Monthly Archives: June 2010

After Foxconn, Taiwan seeks to lure firms in China

In speaking to Taiwan’s industry leaders on June 9, President Ma Ying-jeou spoke of his plan to create a special trade and economic zone on the island to attract Taiwan businesses operating in China to relocate to Taiwan. As wages in China continue to rise and its environmental controls tighten further, more business leaders are considering relocating to Taiwan as an alternative. This trend began in 2006 and has continued as businesses see a decline in their profit margins. And, by lowering business taxes, Taiwan government hopes to lure more business back to Taiwan.

In 2006, the first batch of Taiwanese businesses returned due to newly adopted industrial policies and environmental standards in China, leading the government to crack down on high-pollution, low-technology industries. This prompted a number of Taiwanese businesses to close their small-scale plants and return to Taiwan.

In 2008, the Ma administration eased trade and investment restrictions with China and promoted the first and the second listing of Taiwanese Depository Receipts (TDR), which attracted more Taiwanese businesses to return home, and boosted the local stock market. In this wave of returning businesses, some overseas Taiwanese firms have made direct investments and have taken control of failing companies in Taiwan.

Coping with the end of China’s cheap-labor era

This year, businesses have returned to Taiwan due to changes in the labor market in China and further wage rises in the country. Initially, factories experienced a shortage of labor in the coastal provinces, then, this problem spread inland. Taiwanese firms could not find sufficient manpower despite offering higher wages. Then a spate of suicides at the Taiwanese-owned I-Phone manufacturer Foxconn led the company to announce a 122 percent wage increase last month. These wage increases have heavily impacted Taiwanese firms and the Chinese labor market as a whole.

According to the Taipei-based China Times, the Beijing government has decided that its export-oriented economy shall give way to one of increasing domestic consumption following the global financial tsunami. Beijing wants Chinese citizens to be wealthy enough to generate a vibrant domestic market. Thus “wage increases” have become a key policy goal of the Chinese government. Since the beginning of 2010, all provincial and municipal governments in China have announced plans to raise the minimum wage, with increases ranging from ten percent to over 40 percent. And, this wage adjustment will continue every year from now on. It is increasingly evident that the era of China as the “world’s workshop” with an abundant supply of cheap labor is coming to an end.

Idea of “special economic zones” considered

The China Times, in an editorial, pointed out, that due to rising labor costs and labor market change in China, coupled with relaxed cross-strait relations and the opening up of direct air links, more overseas Taiwanese businesses are returning home to invest. Taiwan’s government has also prepared a plan that it hopes will attract NT$40 billion (US$1.25 billion) of returning Taiwanese investment a year. This returning overseas Taiwanese investment will no doubt enhance the island’s economic structure and hopefully create a higher value-added economy that will also promote the general well-being of Taiwanese citizens. What the government wants to avoid, is Taiwan becoming a processing zone for large-scale high-pollution, low-value exports. The paper said the government should encourage the creation of pollution-free tourism, cultural and creative businesses, and financial services, as well as high value-added R&D and marketing centers, and the emerging green technology energy industry.

The United Daily News also commented in an editorial, that Taiwan has been the main supplier to the “world’s workshop,” yet the island have been buried in an economic slump in recent years. Only Taiwan’s export processing businesses in China have helped maintain Taiwan’s domestic economic growth. The industrial environment in China has changed, affecting not only overseas Taiwanese businesses, but also the fundamentals of the whole Taiwanese economy, to which the government should not turn a blind eye, cautioned the paper.

Taiwan’s cabinet-level Council for Economic Planning and Development is reported to be assessing the risks and feasibility of implementing “special economic operations zones” in Taiwan. The purpose of setting up special zones is to duplicate the successful cases of export processing zones and science parks in the past, starting a third wave of economic transformation. This new generation of “economic operations zones” is intended to attract investment from returning overseas Taiwanese businesses and multinational corporations, and to reduce the high unemployment rate in Taiwan.

