Tag Archives: China

The ‘Sale’ of Foxconn

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Foxconn Precision Electronics, the cellphone manufacturing arm of — guess who? — Foxconn, is for sale.

Well, actually it has been sold.

To Foxconn.

Allow me to explain. Hon Hai, which trades under the Foxconn name, has myriad subsidiaries. Some of those subsidiaries have other subsidiaries. Despite the growing handset market, FPE’s parent, Foxconn International Holdings, has been losing money — $218 million last year alone. So despite sales of $6.63 billion last year, FPE  has been sold to China Prime Rich Holdings, a wholly owned subsidiary of — wait for it — Hon Hai.

If that wasn’t awkward enough, the sale price was HK$550.4 million, which in US currency is $70.7 million.

In other words, Foxconn bought from Foxconn an entity the size of Celestica for about four days’ worth of revenue. No word yet what the company directors paid themselves for what must have been an exhausting maneuver.

Only in China.

 

Good Fiction

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Ian Fletcher (not to be confused with the scribe behind the James Bond novels) yesterday wrote about the problems with American manufacturing.

Whereas I agree with his larger points — manufacturing output does not necessarily measure manufacturing health — there’s a couple of problems with some of his supporting evidence.

For one, there’s his contention that because Japan supplies “over 70 percent of the world’s nickel-metal hydride batteries and 60-70 percent of the world’s lithium-ion batteries,” it give the country “a key advantage in electric cars.”

Well, maybe. Being a supplier of a critical commodity or technology does not, history shows time and again, necessarily translate to ownership over the end-market. Labor and other ancillary costs have a tremendous affect on the procurement decision tree. China, of course, had no real technological advantage over Japan, Taiwan or the US in printed circuit boards. It just had loads of cheap manpower, and a government so eager to build its tech base that it moved land and sea (sometimes literally) to make it possible.

Which brings us to nit No. 2. Says Fletcher: “The Obama administration shows no awareness of any of this, despite scratching a hole in its head over why job creation has stalled. (Hint: it hasn’t stalled in the nations, from China to Germany, running trade surpluses with us in manufactured goods.)” No, unemployment hasn’t stalled in either country, but for reasons other than what Fletcher asserts. China, of course, has an abundance of cheap labor that no country save India can match. In Germany, on the other hand, the unemployment rate is 6.8%, which is better than in the US, but hardly great relative to classical standards. As recently as 2004, it was 9.7%, after which Germany enacted a series of financial reforms. The nation now stands as the financial bedrock upon which lies much of the rest of the beleaguered European Union. Given that, I would argue that Germany ability to position itself financially, rather than any politically driven manufacturing strategy, is at the core of its current export success and employment stability.

Finally, Fletcher ignores a far more significant data point: Japan. Japan’s economy is some 60% larger than Germany’s, and its internal manufacturing supply chains are legendary. Its unemployment rate was 4.9% in December, which appears stellar, until one realizes that figure is 188% higher than the nation’s average from 1953 through 2010. Its GDP is on a roller coaster, having contracted in the December quarter. Yet it runs a $45 billion trade surplus with the US. Here, Fletcher’s contention that trade surpluses and manufacturing supply chains go hand in hand with job creation falls on its face.

Fletcher is on the right track, but some of his supporting details are closer to the James Bond series: good fiction.

Good Fiction

Posted on by
Ian Fletcher (not to be confused with the scribe behind the James Bond novels) yesterday wrote about the problems with American manufacturing.

Whereas I agree with his larger points — manufacturing output does not necessarily measure manufacturing health — there’s a couple of problems with some of his supporting evidence.

For one, there’s his contention that because Japan supplies “over 70 percent of the world’s nickel-metal hydride batteries and 60-70 percent of the world’s lithium-ion batteries,” it give the country “a key advantage in electric cars.”

Well, maybe. Being a supplier of a critical commodity or technology does not, history shows time and again, necessarily translate to ownership over the end-market. Labor and other ancillary costs have a tremendous affect on the procurement decision tree. China, of course, had no real technological advantage over Japan, Taiwan or the US in printed circuit boards. It just had loads of cheap manpower, and a government so eager to build its tech base that it moved land and sea (sometimes literally) to make it possible.

Which brings us to nit No. 2. Says Fletcher: “The Obama administration shows no awareness of any of this, despite scratching a hole in its head over why job creation has stalled. (Hint: it hasn’t stalled in the nations, from China to Germany, running trade surpluses with us in manufactured goods.)” No, unemployment hasn’t stalled in either country, but for reasons other than what Fletcher asserts. China, of course, has an abundance of cheap labor that no country save India can match. In Germany, on the other hand, the unemployment rate is 6.8%, which is better than in the US, but hardly great relative to classical standards. As recently as 2004, it was 9.7%, after which Germany enacted a series of financial reforms. The nation now stands as the financial bedrock upon which lies much of the rest of the beleaguered European Union. I would argue that Germany ability to position itself financially, rather than any politically driven manufacturing strategy, is at the core of its current export success and employment stability.

Finally, Fletcher ignores a far more significant data point: Japan. Japan’s economy is some 60% larger than Germany’s, and its internal manufacturing supply chains are legendary. Its unemployment rate was 4.9% in December, which appears stellar, until one realizes that figure is 188% higher than the nation’s average from 1953 through 2010. Its GDP is on a roller coaster, having contracted in the December quarter. Yet it runs a $45 billion trade surplus with the US. Here, Fletcher’s contention that trade surpluses and manufacturing supply chains go hand in hand with job creation falls on its face.

