A factory’s health in focus

Talk of ‘peak globalisation’, or the view that we have reached a high point in international trade and finance, started to find its way into academic journals such as the Harvard Business Review as long ago as 2010. In the same year cracks also started to emerge in the business model of Foxconn, one of the firms that epitomises the globalised world of business. After embedding itself in the supply chain of one of the world’s most desired brands, the iPhone assembler was widely criticised as a ‘blood and sweat factory’ after a spate of suicides said to be linked to bleak working conditions in its factories.

In the aftermath of Foxconn’s suicides crisis in mid-2010, Chinese provinces including export centres like Guangdong began to roll out policies on minimum wages and protecting workers’ rights. The State Council stepped up the process of so-called ‘income redistribution reform’, which has been given new momentum by the Communist Party’s mantra on ‘Common Prosperity’, which is supposed to bolster social equality.

No longer content with a reputation as ‘the world’s factory’, manned by millions of low-cost workers, Guangdong has also responded to policymakers’ calls that its businesses should climb higher in the value chain and encouraged the development of a range of new companies, many in the internet and tech sectors.

That process put pressure on Foxconn, the Terry Gou-founded contract manufacturer, to rethink where it was doing business. It responded by moving some of its assembly lines further inland in a hunt for lower labour costs, settling for Zhengzhou – the capital of Henan, traditionally one of China’s poorer provinces – as the new site for the world’s biggest iPhone factory.

But the Taiwanese firm was back in the headlines for the wrong reasons again this week. This followed reports that workers have staged a dramatic exodus from its Zhengzhou industrial park, after Covid-19 spread across a campus that is home to around 300,000 employees. Could the crisis turn out to be another watershed moment for another major policy – Beijing’s commitment to the zero-Covid strategy – as well as triggering another test of Foxconn’s relationship with the Chinese government?

What’s been reported?

In early October, Hon Hai Precision (Foxconn’s Taipei-listed unit) reported a 14% rise in revenues for the nine-month period to September reaching a record high of $145 billion. The company said it was “cautiously positive” about the commercial outlook, despite rising inflation and supply chain challenges arising from the Covid-19 situation.

But just two weeks later reports began to spread on social media that the industrial heavyweight had imposed strict Covid-19 control restrictions at its Zhengzhou plants. Workers had also been banned from eating in canteens and were being asked to take their meals back to their dormitories, it was alleged.

Speculation then began to spread on October 26 that nearly 20,000 Foxconn workers in Zhengzhou had been infected with Covid-19. The company loudly denied the rumours, sending statements to Chinese newspapers that only a small group of staff had tested positive. They were being provided with medicine and daily necessities, it added, and pandemic prevention efforts were continuing. The outlook for the fiscal fourth quarter remained unchanged, it also insisted.

Given that Foxconn was ramping up production of Apple’s newest iPhone 14 model, the statements eased concerns that wider disruption in the Apple supply chain was imminent. The local government also got involved, pointing out that only 125 patients had been hospitalised with the coronavirus and that only a handful of new cases were being reported.

Nevertheless, Foxconn and Zhengzhou officials were soon going into crisis management mode as last weekend new revelations on social media painted a rather bleaker picture.

Photos and videos documenting an “exodus” of Foxconn workers from the industrial park quickly spread. In some of them, Foxconn staff were seen scrambling over perimeter fences, some of which had been newly installed as part of an effort to seal the facility off in a Covid bubble. In other footage, workers started journeys back to their hometowns on foot, walking empty highways and wheeling their luggage. Such was the scale of this migration that other photos showed local villagers setting up booths to offer water and steamed buns to the travelling hordes.

Other widely shared clips allegedly showed rubbish piled up outside dorm rooms and people jostling for food in rooms where workers were said to have been sent for quarantine. Some people even posted pleas for help. That said, most of the images didn’t offer definitive evidence of a massive exodus and some analysts treated the revelations with a measure of suspicion. There were even conspiracy theories that the situation was being exaggerated by spin doctors hired by forces who want Apple to move its supply chain away from China.

Yet quite soon media outlets in Hong Kong and Taiwan were able to contact employees from the plant and were told that a Covid crisis had been brewing for a while.

The situation was indirectly confirmed on Sunday as both Foxconn and the Zhengzhou government pledged to help workers caught up in the situation, including people who want to leave the area.

Local governments in nearby regions have also put out notices welcoming the return of Foxconn workers, with offers that typically include free travel for former staff back to their hometowns, followed by a defined period of quarantine.

What’s the background to the crisis?

A few months ago Zhengzhou found itself as the unlikely focus of the international media after a group of anxious savers staged a public protest to demand their money back from local lenders after a bank run.

City authorities tried to suppress the scale of the demonstration by manipulating the ‘health codes’ of the protestors on the mandatory apps that have been used to track Covid infections – i.e. preventing them from travelling or gathering to protest by switching their status to ‘red’.