Foxconn suicides reveal inconvenient truths

On June 1, Foxconn, the world’s largest contract electronics manufacturer and maker of the iPhone, iPod and iPad, announced a comprehensive 30 percent wage increase for all its production-line workers in China. This bold announcement was followed by another six days later, that the minimum wage at its factory in Longhua, Shenzhen, would more than double from RMB900 (US$132) to RMB2,000 (US$293) starting in October. The company’s actions have sent shockwaves through the foreign investor community in China, according to the Commercial Times. The company has been making news for another reason recently, the alarmingly high number of employee suicides at its Shenzhen campus.

Foxconn, which falls under the umbrella of the Hon Hai Precision Industry Group, is headquartered in Taipei, Taiwan. After the 11th employee suicide at its 300,000-worker Longhua site, Terry Gou, the chairman of Hon Hai, invited over two hundred local and foreign journalists to inspect the facility. This initiative proved effective as the journalists could find little to criticize at the plant. Yet, the very night that Gou returned to Taiwan, the 12th suicide took place prompting him to fly back to Shenzhen immediately.

Gou: “I carry 12 crosses on my back”

At the annual shareholders’ meeting on June 7, Gou said he has ceased the practice of paying the high death benefits, which might be considered by some as an inducement to commit suicide. Foxconn previously paid out almost ten times its employees’ annual wages in death benefits, reported the United Daily News. Gou also stressed, “I carry 12 crosses on my back” and said he takes full responsibility for any management flaws.

In reference to an investigative report by Taiwan’s Suicide Prevention Association, Gou said three of the 12 workers attempting suicide had previous mental disorders, and their actions were in no way related to the work environment or to work pressure. The Foxconn management has been shocked that half of the suicide attempts occurred in quick succession in May, a fact that may be attributed to the so-called “Werther Effect” of copy-cat suicides. After Gou flew to Shenzhen to take personal command of the factory, dozens of suicides were apparently prevented, according to the United Daily News.

Not a “sweatshop,” only a “pressure cooker”

The Taiwanese media has written widely about Foxconn’s management style and Gou’s personality in particular. Yang Ren-kai, a veteran journalist who used to work at Hon Hai said, if Foxconn is a “sweatshop,” Chinese journalists who have snuck into the factory by hiding their identity would have broken the story.

Yang wrote in the Journalist magazine that “Terry Gou is downright masochistic…Gou is the axis of Hon Hai, with all the people revolving around him… Gou is an absolute workaholic. He gets up usually around 7 a.m. and enters his office around 8 a.m., he is busy all day, until around 1 or 2 a.m. before returning home… Gou knows of course how to rally his subordinates; however, he has a superior sense of self-motivation. He started Hon Hai from scratch, and has long been fighting to keep his business afloat during hard times. This is all part of his survival instinct.”

Xin Huai-nan, a former senior executive at Hon Hai, said in an interview with the Hong Kong-based Sing Tao Daily that “Gou does not run a sweatshop, and Foxconn is not a “sweatshop,” but it might be a “pressure cooker.” “Hon Hai’s culture dictates that it must be superior to its competitors. There are three elements that are crucial – the company must produce better products, with shorter lead times and at a lower cost.” Gou asks his staff to achieve all three. That is why Foxconn is like a “pressure cooker.”

Originally established in Taipei in 1974, Foxconn has held the top spot for a Chinese exporting enterprise according to Fortune magazine’s Global 500 for the last seven years. It employs in excess of 800,000 people in China. The entire employee population at its Longhua complex, including 3,700 Taiwanese workers, is greater than the population of one medium-sized city in Taiwan.

Managing that many employees is not easy and requires strict control, according to David Sun, co-founder of the flash memory maker Kingston Technology, speaking in an interview with the United Daily News. “It is not easy to run a factory, let alone to manage hundreds of thousands of employees, he said. Ray Chen, general manager of Compal Electronics, stressed, “I hope Foxconn can properly deal with this crisis as soon as possible. Otherwise this could lead to a chain of events affecting other Taiwanese and foreign enterprises in China.” In their view, this is not just a Foxconn issue, but is symptomatic of the changing economic and social environment in China.

Is rigid management a necessary evil?

The United Daily News said, China has been playing the role of “manufacturing base” in the global supply chain for almost three decades now. Many Taiwanese people have moved to China to set up operations to create large contract manufacturing businesses. They impose strict discipline when managing tens of thousands of employees to achieve fast delivery and quality production for global brand leaders. As well as the in-demand iPhones, iPods, and ipads, the latest computer models for HP and Dell are also made at Longhua. Even Acer Computer depends on these manufacturers to make its notebook computers in a bid to increase their global market share.

