Will Innovation Solve the Foxconn Problem?

Since I’ve spent the last week hanging out with intellectual property lawyers, I think it’s only fitting that I dive back into the china/divide with another note on innovation policy. As I’ve noticed over the past few days, the Foxconn suicide/attempted suicide stories have been coming in an unending stream.

Charlie and Kai have covered the basics and more, so I will not rehash. Moreover, I will probably revisit the general topic once more and let you know my take on the issue (i.e., who I think should be blamed, if anyone). At the moment, I have IP on the brain and thought I would respond to this interesting discussion about economic policy. A bit boring for a Sunday, perhaps, so I’ve dressed up the post with some very nice Lefty artwork – enjoy.

William Gropper's "The Sweatshop"

Most of the commentary and analysis I’ve read has focused on the Foxconn facilities and their treatment of their workers. This is of course appropriate, but I was waiting for this story to get stale and for someone to use these unfortunate incidents to make a larger policy argument.

I can always count on China Daily, which published an editorial on the subject of Foxconn and China’s economic policy.

The first sentence contains a concise thesis statement:

The string of suicides at Foxconn highlight the urgent need for China to adjust its mode of economic growth.

So let’s take a brief look at this contention. Half of the article contains information about how much low end processing trade sucks.

With 800,000 employees on the Chinese mainland, the Taiwan-owned company’s exports totaled 55.6 billion U.S. dollars in 2008, accounting for 3.9 percent of the mainland’s total exports.

Foxconn epitomizes China’s traditional export-driven development pattern: investment and cheap labor combining to produce low value-added products.

Processing trade accounts for 50 percent of China’s total trade volume, and it contributes much to the nation’s trade surplus. But it is at the low end of the world production chain.

Eyre Crowe's "Dinner Hour, Wigan"

Sure, this is low value added work, but I don’t think the government was complaining too much about this as millions of folks walked off the family farm and found gainful employment. I don’t think anyone was too upset (except for the manufacturers) as wages in areas like Shenzhen and Dongguan steadily climbed for many years.

Now the author decides to play the victim card:

Foxconn is the biggest manufacturer of Apple’s iPad. The U.S. market research firm iSuppli has estimates the material cost of the low-end version of the iPad is around 260 U.S. dollars, far less than its retail price of 499 U.S. dollars.

The display panel, supplied by LG Display and the most expensive part of the iPad, is priced at 65 U.S. dollars while the device’s manufacturing cost is 9 U.S dollars, according to iSuppli.

Apple takes the lion’s share of the profits with design, while the company of the Republic of Korea makes a big profit with its patented technology. But the mainland-based companies manufacturing it make comparatively little.

One could do this all day with a variety of products. The author’s purpose here is to show that the owners of the technology are the ones that make the most money, and in turn screw over the poor folks who put the stuff together.

So here is the conclusion on this kind of work done by Foxconn and why it is sorely lacking:

The export-oriented processing model can make products, boost GDP, and employ people, but it cannot create brands, develop advanced technology, generate high profits or pay high salaries.

Despite its fast economic growth over past decades, Chinese labor income relative to GDP has dropped — from 49.49 percent in 1993 to 39.74 percent in 2007.

Only through innovation can Chinese companies break away from the traditional growth model and upgrade its business model.

All right, this sounds very straightforward, so you might wonder what the hell my problem is here. Let me unpack some of the inferences in the above language.

First, there is no doubt that this low margin work can not sustain high wages, and certainly this is not the kind of business model that encourages high-end innovation, at least the kind that will result in intellectual property that can generate license fees.

Second, China wants to move up the value chain and has been actively trying to do so for years. Part of that shift in emphasis is to support innovation policies.

Third, China’s income inequality has worsened over the past few years.

Thomas Anschutz's "Iron Workers at Noontime"

All of this is true, but the author has failed to tie up these points and relate all this to the original point: the Foxconn suicides. Let’s take the income inequality issue and low wages. What is the evidence that these workers’ actions were motivated by low pay? Moreover, what is the evidence that these workers’ economic situations were made worse by taking Foxconn jobs? I suspect that many of them saw a rise in income after working at Foxconn.

A lot of the discussion of the Foxconn deaths has covered working conditions, as opposed to wage levels. As a motivating factor for suicide, this to me makes a great deal more sense than talking about low wages per se. For some reason, the author does not take this rhetorical opportunity.

At the end of all this, I’m left with one question: how do we know that China’s innovation policies will work, and will this suggested economic plan necessarily lead to a narrowing of the income gap?

I would answer “Probably yes, but not necessarily.” In the knowledge economy, he who owns valuable ideas (and can protect them!) gets the spoils. In the aggregate, this can lead to higher GDP growth rates and, more importantly, higher GDP per capita, which is the big prize China has been seeking for many years.

But let’s not pretend that GDP per capita is anything but an aggregate number. Just because a big pharmaceutical company owns a fabulously valuable patent portfolio, for example, this does not mean that the average guy out there is going to benefit from that.

