Top News of the Week
Contract Manufacturer Foxconn Moving Inland to Lower Cost
Foxconn, which is almost synonymous with contract manufacturing for technology firms, this week officially announced that the company will relocate most of its manufacturing base to Northern China within this year. After the move, the company will keep about 100,000 workers, or about a quarter of its workforce, in the southern coastal city of Shenzhen, where the firm is headquartered, to work on mainly Apple's products.
The announcement came only weeks after Foxconn stunned its peers by two surprise salary hikes that will eventually bring monthly salary to CNY 2,000 for an average worker in its Shenzhen plant, more than doubling their previous pay. Amid scepticism about its ability to offset the cost increase, Foxconn said at the time that it will try to negotiate higher prices with customers and introduce more automation in the manufacturing process. Apparently, the real answer lies in relocation to inland China, where labour costs can be as much as 30% cheaper than the coastal regions.
As a major employer of migrant workers in China, Foxconn is probably among the first to feel the pressure of labour cost creeping up, especially along the coastal regions where the problem of a labour shortage has worsened in recent years. For more than two decades, abundant supply of migrant workers from rural China has helped keep wages low. Statistics show that wage increases for migrant workers lagged that of economic growth and productivity gains in the manufacturing sector. But the situation is starting to change, and workers made clear their dissatisfaction at wage and working conditions through a recent spate of strikes and, unfortunately, suicides.
By moving further inland, Foxconn is blazing a new trail for contract manufacturers in the new world of rising labour costs. For many smaller firms that don't want to follow Foxconn's example of voluntary wage increases, they will have to raise their pay anyway as local governments across China are raising minimum wages by double digit rates. Some naysayers think that it is very difficult to replicate in inland China the advantage of government efficiency, supply chain proximity and the pool of experienced workers that China's coastal cities have, but Foxconn seems to think the move will benefit more than hurt its business. For now, all eyes are on Foxconn.
Market Recap
Chinese stocks sank to a new low in more than a year, as economic data showed further evidence of slowing in the manufacturing sector, sending jittery investors to the sideline of the market. The mega-IPO of Agricultural Bank of China, and the massive capital-raising plans from other major Chinese banks, also tied up capital and damped market sentiment. The Shanghai Composite Index fell by 6.7% to 2,383 over the past trading week, while the Shenzhen index fell 8.7% to 9,228. The Chinese stock market was the worst performer in the world for the first half of 2010, down 27% from the end of 2009.
Macro and Industry Updates
June PMI Data Showed Further Slowdown in Manufacturing
China's official PMI for June was 52.1, down from 53.9 in May. This closely-followed gauge on manufacturing activities in China has been sliding in the past two months, but stays above 50, which indicates expansion. The underlying statistics point to shrinking orders from both domestic and international markets, as well as to rising inventory levels in the steel and furniture industries. The silver lining is that purchase prices were also falling in the past month, especially for coal, iron ore and steel products, alleviating cost pressure for some manufacturers.
A 51% Stake in China's Largest Mutual Fund Put on Sale
The stake in China Asset Management, the largest mutual fund in China with CNY 260 billion under management or about 10% market share, was put on sale by its parent, Citic Securities, China's largest brokerage firm. The sale will help Citic meet regulatory requirement that caps maximum stake at 49% for a single shareholder in asset management firms that are not joint ventures with foreign companies.
Contributions from Iris Tan and Zhao Hu.
