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China Economy

Foxconn offers a glimpse of where Chinese manufacturing is heading

Andrew Leung says that we need only study the extraordinary changes at Foxconn over the past few years to see where China's manufacturing sector - and its economy - is heading

PUBLISHED : Saturday, 16 February, 2013, 12:00am
UPDATED : Saturday, 16 February, 2013, 5:19am

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Foxconn, a Taiwanese "original equipment manufacturer" with 1.2 million workers in mainland China, is getting help from the US-based Fair Labour Association to train workers in voting for representatives on 18,000 union committees, according to a report this month. Up to now, all workers on the mainland have been represented by the All-China Federation of Trade Unions, a state-backed unelected organ more on the side of management.

This unprecedented move is rightly being held up as extraordinary. What is extraordinary is not so much that this is happening, but why it is being allowed or, rather, encouraged.

First, China aims to double its economy by 2020, to become a fully fledged middle-income nation by 2030. Many developing countries find themselves in the so-called middle-income trap, their economic growth stalling when per capita income reaches US$3,000 to US$8,000. To overcome this hurdle, China has to lift its labour productivity.

With eight million university and community college graduates added every year, China will have 195 million graduates by 2020, larger than America's entire workforce today. China's workers are thus becoming better educated and more aware of their rights, now enshrined in China's latest labour laws.

Second, the teeming millions of university graduates are China's rising middle class, with higher levels of knowledge and aspiration. Amid social, economic and political tension, the Foxconn union election augurs well as a first step towards a more inclusive and equitable society in response to changing aspirations.

The development follows on the heels of a watershed open-and-fair election in Wukan village last March. Guangdong's then party secretary Wang Yang , one of China's reformist "young Turks", personally intervened to bring it about. These high-profile events are unlikely to be knee-jerk reactions, considering the Communist Party's record of cautious political management.

China is unlikely to import the West's form of democracy any time soon. However, while the country continues to study the latter's merits and fault lines, grass-root elections and civil society are by no means anathema to China's socialist ideals, according to Lin Chun in The Transformation of China's Socialis m. Indeed, China is showing signs of "going back to the future" in retaking the "mass line" by promoting "people-based governance" and grass-roots "workplace democracy". In the face of rising inequalities, the party needs to buttress its legitimacy in an enlightened "China 3.0", beyond sheer economic progress.

Foxconn has been moving its manpower-intensive operations from places like Shenzhen to Chengdu , due to growing labour shortages in the coastal regions. This shortage is both a consequence of China's one-child policy, which is resulting in a fast-ageing population, and a manifestation of the "Lewisian turning point", when further economic development triggers rising wages as the pool of "cheap labour" is exhausted.

Foxconn has already raised workers' wages fivefold since 2010. The company is also embarking on automation, vaulting to put in 300,000 robots in the short term and a million in the medium term. In the words of Tim Worstall in Forbes online, this is a new industrial revolution.

Moreover, for the first time in a century, as a developing country, China has just become the world's top filer of patents. It has also become by far the world leader in filed trademarks and industrial designs.

In the nation's latest five-year plan, seven major strategic industries are being targeted: energy saving and environmental protection; next-generation IT; biotechnology industries; high-end assembly and manufacturing; new energy sources; new materials; and new-energy-powered cars.

Foxconn's manufacture in China adds little value to the final product. The lion's share of profits accrues to Apple, its proprietary brand owner. Meanwhile, Chinese manufacture is migrating "from brawn to brain", as The Economist highlighted last year. Labour-intensive operations are relocating to lower-cost regions in Asia, Latin America and Africa. The days of original equipment manufacturers in China are numbered.

There are now reports of a move among some US companies towards "reshoring", bringing outsourced production in China and elsewhere back home. This is a result as much of labour shortages and rising costs as of new technologies like robotics. Nevertheless, according to the Financial Times, there are five reasons why China will remain the world's factory - long-established skill sets, economy of scale, unrivalled infrastructure, globally integrated supply chains, and the world's largest market of potential customers.

Moreover, truly global companies nowadays do not differentiate "shores". Peter Löscher, chief executive of Siemens, has said that his company's home shore "is now as much China and India as it is Germany or America". The same should apply to Apple.

Foxconn's operations in China have been dogged by environmental, health and safety issues, leading to a series of worker protests, riots and suicides. China has been cracking down on polluting industries and is now a world leader in solar, wind and hydro power.

According to "Science and Technology in China: A Roadmap to 2050", a publication of the Chinese Academy of Sciences, between 2020 and 2050, new and renewable energies are planned to grow from 16 per cent to 45 per cent of China's total energy structure, nuclear energy to grow from 4 per cent to 10 per cent, and fossil fuel (coal, oil and gas) to reduce from 80 per cent to 45 per cent. However, judging from the recent smog in Beijing and continuing environmental degradation in various areas, China's road to a "low-carbon future" remains long and tortuous.

Meanwhile, it seems that for reading a China in rapid transition, there are no better tea leaves than Foxconn.

Andrew K. P. Leung is an international and independent China specialist based in Hong Kong