Someone still needs to assemble that widget, and until China completely transforms economically, which will still take quite a few years, whether the IP is owned by a foreign or domestic owner will have no effect on labor conditions. I believe the 20th century philosopher Townshend explained best how conditions may not necessarily change with new management.1

All we need to do is look at income inequality figures, the most common metric being the Geni Coefficient. In 2009, China and the U.S. were not that far apart. America is a wealthy country and a leading innovator, while China is still developing.

To be fair, among developed countries, the U.S. is a bit of an outlier in this regard. Most other innovators have less inequality. I would argue, however, that this has more to do with domestic policy (e.g. tax, labor, business regulation, social insurance) as opposed to how much a nation innovates.

To sum up: nations can grow their way out of recessions, but they can’t grow their way out of income inequality. The Foxconn suicides might tell us something about labor conditions, but not much about the income gap. These deaths certainly do not suggest an economic policy fix. Substituting a local patent owner for Apple will not necessarily make the life of that poor factory worker any better.

  1. Yes, I was indeed referring to The Who’s Won’t Get Fooled Again, and I’ll stand by my statement. []


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  1. B-real

    Great post. I have to agree with everything. In my eyes it comes down to combination of the laws and employment conditions. As an employer if the law posts minimum requirements, I will make sure we operate with in those requirements. Most of the laws are not really in favor of the labor force as they say they are. Outside of the laws it’s up to the employer to want to improve the conditions of its employees. Give a little more than minimum to let the people think they are valuable, like perks and benefits other than medical. Constant position changes to diversify their craft, it will give them the illusion that they are moving up the chain with a comprehensive raise. Throw parties in appreciation. People need to know they are worth something and are not just machines operating the machines or they will break like machines.

  2. Joe Ginger

    Thus far, all the reporting, commentaries are all focused on what Foxconn does to its employees. From there, there has been all sorts of theories postulations, commentaries … all with valid perspectives in their own rights.

    It is quite interesting that no one compared Foxconn with a big privately owned enterprise, say Huawei (although i am sure there are plenty of people who will dispute Huawei’s status as a “private enterprise”) or a big state-owned enterprise (pick any, even after all these years of economic developments, i believe China still have too many of these!) and ask how are those companies faring?

    What are the suicide numbers among these companies? Are the numbers even worse but, as per usual practice, got buried? Are they better, if so, what are they doing that is right?

    I was involved with packaging quite a few SOEs and TVEs for investors in the 90s, i would say that employment by many of these, even nowadays, are revered as being given a key into Eutopia.

    Try anyone of the top 10 steel manufacturers in China and you will find far tougher working environment than Foxconn’s. From my personal experience, workers there are happy, wages are as low as it can possibly get, but pressure from increasing income disparity do does not seem to apply. So just what are these companies doing right?

    Or perhaps more relevant a question, and one that no one seem to care enough to ask, from Chinese to US politicians, from human rights groups to Google: “Just what it is that Chinese people want?”

    • Huawei’s operation is not nearly as big as Foxconn’s – back in 2007 their factory work-force in Longhua was still in the low tens of thousands, compared to 300,000+ at Foxconn. They were reputed to have better working conditions though.

  3. Goodness

    Good read. If there is anything the Chinese can learn from the US its that innovation (often times in the form portable knowledge) in and of itself won’t improve job opportunities or working conditions. How to establish and enforce good labor laws in a country that sometimes looks like the poster child for corporate lawlessness. I’m having trouble imagining a Chinese OSHA with any real power ever emerging.

