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Foxconn Inland China Push Spurred by Labor, BI Says

March 03, 2013

Foxconn Inland China Push Spurred by Labor Not Wages, BI Says

A worker tests the circuit boards at a factory in Mianyang, Sichuan province, China. Inland migration of factories is fueling China’s development, with economic growth in Sichuan and Henan outpacing that of Guangdong as the government seeks to reduce income disparity in the face of a workforce decline. Source: AFP/GettyImages

Foxconn Technology Group and other electronics makers are saving little in wages by opening plants in inland China and are making the move because of labor shortages in traditional manufacturing hubs, according to Bloomberg Industries.

Apple Inc. (AAPL:US) supplier Foxconn, which has boosted its China workforce 50 percent in two years to 1.2 million, needs to use employees in more parts of the country to meet demand, Jitendra Waral, a Bloomberg Industries technology analyst, said in a note published today. The labor-cost savings are minimal as wages in western Sichuan province and central Henan, where Foxconn makes iPads and iPhones, are similar to those in coastal Guangdong.

“The trend is toward inland, and it’s driven by manufacturers’ need to keep finding workers,” Hong Kong-based Waral said. “As that drives wages higher, any cost benefits from inland labor are likely to continue shrinking.”

Foxconn has raised spending in the past three years to build factories, and competitors Quanta Computer Inc. (2382), Pegatron Corp. (4938) and Wistron Corp. (3231) followed. That inland migration is fueling China’s development, with economic growth in Sichuan and Henan outpacing that of Guangdong as the government seeks to reduce income disparity in the face of a workforce decline.

Surging Wages

“Closer to the pool of workers has always been one of the major reasons,” said Louis Woo, a spokesman for Taipei-based Foxconn. “Henan and Sichuan have always been the largest sources of migrant workers. That was why we moved to both of these provinces to tap their labor pool.”

Wages in Sichuan and Henan have surged 120 percent in six years because of economic growth, increasing local competition for labor and slower population-growth nationwide. That threatens to dent the migrant workforce that Guangdong factories rely on, even as Foxconn, Quanta (BREMSODV) and Compal Electronics Inc. (2324) gear up for sales that are likely to grow a combined 30 percent through 2015, Waral said, citing consensus estimates.

Capital expenditures at Foxconn’s Taipei-listed flagship, Hon Hai Precision Industry Co. (2317), surpassed $6 billion during the past three years, according to company filings.

Foxconn employed 300,000 people in Henan in the fourth quarter of last year, compared with almost none in 2010. The Sichuan and Chongqing workforce has jumped to 150,000 from almost none in the same period. The company employs 400,000 people in Guangdong.

The government has also spurred investment in inland regions through its “Go West” policy, which is designed to help curb regional differences in economic development. Growth in Sichuan and Henan will probably outpace Guangdong’s for a third straight year in 2013, according to Nomura Holdings Inc.

Falling Population

Foxconn began operations in Guangdong’s Shenzhen city in 1988 as the Communist government used the region as a test bed for efforts to ease economic restriction. The drive lured migrant workers to Guangdong, boosting its population by 66 percent in the two decades through 2010. The province is now China’s most populous and has the largest economy, government statistics show.

Manufacturers also are looking inland as a slower birthrate dents China’s workforce. The working-age population fell by 3.45 million last year to 937 million, according to National Bureau of Statistics data. That was the first decline in “quite a long period,” Ma Jiantang, the head of the agency, said in January.

Differences in average wages between inland provinces and Guangdong have more than halved in the past six years, driving the two locales toward labor-price parity, according to a Bloomberg Industries analysis of workforce, wages and labor demand. Wages in Chongqing, central China, have surpassed those in Guangdong, it shows.

Migrant Workers

Migrants accounted for 99 percent of workers at Foxconn’s two Shenzhen facilities producing Apple products, according to data from the Fair Labor Association, which was hired by the Cupertino, California-based company last year to investigate conditions among its suppliers. About 14 percent of workers at its Chengdu factory were migrants, it said.

“Manufacturers are spurred to move inland because that’s where most of their employees come from and are likely to be the source of their workforce in coming years,” he said. “Faster rising wages inland have the effect of both reducing possible incentives for migrants to travel thousands of miles for work, and forcing wages higher as employers compete for labor.”

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.

A worker tests the circuit boards at a factory in Mianyang, Sichuan province, China. Inland migration of factories is fueling China’s development, with economic growth in Sichuan and Henan outpacing that of Guangdong as the government seeks to reduce income disparity in the face of a workforce decline. Source: AFP/GettyImages “Henan and Sichuan have always been the largest sources of migrant workers. That was why we moved to both of these provinces to tap their labor pool,” said Louis Woo, special assistant to Foxconn Chief Executive Officer Terry Gou. Photographer: Forbes Conrad/Bloomberg Employees work on the assembly line at Hon Hai Group's Foxconn plant in Shenzhen, Guangdong province, China. Foxconn began operations in Guangdong’s Shenzhen city in 1988 as the Communist government used the region as a test bed for efforts to ease economic restriction. Photographer: Qilai Shen/Bloomberg A worker walks past a shopping and retail pedestrian street in Chongqing. Wages in Sichuan and Henan have surged 120 percent in six years because of economic growth, increasing local competition for labor and slower population-growth nationwide. Photographer: Nelson Ching/Bloomberg

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