That scandal stoked nationwide anger at a time when senior officials in Henan have been treading a political tightrope in introducing renewed measures to contain Covid. In the new climate senior officials are likely to be sacked if they are revealed to have covered up news of an outbreak in Foxconn’s Zhengzhou factories, for instance.

Foxconn is under competing pressure from its most important client to meet its production commitments at a crucial time for Apple’s sales of its latest iPhones. Fending off the highly infectious virus while maintaining normal production levels has proved difficult for a number of industrial manufacturers but there is added complexity in the scale of Foxconn’s operations in Zhengzhou across three giant industrial parks with more than 90 production lines.

The current crisis that Foxconn is confronting, as China News Weekly puts it, is a dilemma of “how to manage a super factory” in the midst of a pandemic. According to the Xinhua-run magazine, Foxconn had locked down its industrial park for weeks and tried to maintain production inside the bubble. The situation began to run out of control around October 19, however, after dining in canteens was banned following a series of “abnormal results” stemming from testing of its workforce.

The company had been operating a closed loop system, where employees were restricted in how they could move in and out of the manufacturing campus and were undergoing regular testing for the virus.

Tesla used a similar closed loop system to resume output during Shanghai’s lockdown earlier this year, Bloomberg reports.

In cases of confirmed positives in Zhengzhou, all of the group and their close contacts, such as co-workers, have been required to go to a quarantined area, China News Weekly reported. The sudden stampede to leave the plant seemed to be triggered by rumours that workers who had been confirmed as positive were being sent back to work on the factory floor.

Citing Foxconn factory staff, CBN said close contacts of infected employees were only being released from quarantine zones if they tested negative but that their return was still generating fear among their co-workers.

“After videos circulated of a few people climbing over the fence, rumours began to swirl on October 29 that the industrial park was to be completely locked down,” a worker told CBN.

“This was when workers started to really panic because they believe they would not be allowed to leave unless they did so immediately.”

In a bid to keep production levels as close to normal as possible, Foxconn has responded by increasing pay for workers who opt to stay behind.

It also tried to calm staff sentiment by highlighting that no one had become critically ill because of Covid.

But that hasn’t stopped online rumours that there have been fatalities, including one much-discussed claim that “all eight workers in Room 726” had died after contracting Covid. In a statement published on Wednesday, Foxconn insisted there had been no deaths at its facility and that the scaremongering had started after a video was “maliciously edited”.

However, another widely circulated WeChat post by a popular blogger summed up the situation thus: “Foxconn has soldiered on with production while trying to contain Covid. But they have overlooked the biggest problem: that people panic.”

What happens if Foxconn shuts down production in Zhengzhou?

The race to get away from the plant in Zhengzhou last week is another “warning about the social and human cost of implementing a zero-tolerance Covid policy”, the South China Morning Post says.

The commercial implications of zero-Covid on companies like Foxconn and Apple are also becoming clearer. The workers who have chosen to leave the Zhengzhou factory obviously weren’t convinced by the offers of extra pay to compensate for the quarantine conditions that Foxconn has put in place. Instead they clocked off and tried to find their way home.

This is revealing in its own way of how things have changed since the watershed year of 2010, when Foxconn was the centre of attention because of a series of staff suicides. More than a decade ago its Shenzhen factories employed a huge army of migrant workers whose hometowns were thousand of miles away. That meant walking home wasn’t an option.

A significant proportion of Foxconn’s staff in Zhengzhou comes from nearby towns and villages, and many seem to have decided to opt for alternative employment.

Of course, none of this means Foxconn is in danger of fading into obscurity – it has long been the largest private sector employer in China. The contract manufacturer is a crucial contributor to Zhengzhou’s economy at the very least. Its factory there was China’s top exporter in 2019 with $31 billion in sales, accounting for 82% of Zhengzhou’s annual trade and 65% of that of Henan province.

Regular WiC readers will know that Zhengzhou has had a troubled year: struck by “once in a hundred years” floods, a bank run on regional lenders, and the near collapse of the province’s leading property developer, as well as the complexities of working through a major overhang of unfinished real estate projects (perhaps that’s why Chinese leader Xi Jinping found it necessary to visit Henan in his first inspection tour after winning a third term).

The possibility of a significant reduction in output at the city’s Foxconn facility (or even worse, the loss of contracts to factories in another location) is the last thing the Zhengzhou government wants to happen.

Foxconn’s latest crisis in China may also bring another review from Apple of its global supply chain. Reuters reports that the situation in Zhengzhou could see production slump by as much as 30% in November in a major blow to Apple’s fourth quarter sales (reducing supply of the newest iPhones to meet Christmas demand, for instance).

Foxconn told the Henan Daily on Monday that it was doing all that it could to keep the plant running at normal levels. “At present, because now is the peak production season… [there is] a large demand for workers,” a spokesperson admitted, adding that the company was “also coordinating back-up production capacity at other sites.”

But news on Wednesday that the local government had ordered a seven-day lockdown of the area around the facility seemed to confirm that shipments are going to be curtailed from the world’s largest iPhone factory, which makes about four out of five of Apple’s latest handsets, Bloomberg says.

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