My thoughts on labor issue of 鴻海/富士康, what’s yours?
By Steve Hwang
Following a recent string of suicides at the Shenzhen facility which employs and houses more than 300,000 people, labor policy and military management model in 鴻海/富士康 are being accused for the cause of suicides.
The military management model and production disciplines in 鴻海/富士康 were once credited for making the company the world’s fast growing and largest contract electronics manufacturer. Suddenly, news, financial analysts, and scholars blamed and urged 鴻海/富士康 to end such business strategy and practice.
The management model and labor policy deployed in鴻海/富士康 are not isolated cases, rather this is the same approach as other manufacturing oriented companies in Taiwan use daily.
Indeed, this business practice and strategy provided the competitive advantage for Taiwan companies to rapidly expand and become world biggest ODM/foundry in 1990.
Let’s look at company comparison data among 鴻海(Hon Hai) &its customers, and other Taiwanese & world renown companies. And I like to bring your attention to the comparison of revenue/per employee and profit/per employee.
鴻海 (Hon Hai) 550,000 employees; revenue US$ 61.8 billion; revenue/per employee US $ 127,160; profit /per employee: US$4,120
Dell 80,800 employees; revenue: US $ 61.1 billion; revenue/per employee US $ 756,597; profit /per employee: US$32,382
Apple 32,000 employees; revenue US $ 32.5 billion; revenue/per employee US$1, 014, 909; profit/ per employee: US$151,063
H.P. 321, 000 employees; revenue US $ 111.8 billion; revenue/per employee US$368, 735; profit /per employee: US$25,947
Google 20,164 employees; revenue US $ 21.8 billion; revenue/per employee US$1.080, 914; profit/ per employee: US$209,624
CISCO 66,129 employees; revenue US $ 39.5 billion; revenue/per employee US$597,922; profit /per employee: US$121,762
Intel 82, 500 employees; revenue US $ 37.6 billion; revenue/per employee US$455, 588; profit /per employee: US$64,145
TSMC 24.466 employees; revenue US $ 8.9 billion; revenue/per employee US$ 330,101; profit /per employee: US$143,055
Acer 8,000 employees; revenue US $ 17 billion; revenue/per employee US$ 2,110, 000; profit /per employee: US$50,000
As we can see that revenue and profit/per employee in 鴻海(Hon-Hai) is 10-50 times lower as compared to world class companies. It means that 鴻海 (Hon Hai ) created wealth and profit by the size of work force, rather than productivity and knowledge of people.
The true gauge for the company performance is revenue and profit per employee. This metrics provides best measurement on how company convert talented people and knowledge into wealth. 鴻海 (Hon-Hai) needs urgently converting to a new knowledge and R&D oriented company in order to compete effectively and become a world class company. Otherwise, the empire of Hon Hai will start to crumple due to rising labor wage in China and other production sites.
The change to knowledge and R&D oriented business model for 鴻海(Hon Hai) and other OEM/ODM companies in Taiwan is inevitable. The labor issue in 鴻海(Hon Hai) may be an opportunity so Taiwan can start transition to next phase of new industry – a industry based on people’s talent, and knowledge, rather than size of work force and capital (money) investment.
What’s your thought? Give your comments.
Thank you,
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Dear all,
ReplyDeleteI’ve received few e-mails from those who are not able to leave comments in the blog. The following are except of comments and my answers.
1. Comments- As compare Hon-Hai to other contractors, like Flextronics, Quanta, .., etc, Hon-Hai’ military management style and very high operation efficiency provide competitive advantage and make Hon-Hai’s one of most fast growing company. May be military management model is not a bad practice.
Answer: Indeed, Hon-Hai is one of best company among all contract manufacturers. The military management model and disiplicine enable them to expand and grow rapidly in 1995- 2010. However, such military management model will not suitable for knowledge & R&D oriented business, instead such practice is detrimental and drive talents away in a knowledge-based company. For building a lasting company, Hon-Hai has to maintain current low profit margin, labor intensive business model while transitions to value added, knowledge- oriented business model.