How to manage such a huge group of low-paid workers and achieve maximum performance in a short space of time has proved problematic for foreign businesses in China, but it works to the advantage of the Taiwanese firms. However, the Foxconn suicides are showing that even Taiwan businesses are powerless. Gou lamented, “What can I do except to apologize? I have done my best to seek advice from psychologists, feng-shui masters, Buddhist monks and the media, even announcing a 30 percent pay rise.”

Gou is not without his supporters though. Reporter Wang Zhong-fang wrote in her blog, “The recent criticism by the local media of Foxconn’s management style seems correct on the surface but not altogether correct. Those who have not worked in China do not really understand the situation there. Implementing a strict system is a “necessary evil.” Without such a system or discipline, the management of tens of thousands of workers would descend into chaos, with no production at all…” Wang also compared Chinese workers to their Taiwanese counterparts working in clean rooms at science parks in Taiwan. Asking why don’t they commit suicide? In either case, if these employees dislike their jobs, they can always quit, she wrote.

Generation Y factor

The labor conditions at Foxconn, at least on a physical level, are far better than the requirements stipulated in China’s official regulations, and certainly do not qualify as being a sweatshop. However, other factors could contribute to the high suicide rate; chief among these is the low regard given to the formation of personal relationships, which is reflected in the institutionalized management style. Additionally, most of the workers are young and away from their families and hometowns for the first time, so they might be emotionally vulnerable as well.

Most of today’s Taiwanese business leaders, including Terry Gou, were born into the first wave of baby boomers in the post-war period and grew up in poverty. In order to improve their lives and those of their families, they worked extremely hard to succeed. China is entering a stage where the generations born in the 1980s and 1990s are starting to work, noted the Commercial Times. The thinking of this generation is very different from those of their parents. The tried and tested Taiwanese business management models do not necessarily apply to this generation.

In speaking to the Taipei-based China Times, a senior manager at Foxconn said that young employees come to work with unrealistically high expectations. Whether they are pampered children from a one-child household, or hard workers away from their hometown and family for the first time, they are frustrated when reality does not meet their expectations.

Alienation and a lack of social mobility

The United Daily News also pointed out that China has learned from Taiwan’s experience to become the world’s workshop with an export-oriented economy, but the economic take-off in Taiwan in the 1970s differs from the current one in China. In Taiwan initially there were gaps between the cities and the countryside, but it was not as extreme as in China. In the early 1970s, Taiwanese workers in export processing zones went home at night, so their work pressure had an outlet for release and this allowed for the continuation of a normal family life. The Chinese workers, however, migrate to the cities from all over the country. There is no easy outlet for them to let off steam and forget about the pressures of work and life.

Furthermore, Taiwanese workers enjoyed equal educational opportunities, and social mobility is a real possibility. As long as they work hard, they have the opportunity to start their own business or succeed doing other things. While in China, the migrant workers are unable to register their households in the cities that they move to. The younger generations are excluded from equal educational opportunities. They feel hopeless because it is difficult for them to rise out of poverty regardless of how hard they work.

Preparing for the manufacturing shift

The reality is that the issues raised by the Foxconn suicide incidents signal a fundamental structural problem in China’s economic development pattern.

According to the Taiwan Electrical and Electronic Manufacturers’ Association chairman Arthur Yu-cheng Chiao, speaking in an interview with the United Daily News, Foxconn’s wage rise will mean higher production costs in China over the next three to five years and Taiwanese electronics manufacturers will be forced to leave. When this happens, the association will help them move to India, Indonesia, Vietnam and other countries, he said. Taiwanese manufacturers must expand their industrial scope and invest in new industries. Those firms that stay in China will have to enhance production automation.

Taiwan’s Economic Minister is already preparing for this critical moment in China’s transformation. In an interview with the Central News Agency on June 8, Minister Shih Yen-hsiang said the government will encourage Taiwanese businessmen to return to Taiwan to invest, and to help Taiwanese entrepreneurs transfer their investments to South East Asia, especially Indonesia. The government is urging investors to make technology-intensive manufacturing process in automated factory in Taiwan and move labor-intensive industries in Southeast Asia. The tragic Foxconn deaths serve as a stark early warning to Taiwan’s government and businesses to be ready to face these inconvenient truths.

