Global Business 3rd Edition by Mike Peng

Exercise 83

The historically low-profile company that made a lot of popular electronics gadgets suddenly found itself under the global media spot light when a number of employees committed suicide. What happened? How should it go forward?
While you are playing on your Apple iPhone, Sony Playstation, or Hewlett-Packard (HP) computer, you probably know those gadgets are not made in the United States, and you probably guess they are from China. But you probably cannot recall the name of the company that produces them. This company has nearly one million employees, more than the population of Detroit, Michigan. Its 25 factories are not only concentrated in China, but are also scattered across 12 countries (Australia, Brazil, the Czech Republic, India, Japan, Mexico, the Netherlands, Poland, Russia, Slovakia, Singapore, and the United States). This company is named Foxconn Technology Group, anchored by the Taiwan-based Hon Hai Precision Industry and run by Terry Gou, founder and chairman of the board.
Early History
Gou's entrepreneurial orientation drove the early success of his company. Gou started his business in 1974. With three years of vocational training and two years of experience as a shipping clerk, he witnessed the boom of Taiwan's export economy. With a $7,500 loan from his mother, he bought a couple of plastic molding machines and started making channel-changing knobs for black-and-white televisions. His first customer was Chicago-based Admiral TV, and he soon landed deals to supply RCA, Zenith, and Philips. In the early 1980s, Gou made his first big push into the United States, visiting 32 states over the course of an 11-month tour. His proactiveness was not diminished by the lack of a prestigious college degree. He dropped in on companies unannounced, like a doorto- door salesman, arriving in a "big and safe" Lincoln Town car he rented in every city. "He is really one of the top sales guys in the world," said Max Fang, the former head of procurement for Dell in Asia who did business with Gou. "He is very aggressive and always on your tail."
Managing an Expanding Firm
Gou dares to take strategic risks. As the Taiwanese labor market tightened and wages rose throughout the 1980s, manufacturers started moving to Malaysia, the Philippines, and Thailand. Although China was nearby and offered a virtually limitless supply of cheap labor, few Taiwanese companies dared to go there. The primitive infrastructure and inscrutable communist government scared them off. Gou was undeterred, setting up shop in a dusty suburb of Shenzhen across the border from Hong Kong, where factories producing cheap garments, shoes, and toys were springing up. The political situation was tricky. Beijing still regards Taiwan as one of its provinces that should be integrated back into the motherland-by force if necessary. By 1996, believing that China would become a manufacturing juggernaut, Gou started heavily investing in Shenzhen, where he eventually built his city-like factory complex with 470,000 employees. In addition to the investment in China, Gou also invested aggressively in the Czech Republic and Brazil, among many other countries.
Like Henry Ford, Gou understood the importance of vertical integration-producing his own materials and tweaking his assembly lines for maximum efficiency. "He had this vision and the guts to do anything in a big way," said Fang. "When I first visited the factory, I saw the whole value chain nicely and effectively designed, starting from a big coil of sheet metal at one end that was cut, formed, welded, and stamped to make the top and bottom of the chassis. Then they did the in-line subassembly, adding a floppy drive, the power supply, and cables. It was all shipped to customers who only had to install the motherboard, CPU, memory, and hard drive. After this revolution by Gou, final computer assembly was easy." To sustain an efficient Chinese workforce, Gou quickly discovered that he had to provide housing, food, and health care- additional costs that kept the barriers to entry high.
"He had to do everything himself," said Michael Marks, then chief executive officer of contract-manufacturing giant Flextronics. "They had chicken farms to lay the eggs for the cafeteria."
To manage such a large company with its armies of employees, Foxconn had to cultivate a military-like tough culture. On the walls of factories are various written aphorisms, such as "Work itself is a type of joy," "A harsh environment is a good thing," "Hungry people have especially clear minds," and "An army of one thousand is easy to get; one general is tough to find."
This military-style management constantly attracts criticisms, though Gou usually sees such criticisms as a compliment. In 2006, a British newspaper claimed that Foxconn was Apple's "sweatshop." To mitigate criticisms, Foxconn provided Apple's auditors from the United States, China, and Singapore with unfettered access to its employees and working environment. Apple's final report showed no forced labor, but it found that employees were exceeding the company's limits on working hours and days. Foxconn considered Apple's report to be fairly accurate. However, in 2012, some media still labeled Foxconn a "sweatshop."
Suicides and iPads
Apple's investigation provided vindication for Foxconn but provided little benefits for its workers. Grumbles from employees in terms of psychological stress still did not catch managers' attention. One 21-year-old assembly-line worker, who asked that his name not be used, told reporters that conditions at Foxconn made his life seem meaningless. He said conversation on the production line was forbidden, bathroom breaks were kept to 10 minutes every two hours, and workers were yelled at frequently. In 2010, a wave of employee suicides caught the attention of top managers as well as the public around the world. At least 12 employees had committed suicide within half a year. Thereafter, news regarding suicides was blocked by the Chinese government.