  4. Michiel V

    (First time commenter, please go easy on me:)
    There are many questions about these issues that may never get answered, depending on who you ask, or at all.
    – For my (Chinese) family, the answer to why these kids are jumping is easy and clear. I’m not going to elaborate on that (if they wanted to, they can themselves). But it’s the “who you ask” bit I’m illustrating. Some people have all the answers. I don’t. I have questions.
    – Whether these suicides are ‘normal’ or not is definitely a tricky question. Yes, statistics. No, statistics. But wasn’t there at least one who accidentally fell off a building after accidentally stabbing himself four times? I’ve had a relative jump off a building (no, not Foxcon) under equally odd circumstances, perfectly happy kid, suspicious rumors about baoan being involved, etc. Of course the police didn’t find anything wrong. Big company. Sit-in wailing in front of the office did get the family some compensation, without interference of the police. So, how many of these Foxcon kids are ‘trouble makers’?
    – Sure, there may be kids who kill themselves for stupid reasons like not getting rich immediately (see below) or because their girlfriend/boyfriend dumps them or actually having to work rather than sleep, play, and chat. But do they do so more frequently at Foxcon than at other places? From where I sit (Suzhou) it does seem that the trouble is more in the south, but then again, so are the menial jobs, so it may even out. Statistics again. Does anybody know?
    – So, if it’s low pay and/or bad conditions (and not something else), then why jump and not just quit and go someplace else? Sure, there’s other places that pay less, have worse conditions, but there’s also places that pay same or better, have better conditions. Currently, it is not too hard finding a job, unless you are a complete idiot. Everybody’s hiring. Everybody.
    – Try to answer the previous question: From what I understand, there is enormous pressure to succeed, strike it rich. Sure, you sat around sleeping or playing with your phone in high school or college, but hey, you sat around sleeping or playing with your phone in high school or college so you must therefore be brilliant and get a good job, right? And so you head south, where everybody knows the streets are made of gold, just flip-up a few gold bricks and your done, right? (I know several people who actually believe there’s easy money like that, just need to show up). You start work for a famous company, with or without wonderful promises (you too can be rich, if only you work hard enough, look at me…) and since you are brilliant, your management position and accompanying BMW will be made available to you within days, weeks at most, naturally. Besides, while you worked hard in school to memorize and conform, brilliant you has never had anything denied, no brothers picking on you, whatever, so why would anybody now deny you your success? [and then you wake up, and jump off a building? I don’t know. I’ll have to ask…]
    – So, what to do? Get China up the food chain, yes. That will work, eventually. Maybe. But how? Just change the patent holder (somehow?) to a Chinese company? That will not work. Make it worse perhaps. Better enforcement of existing and maybe new labor laws will help. But those who know China a bit know that’s going to take time.
    – Innovation? Yes. Steal high-value jobs from elsewhere (we still call it stealing, do we?). That will work for some. Skilled jobs go for multiples of unskilled jobs (e.g. 8K+ v.s. 1K starting salary). But I don’t think innovation will be achieved by the current innovation policies. Those mostly just transfer tax money to rich people. And you can’t become innovative by just copying existing stuff, no matter how many encouraging slogans. I think it comes from asking questions, non-conformance, trying new things, taking risks, failing and trying again. Don’t see that happen any time soon here, though. Later, maybe.
    – Am I wrong here? Can somebody tell me/us why for example the USA innovates?

    • Dude!! UR牛B!!
      I will tell you what America! innovates!
      “if we do not destroy, we set the standard!”
      USA Always A”O” K baby!
      五毛党 that means wumaodang
      I will go easy on you,
      love and peace

    • Jones

      I feel like killing myself right now here at work. I’m going to kill Kedafu first, though. Just for kicks.

      • bai ren

        kedafu if got your back…. but you know my fee 五毛hired guns come that cheap

        • King Tubby

          bai ren. Hired gunsels are el cheapo. Antonio Bandera. El Mariachi.
          kedafu is okay as he provides me with musical chuckles, but I think my last one to him on CS passed his horizon without notice: kedafu has got to know his limitations.
          But I think he is trying to sort that one right now: fossicking thru his Slade, The Sweet and Duran Duran collection to solve the riddle. (A public school education has its limitations plus those cold showers after rugger.)

  5. Richard

    Income inequality is still very high in countries that have moved up the value chain to become innovation-based economies.

    Gini coefficient:

    China: 46.9
    U.S.: 40.8

  6. 1) China’s innovation policy and Foxconn’s innovation policy are not one and the same, Foxconn has made abortive moves to scale the innovation ladder, but to be honest these are largely for show. In fact much of what Foxconn does is for show – this is the result of stock options consituting such a large proportion of the income of the mid/senior-level management. It works – a substantial part of the Taiwanese population holds shares in them.

    2) IP ownership is not nearly as important as IP generation, on paper Foxconn excels at this – when I worked in the IP department there we were making in excess of 3,000 USPTO applications a year, and 8,000+ applications to the Chinese SIPO.

    In reality, however, these application were largely worthless, described by my co-workers as 垃圾案子. The R&D necessary to generate substantive applications not only wasn’t happening, but quite probably couldn’t happen within a company like Foxconn, which is oriented entirely toward streamlining manufacturing things for other people.

    3) Trying hard to see how exactly you have connected IP, innovation, development, inequality and Foxconn – but I’m afraid I can’t really make it out. Care to clarify a little? You seem to say that the people holding the substantive IP are the ones driving inequality – have I read correctly?

  7. bai ren

    Government policy on economic growth does relate to this issue, but the article and comments appear to deal with it at the level of politics… who are we to debate scientific socialism? Its science!

    But how about the softer sciences?

    China is currently going through a “process of changing from peasant to citizen, namely from dependents of the community to individual free people” (Qin Hui). Migrant workers remain peasants, but Chinese social consciousness has been evolving past accepting this social position.

    Anyone read Tom Doctoroff’s piece on the rising middle class in China?

    The thrust of my point in connecting these ideas is that lifestyle choice is growing in importance around the world and in China. What is a lifestyle? it is the practice -or enactment- of identity. Entitlement to expressing identity is catching like wildfire in china, just look at all them crazy post 90 gens…. YES the same group that is here commiting suicide.

    Providing amenities does improve the lifestyle of people, but Foxcomm is doing it in a way which reenforces dependance. Wage disparity is an issue as people want to work not to be part of the great machine advancing their nation, but to be able to afford their lifestyle.

  8. Amy

    Huawei’s operation is not nearly as big as Foxconn’s – back in 2007 their factory work-force in Longhua was still in the low tens of thousands, compared to 300,000+ at Foxconn. They were reputed to have better working conditions though.