Former top advisor assesses the frist two years of Ma’s administration

On May 28, Dr. Su Chi, the former secretary-general of Taiwan’s National Security Council was the guest speaker at a luncheon discussion at the Center on Democracy, Development, and the Rule of Law (CDDRL) at Stanford University. The event was part of a larger seminar on “Trends in the Strategic Triangle: US-China-Taiwan Relations in the Coming Decade.” The informal luncheon was hosted by Professor Larry Diamond, director of CDDRL and was on the topic “Assessing the first two years of the Ma Ying-jeou Presidency: A Conversation with Dr. Su Chi.”

Key problems facing the Ma administration

Su began by listing the problems that have dogged the Ma administration since assuming office in May 2008. “Economically, we were hit by the tsunami, the worst since 1929. We were surprised and ill prepared… Then in September 2008, the US economy had a heart attack. We were able to save Taiwan’s banking sector, but could not save our export sector,” he said. This in turn cast doubts on President Ma and his ability to turn things around.

Politically, public trust in government and democracy was at an all-time low. Former President Chen Shui-bian was convicted of embezzling official funds and was detained in jail. The Taiwanese people used to celebrate their democracy, but by the end of 2008, it was hard to celebrate. The opposition party also played a part in manipulating Taiwanese fear of China, according to Su.

In dealing with these issues, the Ma administration has focused on instilling trust, both internal and external, noted Su. Many Taiwanese people felt that the government had betrayed them and it was incumbent on the government to rebuild that trust within the country. Externally, Taiwan also needed to build a good relationship with the US and to prove itself trustworthy again, he said.

Rebuilding trust with the US

Taipei did not want to put the US in the position of again having to mediate between the two sides across the Taiwan Strait, where Washington needed to tell China “I love you” and then reassure Taiwan, but “I love you too,” said Su.

Much to the amusement of the audience, Professor Tom Christensen of Princeton University interjected that the State Department likely did not use “love”, maybe “like.”

Now Taipei is able to communicate directly with Beijing, sparing Washington the need to be the go-between. Since Ma took office, Taiwan’s international standing has improved, stressed Su.

Also, in the early days of the administration, Ma’s government strived not to make promises it could not keep. Ma himself was “surprise-free and low key,” said Su. This meant no hanky-panky, but being predictable where the administrations would consult each other fully. The Ma administration has also not rushed to claim victory at every round, said Su.

Professor Diamond noted the similarities between President Obama and President Ma. The former is noted for being “No Drama Obama,” while the latter is “surprise-free and low key.”

Focus on pragmatism

The Ma administration has focused on pragmatism, according to Su, approaching issues in a pragmatic fashion and not from an ideological standpoint. If it could be done, it would be done. It has not been a matter of what should be done. If it couldn’t be done, then it wasn’t attempted, said Su. As an example, a direct flight to Shanghai took 80 minutes. It made sense to allow direct flights between the two countries, but not direct flights to Taichung since it would be across Taiwan’s central line and not defense savvy, he said.

Pragmatically, the Ma administration sees Taiwan in geographic terms and in terms of US, China and Japan, said Su. Taiwan may represent only 1 percent of the world’s GDP (US – 25%, China – 7% and Japan – 7%), but nobody else is as close to the top three. Besides, Su joked, “we speak better Chinese and Japanese than the Koreans.”

“We have gone from being enemies to being good neighbors with China,” said Su. Eventually, maybe the two countries can be good friends, but Beijing has to show Taipei that they are trustworthy also, he said.

If the FTA-like Economic Cooperation Framework Agreement (ECFA) is signed between Taiwan and China, then fear of China will decrease and economic relations across the Taiwan Strait will be closer. However, people should not expect things to get easier as Taiwan and China become more integrated economically, said Su. The ECFA is shaping up and that by itself is getting more difficult, because both parties are now talking about specifics and fighting to gain ground on the early harvest list. It is the nature of things, Su concluded.