Why Raising Wages Won’t Work as a Long Term Solution For Foxconn. Or Apple

Sunday, June 13, 2010 2:06

A few weeks back I was asked to speak at the BMW Europe Asian Young Leaders Forum on “How do cities organize communal life and maintain social harmony? What can business contribute to these processes?”  It was the week after EXPO, and everyone was in Harmonious society mode, but in developing what I thought were the 5 key pillars of a harmonious society (I called it sustainable city), I inadvertently began thinking about the wider application of what I presented on for the Foxconn case as well.  I did so primarily because Terry Guo, CEO of Foxconn, continued to say that the suicide rate of Foxconn was less than the national average.. and that the steps they were taking were the right ones.  Yet, with every announcement of another solution, particularly the wage increase, the warning bells continued to go off.

We all know what has taken place over the last several weeks as a number of Foxconn’s line workers have leapt from factory rooftops.  Acts that many have looked to understand, explain, and analyze in attempts to make a story, make a story disappear, and ultimately stop others from jumping. Solutions involved 100 monks, “I Promise not to kill myself” contracts, “the always morale boosting safety nets, announcements “Foxconn would not longer payout families of suicide victims”, and ultimately wage increases.  A process, and set of solutions, that I feel are not only broken, but will do little to solve the real problems that both Foxconn and Apple face within their organizations.

It was a process that I believe was broken in a number of important ways:

  1. Foxconn and Apple both believed in, and developed, economic models on foundations that arbitraged externalities.  In this case, the externality being the reduced labor costs that were found in China, and lax supervision of labor laws that allowed for further exploitation of labor (unpaid and forced overtime).  However, this could also be extended in other areas  – the environmental costs of producing in China vs. Cupertino
  2. Foxconn and Apple both failed to assess the risks of exposure, the catalysts where the systems would fail, and the costs that would result from the removal/ reduction of the externalized labor cost savings.
  3. Foxconn and Apple both failed to act when systemic failures began to show themselves.  Suicides were not the first issue, and besides the continued labor related infractions found within both supply chains (Foxconn and Apple), and Apple’s own 2008 & 2009 Apple supplier responsibility reports, no systemic actions were take.  Band-aid were applied. The press was pacified. Consumers … consumed
  4. Foxconn and Apple thought that a wage increase would solve their problem.  That this entire affair, and the underlying issues, would remove the despair felt among the 800,000 Foxconn workers

How would I have done it differently?  Where would I have started?  Well. For me, sustainable cities really came down to the following (and you may also reference the slide show above).  It comes down to 5 key areas: Urban Planning, Economic opportunity, Quality of life, Safety and Security, and finally Environmental Stability.  It is a city that will, engage investment by citizens (native and immigrant ) into the economy, the community, and in the environment in a way that is self supporting… rather than requiring ongoing fire fighting to hold it together.  The 5 pillars are essentially the glue that will bind the city together if done right.

.. and in the current situation, I would say that all of the above also apply to the Foxconn as well

  1. Urban Planning – Foxconn’s own campus design
  2. Economic opportunity – The ability to earn a “good” living at a rate that would be higher than found through other sources, or at other sites. With the ability to develop personal / professional skills that would allow for improved access to further opportunities.
  3. Quality of life – Beyond the workshop, the company (and its facilities – dorm, canteen food, etc) needs to offer a level of comfort that improves the lives of workers.  Are the employees stuffed into a dormitory that offers little privacy or ability to disconnect, or are they provided living conditions that develop a sense of home that will settle the worker
  4. Safety and Security – workers need to have a sense of both economic and physical security that allows for stability.  Holding a deposit of a worker’s salary or subjecting those workers to abuse from security guards goes fundamentally against this, just as firing entire factories of staff at Chinese New Year removes the sense of stability a returning worker would have while trying to enjoy the festival with family members.  Family members who can be hundreds/ thousands of kilometers away, which only diminishes the sense of stability/ security a laborer may have at the factory
  5. Environmental Stability  – the workplace must be environmentally safe to work in.  Exposure to deadly chemicals, dirty water in the showers, acrid air, and  noise pollution are all environmental threats that the average worker in China’s factories faces, and a quick read of 2009 Apple’s Supplier Responsibility report will highlight that most of their China based suppliers do not meat local environmental standards.

