Foxconn And Chemicals

By John Richardson

THE recent investigation by the US-based Fair Labor Association into Foxconn is a further indication of how China is transforming its economic model.

It was found that Foxconn breached several Chinese regulations, including a maximum working week of 49 hours. The company is China’s biggest private-sector employer and manufactures 40 percent of the world’s electronics.

The association being allowed into Foxconn by the Chinese authorities is significant, as is the fact that the investigation was initiated by Apple. Apple was no doubt responding to bad publicity earlier this year over working conditions at Foxconn. The US company has already agreed to raise wages in response to the report.

Back in the 1980s, around 5 percent of China’s GDP was generated by exports. Now the figure is closer to 40 percent as a result of China deliberately stacking the competitive-advantage cards in its favour.

This has involved low salaries and poor working conditions, lax environmental standards, cheap energy, cheap land, excellent infrastructure and tremendous tax incentives, particularly post-2001 after China joined the World Trade Organisation.

China is now trying to create a more equal society, hence its determination to raise minimum wages. Minimum wages are being raised by 13 percent under the 12th Five-Year-Plan (2011-2015), but total wage costs, when extra social benefits are taken into account, are reported to be increasing by 15-20 percent per year.

And the Foxconn investigation could result in a “race to the top” by contract manufacturers in general as working conditions are improved, said Auren van Heerden, president and CEO of the Fair Labor Association. This would, of course, add to costs.

Here are some implicatioons for the chemicals industry:

*A China plus one strategy, in response to these rising costs, has long been the policy of the big Western retailers and branded-goods manufacturers. This process is likely to accelerate with countries such as Vietnam, Indonesia and Bangladesh likely to benefit. This will result in the relocation of some chemicals demand.

*For reasons of infrastructure, logistics and the availability of skilled labour, some low-value manufacturing will stay in China.

*Suppliers of commodity chemicals and polymers to Western branded-goods manufacturers forced to stay in China will, as a result, be under more pressure to keep prices down. “We used to be able to raise our polymer prices by $100/tonne or more and Apple didn’t really care,” said a source with a former Apple plastic-resin supplier. “This might no longer be the case for Apple, and probably more so for other companies where margins on their finished products are not as spectacular.”

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