DKN Research Newsletter from Japan

Recent Labor Disputes in China

A recent wave of emails sent to DKN Research is asking us to comment on a labor controversy surrounding an iPad manufacturer from China.  Another employee from the Guangdong providence working for a subsidiary of Foxconn Electronics Inc. plunged to his death from a dormitory, bringing the total number of work related suicides at this facility to ten.  Employees are insisting on better conditions and higher pay, and in an effort to appease the rank and file, Foxconn decided to increase salary levels by 20 - 30%.
 
Increases in labor strikes throughout China were reported at manufacturing plants affiliated with foreign companies.  Toyota and Honda Motors suspended production at some of their car assembly plants after employees for parts suppliers walked away from their jobs in an effort to increase wages.  Most foreign companies with operations in China were forced to increase salary levels significantly at these plants.  Manufacturing costs in China continue to increase at rapid rates, pushing the RMB (Chinese money is called Renminbi – RMB – which means "The Peoples Money") to higher levels.  This currency appreciation will drive up export costs for foreign manufacturers.

A recent news report from China reported on comments from a high ranking government official when asked about the labor disputes and currency appreciation.  He downplayed the worker rebellions and stated they are part of normal economical activities.  He further went on to say the rising salaries for Chinese workers will increase their buying power and stimulate both the domestic and global economies,  while a strong RMB  increases China's import power and will balance their international trade.  His comments probably represent the political direction of the government.

He offered no comments or sympathy to the foreign companies that moved their manufacturing operations to China because of the low labor costs.  That's the only reason they are in China – low labor costs – especially for circuit board and EMS companies.  Manufacturing is the only activity for these companies; they can not compete with domestic manufacturers in terms of price and try to sell and market products.  The average consumer in China prefers low price to high quality, and the home grown manufacturers cater to this market.  

Increased wages does not necessarily mean the expected consumer spending will return to employers in the form of purchases, especially to foreign manufacturers.  The Chinese Government has a hands off approach to solving labor disputes at foreign company plants, so these corporations must act accordingly without government assistance.  This same scenario played out in Taiwan, and listed below are four possible scenarios for operations to continue in China:

-- Increase selling prices
-- Relocate the factories from coastal areas to the inland parts of China from the coast areas
-- Move operations to other low labor cost countries such as Vietnam and Indonesia
-- Return to Taiwan and invest in plant and equipment and increase productivity

Customers do not like price increases, so plan number one is eliminated.  Plan number two and three will have short term success; however, similar labor disputes will arise in a couple of years.  The only plan with a long term solution is number four.  The only problem is the return on investment will take years, and may need even more investments in the future.

American and Japanese companies have fewer choices to solve labor issues compared to their Taiwanese counterparts and they can not rule out shutting down operations in China.  The situation in China is viral, and decision makers must move quickly.  It could be a gloomy summer vacation for those workers with this looming overhead.

Dominique K. Numakura


Headlines of the week

A*STAR (Research organization in Singapore) 7/8
Has agreed to co-develop new 3D semiconductor packaging with EV Group in Austria assuming the use of TSV process.

Sharp (Major electronics company in Japan) 7/13
Has commercialized three types of LED lighting bulbs with the highest light flux of 500 lm for chandelier use.

TSMC (Major semiconductor manufacturer in Taiwan) 7/14
Will additionally hire 3000 operators in the second half of 2010 to satisfy the growing demands of LED and photovoltaic cells.

Mitsubishi Chemical (Major chemical company in Japan) 7/14
Will out source some parts of UV-LED chip manufacturing to enlarge the total production capacity.

Canon (Major electronics company in Japan) 7/14
Has rolled out a new VCR camera "iVIS HF M32" with 64 GB flash memory. It is capable for over 24 hours recording.

Sanyo Electric (Major electronics company in Japan) 7/14
Will supply lithium ion batteries for YAMAHA's new electric bicycles.

Kuraray (Major organic material supplier in Japan) 7/14
Will invest 5 billion yens for expansion of production capacity of optical-use Poval Film for polarized films to 20 million sq meters per year.

Meiko (Major circuit board manufacturer in Japan) 7/14
Will invest 38 billion yens for next three years to expand the production capacities of overseas manufacturing, mostly in China and Vietnam.

Aron Kasei (Material supplier in Japan) 7/14
Has commercialized a new thermoplastic elastomer as the cushion layer between LED board and heat sink.

Micro Tech (Equipment supplier in Japan) 7/14
Will open technical service office of screen-printers in China for the booming demands of photovoltaic cell applications.

Fuji Film (Major film product supplier in Japan) 7/15
Will invest 40 billion yens to increase the production capacity of "Fuji-Tack", protection film of LCD panels.