So, why is a wage increase not the solution?

Well, if you are the average Foxconn employee, or an employee within one of Apple’s 83 China based suppliers, the question is not whether or not it is needed, but whether or not the additional 20% (150-200RMB per month) would make up for the failures found in the other 4 pillars.

For Apple, that is of course the next risk. The systematic risk.  That, outside of Foxconn, employees at its other 82 suppliers take offense to Foxconn employee’s getting special treatment when they are working at facilities where the quality of life, environmental conditions, and security issues are certainly far worse.

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9 Responses to “Why Raising Wages Won’t Work as a Long Term Solution For Foxconn. Or Apple”

  1. Jesse Covner says:

    June 17th, 2010 at 3:31 am

    Hi,

    I will be contrarian and disagree. Operators in CMS type factories care mainly…almost only…about money. I do not believe they mind the dorm-rooms … that is the same condition they had at school. Foxconn’s conditions are most likely better than most privately held Chinese companies… except maybe the security appartus.

    And I really dislike linking suicide to working conditions; there is NO evidence for this (unless you believe the rumors that the guards are all mafia types).

    Yes, Foxconn should develop their workforce. They don’t. Almost no Taiwanese company (and most Chinese private companies for that matter) do employee development. But do operators, who act as, more or less, literally cogs in a machine, need development? What is the economic motivation for a company to invest in operators?

  2. Rich says:

    June 18th, 2010 at 2:23 am

    Jesse.

    You, a contrarian? Nahh…

    In short, where I guess you are being proven wrong is that Foxconn’s stock got hammered, its products are being boycotted now (limited, I’ll agree), there are rumors that they are moving shop from SZ to other places, and I have no doubt that this is costsing them long term business as other firms who were getting ready to close big deals with them are now most certainly assessing that option.

    The rest of it is irrelevant, and does not hold water.

    It doesn’t matter if Foxconn is the “best”, or that they do not invest in their people any more / less that anyone else. It is about FOXCONN, and FOXCONN only…

    If you want to widen it, and discuss Apple’s entire supply chain, then you can take the “industry” angle, but again, saying that Apple is better than/ worse than someone else is irrelevant.

    finally, what is the economic motivation for a company to invest in its staff of 800,000 operators. Simple. It costs more money to move, it costs more money to hire people than it does to retain people, it costs more money to build a ruined reputation than it does to build one that cannot be, and that is before you consider the costs of capital (lower for GRI companies than non), costs of government relationships (hirer for those who have bad practice vs. not).. and on and on..

    it is not about a single act. It is not about a single slice of time.

    R

  3. lark says:

    June 20th, 2010 at 4:37 pm

    I am curious about the hours demanded by FOXCONN (and other China based employers). I think 12 hours/day 6 or 7 days a week makes it impossible to have a life, personal relationships, etc., you are merely a drone. But you don’t address it. Do you think this is an area that FOXCONN should change?

  4. Jesse Covner says:

    June 24th, 2010 at 7:35 pm

    Sorry for replying to you so late.

    First, other firms might re-think working with Foxconn. That’s because of the publicity of the suicides, not because they are going to use firms which use better, more sustainable practices.

    As you know, margins are so tight in the CMS business. There is a definite “inflection point” where in it will be cheaper for Foxconn to move the factory either out of China or (more likely) into the heartland of China, rather than pay higher wages. And it is definitely cheaper to hire new operators than to give them more training…same is not true for line-leaders, supervisors, and above.

    Point is, there are many factors here. As a former trainer, I want to believe that its just better to invest in people. But clearly, from a financial perspective, it is not better in certain industries, for certain levels of employees.

