June 9th, 2011
04:52 AM GMT
Hong Kong, China (CNN) – While Apple Inc. continues to move from strength to strength, the Chinese firm instrumental in creating Steve Jobs’ recent success has fallen on hard times.
Foxconn became international news when it was beset by a rash of employee suicides in early 2010. The Taiwan-based company, which has a million employees in China, was hit by a factory blast in May that killed four. Then on Tuesday, the company lost its blue chip status after it was taken off the Hang Seng Index in Hong Kong. In its place came insurer AIA and Hengan, a major producer of toilet paper on the mainland.
How did Foxconn slip into the toilet? After all, it’s not only the world’s largest computer component supplier for red-hot Apple, but for Nokia and Sony as well. Foxconn makes more mobile phones than any other company.
In many ways, Foxconn is caught in a sea change sweeping across China: The days of making fortunes simply as a low-cost, low-margin manufacturer are drawing to a close.
Foxconn lost around 34% of its market value in the past year, which contributed to Hang Seng’s decision to drop the manufacturer from its Hang Seng index. "When deciding which companies are to be added to or dropped from the HSI, companies are evaluated on several factors, including their financial performance, their market capitalization and turnover," an index spokesperson told Agence France-Presse.
Terry Gou, chairman of Foxconn’s parent company, Hon Hai Precision Industry Co., said yesterday that the losses from the company stem in large part from a massive shift in relocating much of its China production facilities from coastal areas farther into the interior, according to Taiwan’s Central News Agency.
The company also increased pay 30% to mainland employees in the wake of the suicides.
"Last year some tragedies befell employees of our company, and it took us months to minimize the damage," Gou said. "Our performance in 2010 was barely worth a passing grade, with plenty of room for improvement."
Gou told reporters after the annual meeting that the company will start to move away from low-margin contract business and into higher value technology processes, such as solar and optoelectronics. “This is a year for solidifying our base; next year will definitely be a harvest year,” http://in.reuters.com/article/2011/06/08/hon-hai-idINT8E7GJ01P20110608">Gou said.
Analysts believe Foxconn is moving in the right direction, and will improve returns this year. But it comes as other businesses that built their success on harvesting China as a low-cost supplier – such as Hong Kong’s Li & Fung – are suddenly seeing diminishing returns as China’s wages and domestic market grows.
As Li & Fung noted in an earnings statement this year: “With the entry of China as a major supply market from 1979, the world has basically been in a low supply-cost era for the last 30 years.
“The change in wage policy in China in 2009 and the subsequent significant higher export prices brings this status quo to an end.”
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