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Foxconn symbolizes China economy’s wider structural problems and industrial unrest (2)

Posted by Author on June 2, 2010

By Craig Stephen, The Market Watch, May 31, 2010 –

<< Previous

(China’s wider problems)

While Shenzhen was set up as China’s first Special Economic Zone thirty years ago, media reports describe Foxconn’s operations there as operating something like an independent kingdom with officialdom rarely regulating it. Given that the company reportedly provides more than 10 billion yuan ($1.46 billion) in taxes annually to the city’s coffers, it’s understandable if there is a hands-off approach.

Arguably Foxconn symbolizes wider structural problems in China’s economy: It’s unbalanced and overly focused on exports and investment spending, and lacks domestic-led consumption.

At the root of weak consumption is low wages. According to a survey released by the All China Federation of Trade Unionists (ACFTU) last week, almost one-quarter of Chinese employees had not seen a salary rise in the past five years. The workers at Foxconn got a base monthly salary of 950 yuan, which is in line with the minimum wage set by Guangdong government — although a 20% pay rise was announced on Friday.

The low level of wages is also borne out by looking at the make-up of China’s gross domestic product, where the share of company profits is rising and wages shrinking.

According to the ACFTU the proportion of China’s GDP that goes towards wages and salaries has continued to shrink since 1983, having dropped from 65.5% in 1983 to 36.7% in 2005. Meanwhile the proportion of returns on capital in GDP had risen by 20% in the 27 years through 2005.

This may be good news for equity investors in the short run, but it hardly looks like a sustainable model of development.

The Foxconn controversy also came in a week when workers in Honda’s (HMC 30.40, +0.36, +1.21%) (JP:7267 2,764, -6.00, -0.22%) four mainland factories were shut after parts makers went on strike seeking a pay rise, paralyzing the Japanese auto maker’s production.

The risk is that Foxconn is just the tip of the iceberg, and China could be entering a new phase of industrial unrest. Other imbalances in China’s economy, such as feel-bad rising prices of food and housing, are exacerbating tensions.

We should acknowledge not all factories are bad stories. Huawei, China’s largest telecom equipment vendor, is also based in Shenzhen, and is held up as model operator with its impressive, campus-like facilities. Making modern telecom equipment is more sophisticated than assembling mobile phones, of course.

The mainland authorities, manufacturing companies and international brands face a difficult challenge to quell labor unrest and better share the spoils of China’s growth.

Dealing with the cause — better pay and conditions — looks to be a better start than simply asking workers not to jump. (END)

The Market Watch

Related:
Foxconn symbolizes China economy’s wider structural problems and industrial unrest (1)

One Response to “Foxconn symbolizes China economy’s wider structural problems and industrial unrest (2)”

  1. Haberler said

    this article is greate , very very nice , thans for info

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