Gou admitted that he did not notice any differences when the first three suicides took place. Not until the fifth one committed suicide did he realize that he needed to do something to fix the problem. Unfortunately, Foxconn did not respond to it as a serious corporate crisis until the ninth suicide case took place. But it was too late. A low-profile, secretive company suddenly became the spotlight of the media around the world. At a press conference in May 2010 confronting aggressive reporters, Gou was virtually speechless. "No matter how you force me, I don't know [the causes of these suicides]."
Regardless of the clumsy responses by Foxconn, two intriguing questions emerge. First, given such negative publicity, why do image-conscious companies, such as Apple, Cisco, HP, IBM, and Microsoft, keep doing business with Foxconn? Second, who should assume responsibility for these suicide events or similar social issues in the future?
For many companies, Foxconn is difficult to substitute. On the one hand, Foxconn is willing to take risk on behalf of its major clients. Foxconn spent $1 billion on a factory that would produce 30 million machines a year just for HP. When Apple's iPhone 4 was nearing production, Foxconn and Apple discovered that the metal frame was so specialized that it could be made only by an expensive, low-volume machine usually reserved for prototypes. Apple's designers would not budge on their specs, so Gou ordered more than 1,000 of the $20,000 machines from a Japanese company. Most competitors have just one. Foxconn may compromise its bottom line in order to earn trust from its clients, resulting in more business orders from its clients down the road.
Foxconn's business, on the other hand, is not just relying on cheap, unskilled labor. It now employs 50,000 toolmakers, including a team of 2,000-plus employees who focus on the design and fabrication of molds and dies. It also employs about 1,000 workers in a Houston, Texas, plant that specifically provides high-end servers for its clients. By the end of 2010, Foxconn had a total of 88,200 patent applications, of which 39,870 were awarded, ranking No. 13 in the United States for the number of patents awarded. This knowledge-intensive labor force enables Foxconn to boost production faster than anyone else. This is especially important in the handset market where new models are constantly introduced.
While most of its corporate clients know that overdependence on Foxconn may constrain their flexibility, it is hard for them to switch from a partner the size and sophistication of Foxconn. Separating from Foxconn can be painful because it possesses most of the knowledge involved in the production and prototyping of any forthcoming product. For example, while Apple tries to reduce its dependence on Foxconn by finding other suppliers, Foxconn is the only capable manufacturer that can make the iPad and one of the only two producers that can make the iPhone. From the perspective of Apple, it does not want to expose its commercial knowledge to too many contractors. Although low-cost labor that Foxconn possesses does not seem too difficult to duplicate, a high level of accumulated knowledge is not easy to imitate in a short time. In addition, Foxconn has managed to find a way to orchestrate all of its resources with the best combination to meet clients' needs and create competitive advantage.
Foxconn's Views on Social Responsibility
As economic conditions become better, not only do wages go up, the cost of taking care of employees and other stakeholders also shoot up. Despite the suicide events, Foxconn is proud of being one of the leading companies in providing benefits to its Chinese employees. For example, Foxconn is one of the few companies that provide scholarships to help employees finish their education degrees. Foxconn also provides annual medical checkups for employees, and one of its campuses in Shenzhen even has a branch of a local hospital.
Providing employees with basic necessities including a safe and convenient place to live at work site might have been sufficient in the past, but this arrangement no longer satisfies the needs of today's young migrant workers. After the suicide events Foxconn has made a lot of effort to improve morale and working conditions. It more than doubled wages in Shenzhen in 2011 and instituted a program called "Care-Love." In 2012, Foxconn generously invited 216 employees from 17 provinces in China to tour Taiwan. "This trip is to help reduce worker stress and encourage highperforming workers," said Gou. For example, Li, 20, is one of close to 500,000 people working in Shenzhen. She is not only making more money but has made new friends and gone on company-sponsored outings with colleagues. "I've been to the beach and the mountains," she says. "People are definitely much happier."
However, a change in Foxconn regarding "social responsibility" is coming. "We came in the early '90s to Shenzhen, built factories, and provided dormitories, cafeterias, and everything, even laundries," said Gou. "We are not just a factory, we take care of social responsibility." Now, "I think we need to change the way things are. Businesses should focus on business, and social responsibility should be the government's responsibility." Gou is negotiating with the provincial government to provide low-cost housing to his workers. Meanwhile, Gou has decided to stop operating its own dormitories for workers. Foxconn has essentially outsourced its living arrangements to two real estate companies that will eventually take over the operations of 153 dormitories that house half of its workers in Shenzhen. But can this effort change society's expectation of Foxconn's approach to corporate social responsibility? While you are playing on your iPhone, iPad, and the like, you may have some issues to contemplate.
Case Discussion Questions
ON ETHICS: From an institution-based view, was Foxconn responsible for a series of worker suicides?