon, large-scale global manufacturers will be forced to make a decision. China is still the best region to place labor-intensive as well as technologically demanding production, and the workers are at a better place to demand for more: they must either absorb the rising cost or pass the burden to the consumers. Meanwhile, China can seem invincible. In 2010 it overtook America in terms of manufactured output, energy use and car sales. Contrary to the better judgement of Timothy Beardson, author of Stumbling Giant: The Threats to China’s Future, the world is still expecting it to be the largest economy soon. To maintain the likelihood, China should focus on increase the quality of human capital and productivity, as well as paying real attention to the social welfare of it’s shrinking labor force. In the next decade, it should be able to see where the demographic change hurts the most. Keep the workers happy and help the engineers to create should be China’s new model, likewise for Foxxconn.

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