Fletcher is on the right track, but some of his supporting details are closer to the James Bond series: good fiction.

Paying the Price

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Interesting discussion going on at LinkedIn, where a handful of folks are debating the going rates for PCB design in China.

It started when someone asked what the “least per hour charges” to attract a client for PCB layout outside China (emphasis mine). (The question was asked by a LinkedIn member in Pakistan.) Quickly others chimed in with the usual “you get what you pay for” refrain (when it comes to PCB design, I tend to agree).

Someone from Israel noted that they charge by the pad. Those who commented on hourly charges relayed reports (unconfirmed, by the way) of $5 (China) to $10 (Pakistan).

PCD&F conducts an annual salary survey, and certainly a $10/hour contract rate would undermine even the lowest paid designer responding to that questionnaire. But keep in mind, these are not confirmed quotes. And as the folks at PCB West last week showed in spades, there’s no comparison between a button pusher and a PCB design engineer.

Jabil’s Turn in the Hot Seat

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You can forgive — if only slightly — Terry Gou if he is smiling today.

One of the chairman of Foxconn’s main competitors, Jabil, stands accused today of creating and maintaining a what can best be described as a cruel environment for its 6,000-some workers in Guangzhou.

While no suicides have been reported — unlike the dozen at Foxconn’s Shenzhen plant this year alone — the accusations, by the very official-sounding National Labor Committee, a US-based NGO, are damning.

In a less-than-stellar initial response, Jabil took issue with the report’s summary, saying , “A quick look over this lengthy summary, written by a ‘respected Chinese worker rights activist and scholar, who must remain anonymous,’ paints a very accusatory but not very accurate picture.” Jabil’s response is too cute by half: the full report was authored by NLC director Charles Kernaghan, based on undercover investigations in China. Only the  three-paragraph preface, per the report, is credited to the anonymous Chinese scholar.

Regardless of whether the charges are warranted, Jabil will certainly have to answer for itself. For the workers’ sake, let’s hope they are exaggerated. But if they aren’t, Jabil faces the same disdain the world holds for the likes of Terry Guo — and deservedly so.

Foxconn, China Tied For Good (or Bad)

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The pundits are out and speculating that, in the wake of a dozen worker suicides, higher wages and reams of bad press, Foxconn might relocate from China.

AppleInsider thinks Foxconn might move production back to Taiwan. John Dvorak suggests a fed-up Terry Gou might either replace workers with robots or leave altogether. Others pose similar notions.

Two fundamental problems exist with this line of reasoning (three, if you factor in that a scaled-up lights-out electronics manufacturing operation has never existed).

1. No other country, save for India, offers the population China does. Foxconn’s model is built on having access to hundreds of thousands of workers in company towns. Where else in the world is that possible? What other government would even allow it? Taiwan, for example, has neither the space, the population nor the wage rates necessary to pull this off, even if it wanted to.
2. Foxconn has established complete supply chains in or near its campuses. It’s one thing to move a factory. EMS companies do this all the time, and (with some notable exceptions) have actually become fairly good at it. But relocating an entire supply chain takes time and commitments. Foxconn may be the largest EMS player in China, but it’s not the only one, and in just a handful of cities those chains can feed the 75% or so of all electronics manufacturing in the world. Simply put, there are good reasons everyone is in China right now and not, for example, India.

For better or worse, Foxconn and China are bound together.

Not in Vain

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The impact of Foxconn’s decision to raise wages at its Shenzhen campus could have longer-term repercussions.

As the New York Times reports today, workers in the region appear emboldened, with Honda plant workers staging a walkout, TPV Technology contemplating raises, and the entire contract manufacturing industry under the world media microscope.

Foxconn itself seems to be reconsidering the scope of its agenda, with a spokesman saying that the all-in-one model might not be the best going forward.

Let’s hope the death of the dozen (and counting) workers is not in vain.

Blowback from China

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Those seers who predicted America’s infatuation with China would backfire are looking awfully smart these days.

As Business Week reports today,

Nearly a decade after China’s entry into the World Trade Organization, many foreign companies say the warm reception they once received has turned frosty. While China can still be highly profitable, some question how long that will last as Beijing changes the rules to give a lift to its domestic companies, especially state-owned enterprises.

The piece goes on to quote government officials and others who share several anecdotes suggesting China is no longer a “level playing field.”

News flash: It never was a level playing field. When the laowai (foreigners) showed up, they were “partnered” with Chinese enterprises, usually failing, government-owned or -backed businesses with out-of-date equipment and no management prowess. We got what we wanted (entree into the world’s most populous, and arguably, cheapest, place to manufacture), and so did the locals (massive investment, access to Western business methods, and most important, customers).

But for those critics who counseled against the rush, recent events are making them look more and more prescient. Like a novice bodybuilder on steroids, given its new muscles, China wasting no time in flexing them, whether it be in currency markets, its ever-changing tax laws, its military buildup, its bull-snorts over mining the moon’s minerals, and so on.

And given China’s eons-long history of opening the door to outsiders only to slam it shut again, in hindsight, should we be at all surprised?