2. People tout Hon-Hai’s business because its low profit margin and highly complex supplier chain management post very high barrier to compete.
ReplyDeleteHon-Hai reported that they are looking for building a total automated factory in Taiwan in order to mitigate the impact of increasing labor cost.
Answer: There are many companies from emerging economic regions, like China, India, Brazil, Russia…etc, who have high interest entering contract manufacturing service with their significant lower overhead.
In the late of 80 and early of 90, they are many contract manufacturers in USA, and Solectron was one of most notable and admired company because of its quality and operation efficiency.
Now, EMS (Electronic Manufacturing Service) business model faces great difficult operating in USA and can’t compete with rivals from Asia. I believe that pure EMS business model in Taiwan will gradually see fierce competition from companies in low labor cost area.
Personally, I don’t believe that a total automated factor will solve the labor cost issue. Total automated factors require enormous capital (Money) investment, high skill talent and labor to keep line running.
How can a 5% profit margin business model sustain a total automated factory? So the issue is not labor cost, rather its low profit margin.
3. Below is a revenue/per employee and profit/per revenue for one of company in Taiwan, what’s your view of these numbers?
ReplyDeleteNo.1 resistor manufacturer of the world and No.1 passive component
manufacturer of Taiwan,
9,000 employees; revenue US $ 0.78 billion;
revenue/per employee US $ 86,667;
profit /per employee: US$21,667
Answer: Based on the numbers that you showed above, your company' performance is very impressive in term of profit/per employee while the revenue/per employee seems to be lower.
The lower revenue/per employee may due to the fact that your company has its manufacturing capability that employs large # of employees, instead of outsourcing to contract manufacturer.
Owning manufacturing facilities and employing large # of labors are not the bad thing (the revenue/per employee will go down if company manufactures product itself) as long as company has proprietary design and R&D capability – Your company owns technology, design and R&D for its product so your company is still in a very good business environment as compared to many Taiwanese companies.
It looks Hon Hai employee’s profit margin is much lower than world class companies, on the other point of view Hon Hai really provide the more jobs for the working level to take care their families in China. But this also might force some assembly lines closed and working level lost their jobs in somewhere else. No matter how, in the real world winner could take all, Forbes 2010 world’s billionaires ranking shows Terry Gou and Steven Jobs are at the same rank #136.
ReplyDeleteIt is hard for someone who has close relative, friend or colleague got suicide. They might blame themselves for not giving a hand as need. Human brain cell is very complexity function similarly to computer, without good protecting circuit or thermal dispatch could cause function luck down as over loading or high power surge. After reboot, the computer could function normal as usual. Same mechanism, find the grounding (take a break, exercise, talk with friend, sun shower, ….) to release charge as brain overwhelming; after that, it will be function normal again.
行到水窮, 處坐看雲起時.
Dear Sloan,
ReplyDeleteHon Hai indeed creates many opportunity for working people in China and helps people & society improve living standard. That is one of most import contribution that Hon Hai has contributed to local community.
However, if company exploits labor capital, uses the masses of employee and production discipline as main competitive advantage, such practice and model is not sustainable. When employees have more choice working for better companies, they will either ask for higher salary or pursue better opportunity.
Well said of “行到水窮, 處坐看雲起時.” Facing business competition, and living daily job and life seem to be stressful, sometime painful, however, there are many beautiful things waiting for us to explore and enjoy. I guess that we should all learn to “reset”, “stop & smell roses” and have an attitude with which I am promoting all the time – “don’t sweat at small stuff, it is all small stuff” If we can all do that, the world will be a better place.
Cheers,
Steve
After reading the above comments, several questions came to my mind. 1) How long can Hon Hai sustain its competitive advantage? 2) Will Hon Hai shift its focus to R&D and branding like other OEM/ODM companies (Ex. Acer and Asus)?
