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The risks of Foxconn’s model

by CKGSB Knowledge

April 8, 2012

Taiwanese manufacturer Foxconn, the world’s largest electronics contract manufacturer, which supplies to companies including Apple and Dell, has come under intense scrutiny following a series of suicides among its employees.

At least 18 Foxconn workers have attempted suicide between January 2010 and November 2011 by throwing themselves from the Foxconn building, 14 of which resulted in death. Foxconn blamed the employees’ personal issues for the deaths. Romantic troubles, family problems and loneliness were among the reasons cited by Foxconn.
Unfortunately, this situation is not limited only to Foxconn. A majority of factories operating in China also fit the same mold. Professor Teng Bingsheng, associate dean of Cheung Kong Graduate School of Business and professor of strategic management, explains that the recent tragedies highlight shortcomings in management philosophy, and suggest the need to reassess a workplace culture obsessed with efficiency at the expense of an employee’s quality of life.

“Foxconn’s management style may not have directly caused the string of suicides at the company earlier this year, but it did contribute to an environment in which pre-existing troubles simply became intolerable for some of its workers,” Teng says.

Military-Style Management

Taiwanese contract manufacturers have managed to subdue competitors that subscribe to other management styles precisely because of the startling power and efficiency of their operating model.

Teng says that their highly-disciplined ethic arose from a combination of factors: the Japanese tradition of self-sacrifice on behalf of the group, instilled in the Taiwanese people during their decades-long period as a Japanese colony; the military culture on the island, born of Taiwan’s policy of compulsory military service; and the culture of hardworking persistence fostered by Taiwan’s status as an island. These principles are the foundation of Foxconn, a pillar of Taiwanese industry.

While entry-level workers earn about 900 yuan ($132) a month, some 300,000 workers earn monthly wages of between $190 to $236, and are often forced–either by coercion or necessity–to work between 50 and 100 hours of overtime a month, according to a report conducted by the labor group Students and Scholars Against Corporate Misbehavior. But The Mail on Sunday reported in 2006 that Foxconn has been forcing workers to work long shifts (over 60 hours a week) to meet unrealistic quotas.

In response, spokesperson Arthur Huang stated, “Foxconn has provided workers with a far better environment and benefits than the manufacturing industry as a whole, yet has long strived to be a leader in corporate social responsibility and continuously pushes for improvement.”

Still, workers complain that they are overworked and suffer extreme pressure to produce under intense conditions. After work, they have nowhere to go but their dorm rooms that they share with seven other workers. The on-site dormitories, implemented under founder Terry Gou, are said to be for the well-being of Foxconn employees.

The Management Problem

Teng says this method is difficult to reconcile with mainland China’s migrant worker culture. “In China, migrant workers who move far away from their families are already susceptible to feelings of loneliness and isolation, and thus all the more vulnerable to the stresses of a highly-regimented manufacturing culture.”

Lee Kuen-Yao, chairman of BenQ, another major Taiwanese electronics company, also expressed the same concerns. “Taiwan’s manufacturers are like gray wolves. But gray wolves will inevitably disappear, since the grasslands they survive on are bound to disappear.”

Teng further explains that Foxconn’s business models pose some inherent risks since the longer a supply chain is, the greater the demands on management to maintain control of the chain in its entirety.

Take Samsung as an example. Their tightly integrated model, which helped bring success in the early years, has recently hindered the company’s performance. Samsung’s competitive standing in some markets has fallen due to price fluctuations among upstream suppliers. The same could happen to Foxconn.

“The risks are especially apparent in the Chinese market, where private companies are already at a disadvantage relative to state-owned enterprises (SOEs) in terms of access to financing. SOEs can more easily secure capital to help buffer against this bullwhip effect,” says Teng.

“Still if Foxconn were to put pressure on its customers, it would only be a matter of time before it was replaced.”

Where does Foxconn go from here?

After the spate of suicides, the company offered a $30 bonus to any employee giving managers a warning about colleagues having emotional problems. In addition, wages were increased 20 percent to boost morale.
But Professor Teng says the company can do more than that. “A short-term solution is to improve working conditions and allow workers greater leeway to experience life outside the factory. But over the long term, Foxconn must consider adapting its business model to the realities of Mainland China and temper its single-minded pursuit of efficiency.”

He suggests that Foxconn should consider building new factories in the interior provinces to help reduce the stress experienced by migrant workers. Such a move would coincide with Beijing’s recent emphasis on developing industry within the interior provinces.

“For only companies that adopt a more people-centered and far-sighted business model can survive in the long term,” Teng said.

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