Foxconn Suicide Problem and Its Recommendations

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2013 _ 2012

Wages and salaries $235,162,293 $ 227,223,568

Employee stock options 1,416,688 2,191,699

Labor and health insurance fees 12,182,952 11,702,871

Pension costs 15,816,363 15,631,373

Other personnel expenses 13,622,206 13,290,348

$ 278,200,502 _ $270,039,859

Unlimited supply of cheap surplus labour has driven the growth in Chinese manufacturing industries for decades. Foxconn, the Taiwanese electronics manufacturer also makes use of this advantage and employs more than a million workers in China. However, some economists say, when labour surplus is superseded by shortage, wages will rise and factory owners like Foxconn need to change their business model: Increase worker productivity by raising salaries

In order to maintain low wage cost, Foxconn moved many factories to the inland while wages in the coastal region have been climbing with an average of between ten and twenty per cent ayear. Guizhou is one of China’s poorest areas, with an estimated per capita GDP of just $3,700 last year, according to government estimates, the lowest of China’s 31 provinces. Moving to the southwest part of China is recognition that “cheap China” is not so cheap any more. 2008 Contract Labor Law and mandated minimum wage increase of 13% a year from 2008 to 2012, with higher targets in the future worsening the problem.

Another reason that the labour cost increases is due to the original company management. Foxconn’s management style was deemed inhumane and abusive. Probing into the enployment practices in Foxconn, one could compare them to labor camp conditions. Long working hours, employee mistreatment, illegal overtime, failure to report accidents, discrimination against mainland Chinese workers by their Taiwanese co-workers, and a lack of working relationships were all regarded as potential problems. Foxconn has become the epitome of the country’s sweatshop conditions after a spate of suicides at their factories in 2010.

In response to the suicides, Foxconn substantially increased wages for its factory workforce, installed suicide-prevention netting, and asked employees to sign no-suicide pledges. As of mid-2011, the basic monthly wage of assembly-line workers was 1,350 yuan (US$213) in Chengdu and 1,550 yuan (US$245) in Shenzhen, the other surveyed Foxconn factories falling within this range. The regional variations reflect differences in China’s minimum wage by locality. In December 2013, as Foxconn’s entry-level workers’ wage was increased to 1,800 yuan a month (US$285) in Shenzhen.

Problem One: Recommendations

As the question mentioned in the above part, the direct labour cost which is a variable cost is increase continually in the China because of the minimum wages and poor reputation of the workers’ suicides. This means that the variable cost of the Foxconn will keep increasing as they need to follow the government laws and attract the young workers to work in the company to improve the productivity. To resolve the increasing variable cost, the Foxconn to replace the workers with the machinery or equipment is a possible solution. Just let us assume that if the Foxconn can introduce machinery with annual depreciation of $2000000 that can be reduce the labour cost about 1% and we use the figures of the labour cost in 2013.

Avoidable cost (direct labour cost reduced)($278,200,502 *1%) 2,782,005

Additional cost (annual depreciation) (2000000)

Net advantage 782,005

If the annual deprecation of the machinery is less than $2,782,005 if the company have the same sales revenue so that the company’s profit can be increase. The depreciation of the machinery and equipment is usually a fixed cost.

Also, changing the labour(variable cost) into the machinery has another benefit to the Foxconn. Changing labour into the machinery means that the company has a higher fixed cost structure. As the Foxconn’s annual report mentioned, the company has enlarge its customer base and attract more new customers. This means that the operating revenue of the company can be keep increasing. Due to the increasing labour cost, if the Foxconn keep using the high variable cost structure, the contribution margin and profit both will be reduce. But if using the machine which means higher fixed costs structure, the fixed cost will be a lower proportion of the company as the company’s sales revenue will be increasing continually and the income of the company can keep increasing in the future years.

Also, the second recommendation about the keep increasing labour cost is the foxconn may be dropped some of the unprofitable projects or work assembly. According to the annual report and some of the news, some of the operation only have $23-25 contribution margin per units which contribution margin ratio is only 2.03%. However, the labour cost was keep increasing with a rate of 13-14% and with the minimum wages ($1800) and this means that the variable cost may increase around $240(1800*13%). It is difficult for the company to earn a contribution margin in the future years with the increasing labour wages and salaries. As a result, it is necessary for the Foxconn company to providing information about the less profitable segment or project to the managers to consider the avoidable cost and lost contribution margin to think about dropping segments.

Problem2: Ethical Concern

I) Environmental Problem

Foxconn have been criticized by Chinese non-profitmaking environmental organizations for toxic water pollution. According to the news on 5 August 2013, the environment groups found that Foxconn’s factories have discharged water in black-green color and a chemical odor into the Huangcangjing and Hanputang rivers, which supplies Shanghai drinking water. It may have a serious impact on the nearby marine ecosystem and human will also be suffered from the water pollution finally. As a huge manufacturing company, discharging industrial waste improperly can cause enormous consequences to the environment.

Foxconn discharges the industrial waste water improperly since it can save the cost of sewage treatment which can be a considerable cost of the company. Also, it is very convenient to discharge waste chemicals to the nearby rivers. Although discharging the waste water may