  5. Rich says:

    June 25th, 2010 at 7:01 am

    Jesse

    Only time will tell, but the conversations I am having are different. That, because there are limited opportunities to work with firms who have scale and quality requirements, you will see OEMs going to ODMs that were once “too expensive”. Second option is that no one gets the business as firms chose to keep assembly inhouse in controlled environments.

    However, you need to also keep in mind that due to the recent issues that Foxconn has faced, Foxconn will no longer be able to maintain its cost structure, and will see its price driven advantage erode. Publicity moved to economics.

    The price of risks to brand are becoming more tangible, and that makes it easier for firms to accurately and fairly judge their decisions on more than a per/ piece basis that strips out the externalities.

  6. Rich says:

    June 25th, 2010 at 7:02 am

    Lark

    There are going to be different conditions for different industries, but going more than 12 hours is not unheard of for electronics and textiles when there is a big order is in…

    R

  7. Lloyd Lofthouse says:

    July 4th, 2010 at 7:05 pm

    Foconn’s suicide rate is about 1.25 for each 100,000 people. That’s a decimal between the 1 and the 2.

    The World Health Organization suicide figures for China show 18 male and 14.8 female suicides per 100,000. That’s 32.8 suicides for every 100,000.

    In the US, the suicide rate is 10.9 per 100,000.

    In fact, Foxconn looks like the place to be if you want to have the odds in your favor to avoid suicide. What do you want? No suicide rate for Foxconn while ignoring the numbers for China and America? These numbers tell me Foxconn is doing a pretty good job keeping the suicide rates down.

    The reason is simple: The Foxconn people have jobs and are earning more than the village they came from. Just because they aren’t earning what a US autoworker earns with benefits doesn’t mean they are all suicidal and the high pay for US autoworkers almost brought that industry down. When the unemployment benefits run out, I wonder what the suicide rate will be for unemployed US autoworkers.

  8. Rich says:

    July 6th, 2010 at 9:12 am

    Lloyd.

    What I love about statistics is that one can really use them for anything.

    .. and I love that there are still people out there that believe that one can draw a direct comparison between China’s overall suicide rate and the Foxconn facilities, much less commend the company for doing a good job… honestly, it is shocking how thin the analysis you have presented is.

    That you have not adjusted the China rate for different conditions (rural rates vs. urban rates, male vs female, age, etc)…made any adjustment for time.. or made any adjustment for the geographic concentration of these incidents.

    … as for the remaining portion of your post, perhaps you should spend 3 months on the line, apart from your family, in a high pressure environment where you are not allowed to speak to the person sitting next to you… then, perhaps you will feel differently about whether or not making a Foxconn wage is being better than being on the farm.

  9. Jesse Covner says:

    July 6th, 2010 at 10:54 am

    Late night posting. I love it.

    Rich, I already said that it is wrong to make a connection between Foxconn working conditions and the suicides. I think it is presumptuous to do so. And I also believe that the blame goes to the fucking idiots who throws away their little bit of opportunity to make a light in the darkness of the universe. However, I also agree with your comment to the last poster about the use of statistics. And clearly, the suicide rate for that age group and demographic is very high in the Foxconn factory.

    The important part where I disagree with your comment is in the last paragraph. ALL CMS conditions are more or less the same. Operators are not allowed to talk to each other while on the line. The operator is basically an organic machine part. It sucks for them. In an ideal world, every worker should get a good living wage and have working conditions that do not reduce the worker to a cog in the machine. But this is how line-operators are in most high-volume assembly operations in China…and probably everywhere else. I won’t make the excuse to say its better than where they come from… that’s a difficult thing to measure. But they have taken that work for a reason.

    If the reason why they took the work was rational – ie. because the money is much better than what they could make at home and this was the only type of work they could get – then this is their choice. Nothing very wrong with this.

    However, I believe the true moral crime here is in how they were brought to the factory in the first place. I do not believe the workers are rational economic actors. I believe that many of them were tricked by their school head-masters. I believe they were basically sold /commodified as part of a group package into a labor market which is run by “labor heads”.