Chinese Character

Hard times

Terry Gou’s Chinese factories are giving him headaches

Hard times

Gou’s factories have been plagued by suicides

Terry Gou is not a man to lose his cool. When an earthquake interrupted proceedings at the annual meeting of Gou’s company, Hon Hai, a few years ago, panicked investors headed for the exits. Not Gou, who was unfazed. “It’s just an earthquake!” the Taiwanese tycoon yelled.

But the recent spate of suicides among migrant workers at Hon Hai-owned Foxconn seems to have chipped away at Gou’s calm veneer.

The frenzied media coverage hasn’t helped. “Are we going to have this happen again? From a logical, scientific standpoint, I don’t have a grasp on that. No matter how you force me, I don’t know,” Gou countered in a recent press conference in Shenzhen, where the company now employs nearly 450,000 workers.

Since the beginning of the year, 10 workers have taken their own lives at the company’s massive manufacturing plant (see WiC63).

The deaths have focused media attention on the normally media-shy Hon Hai and its founding chairman. As the world’s largest electronics contract manufacturer and China’s biggest exporter, the company makes products for leading global brands like Apple, Dell, Hewlett-Packard and Sony.

Despite his success, Gou doesn’t enjoy the limelight. “I hate that I have become famous,” he told the Wall Street Journal in 2007. “Publicity risks helping competitors and alienating customers.”

Born in 1950 in Taipei to parents who emigrated from China’s Shanxi province, Gou started his business in 1974 with $7,500 borrowed from his mother. He began in Taipei, making channel-changing knobs for black-and-white television sets.

In the early 1980s he expanded into the PC industry. His first products were connectors, the parts that join components in a PC. Gou was soon travelling to the US and Japan, seeking out customers.

By 1988, his order book had grown significantly. But his costs were on the increase too, and Gou became one of the first Taiwanese businessmen to move his manufacturing operations to China, in search of lower costs in land and labour. That year, he set up his first plant in Shenzhen, getting to China ahead of the rest. Around the same time, Gou started to expand into production of a wider range of components. That strategy quickly paid off, as did the decision to concentrate on a smaller group of large customers.

Foxconn then moved up the component value chain into modules, circuit boards and enclosures. Then, as more of the major electronic brands began to opt for outsourcing, Foxconn moved into motherboard and systems assembly. As a major component maker itself, it could undercut competitors on the price of its finished products without significantly reducing its overall margins, says iSuppli Corp, a market research firm.

In fact, Hon Hai won Apple’s order for iPhone assembly after Gou ordered the business units that made a series of the iPhone’s parts to sell them at zero profit, says Bloomberg.

Competitors have struggled to keep up with Gou’s low-cost pricing. Closest rival Quanta (also Taiwanese) recorded revenues of $26 billion in 2009, less than half of Hon Hai’s.

Client confidentiality is another key selling point for Hon Hai. Since rival brands might be assembled in close proximity in Foxconn factories, Gou has guaranteed that designs or technical details won’t leave factory premises. For this reason, the company long refused to let outsiders into its plants.

The secrecy now comes at a cost. Last year an employee responsible for assembling the popular iPhone committed suicide, reportedly after undergoing questioning about the disappearance of a prototype of Apple’s next-generation phone. The South China Morning Post said the worker later complained to friends that he had been beaten by the factory’s security team.

As the furore around subsequent suicides grew, speculation about what went on within Foxconn premises became intense. As a company used to guarding its secrets tightly, Foxconn struggled to respond. The media storm soon became an international one.

Much of it focused on Gou and his supposedly imperious behaviour. Alllegedly, he is a demanding boss. In management meetings, executives asking questions considered silly are made to stand before the group as punishment, says the Financial Times. His attention to detail is relentless, with assembly line tasks still coming in for the occasional monitoring by the Gou stopwatch.

Company managers are also expected to memorise a document called “Gou’s quotations”. Rule number 133: “The important thing in any organisation is leadership, not management. A leader must have decisive courage to be a dictator for the common good.” Perhaps it shouldn’t come as a surprise that the businessman that Gou says he most admires is the reclusive founder and CEO of Huawei Technologies Ren Zhengfei, also known for running his company with a military discipline (see WiC 15).

Early in June Hon Hai raised basic pay for workers by 30% to Rmb1,200 from Rmb900 a month in Shenzhen, although domestic media reports say that not all workers have seen the pay rise come into effect. Some analysts say it could raise Hon Hai’s quarterly labour costs by about $84 million, which would erode operating profits by up to 12%.

So, just as cost pressures saw Gou leave Taiwan for southern China more than 20 years ago, now he is looking to head north again. This week the company announced that it is planning to build a huge new factory in the central Chinese city of Zhengzhou in Henan, says Xinhua. The new plant will employ 100,000 people in the near future and 300,000 in the long run.

Gou – who is 60 this year – says he wants to focus more on the big strategic issues than day-to-day work. He also pledges to devote more time to charity – he has already committed to give away a third of his fortune.

In fact, he has gone on record as saying he will retire when Hon Hai shares reach NT$200. The Foxconn suicides, and market jitters about the impact of rising labour costs on the Made in China model, mean that the retirement plans may have to wait. Since the beginning of the year, Hon Hai’s share price has dropped 24%, to NT$121.

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