ReplyDelete1) As Steve mentioned, the revenue/per employee presents the facts of LOW PRODUCTIVITY in Hon Hai compare to other manufacturing-oriented MNC. This reminds me back to the fundamental economy class in school. I remembered the term of PRODUCTIVITY which has been heavily stressed by my professor. He said firms should try their best to increase the productivity while lowering man power usage in order to maximize the profit. So, how about the case we discuss? Hon Hai's productivity has been proven the lowest among all competitors and the concept of more employees=more revenue is always been questionable. To me, if Hong Hai were involved in FMCG (fast moving consumer goods) industry that is not require high technological supported and the market stability is relatively high compare to high-tech industry, his management philosophy could be successfully established. However, Hon Hai is now the OEM factory of high tech companies and the biggest profit margin source is not from the manufacturing. I personally think that its hard for Hong Hai to sustain if he only focuses on manufacturing in the future.
2)Refer to Smile Curve presented by Stan Shin, he pointed out firms should emphasize on R&D and branding for value creation. Hence, an interesting question raised “will Hon Hai shift his focus to R&D or branding activities”？ Before answering this question, I would like to quote a statement from Terry Gou on his opinion on branding:
"Supply chain in high tech industry is obviously long and complex, if Hon Hai is involved in R&D, manufacturing, and branding at the same time, we will lose the flexibility and its so hard to well-control the changes of supply chain in high-tech industry due to the rapidly technological changes and product obsolescence （YouTube:郭台銘的鴻海跨國經營學)".
From his speech, i personally think Terry Gou will not establish the brand and branding is not so important to Hon Hai. Instead, he will continue to work on manufacturing site and show his determination by devoting himself to constantly develop "Hon Hai Empire" throughout the world.
Peace,
Anthony Loh
Dear Anthony,
ReplyDeleteYou’ve posted a very well thought-through comment and many excellent insights on how to build a competitive and lasting company.
You mentioned of “ smile curve” from Stan Shi. Indeed, I-phone is perfectly example of “ smile curve.
Let’s see this fact: It is estimated that of the $400 price of an iPhone $5 goes to manufacturing for Hon-Hai, about $45 goes to Japan for parts, the other $350 to the US or, in this case, Apple.
It means that Apple creates 87% of value chain, Japanese companies has 11% and Hon Hai contributes a meagerly 1.3% of whole I-phone value chain.
If Terry Gou wants to build Hon-Hai into a lasting and great company, it is inevitable that Hon Hai has to clime value chain and move toward to R&D /Brand/Design oriented business model.
This step is not easy but doable. Asus and Acer provide a good story for being a manufacturing company and successfully transitioning to a branding company.
All the best,
Steve
Dear Steve,
ReplyDeleteIt is so useful to know the fact of Iphone. Now, I am very impressed by those OEM/ODM companies in Taiwan;indeed, they are all competitive.
Beside, I agreed with you the step of transitioning OEM/ODM to R&D /Brand/Design oriented company is a very tough task. However, if it could be a must, then how to do?
Few remembered the case of Asus, in order to separate two major management activities, Asus has been experienced a hard time especially dealing with shareholders' interest issues.
What are the challenges when OEM/ODM company transits to a branding company? I simply point out some; 1) Conflict of customer's brand who OEM/ODM to firm. 2）Dilute firms' core competences 3) Additional Capital 4) potential risk 5) Firm's flexibility reacts to market(Ex.if demand shifts)
Lastly, quality product will always be more convincing than any branding activities.
Cheers,
Anthony Loh
Dear Anthony,
ReplyDeleteFirst of all, I wish that you’d a very successful job interview. Companies in Taiwan need your service because you bring in not only talent and knowledge but more importantly diversity to Taiwan. I am a strong believer of diversity that gives company the best advantage to compete globally.
How to transition from a manufacturing to a concept/R&D oriented company? You’d pointed out many issues when a company tries to do such transition.
The best and only way is that a company needs to separate a concept/R&D company totally from parent company. So the new concept/R&D company has its own responsibilities from operation, R&D, finance to administration.
For example, Acer Groups separated into Acer and Wistron where each company has its own management, and profit/loss responsibility.
If other manufacturing oriented companies can learn from Acer, it is doable to transition Taiwan from manufacturing and R&D center.
All the best,
Steve