Prof speaks on China’s factory unrest

Huang discusses factory model’s limits & Foxconn suicides

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MIT Sloan Professor Yasheng Huang gave The Tech an exclusive interview regarding the recent Foxconn suicides and the Honda strikes in China, what they mean for the Chinese factory model, and how MIT can help China move forward.
Courtesy of Yasheng Huang

CORRECTION TO THIS ARTICLE: Because of an editing error, the original version of this article referred to Professor Yasheng Huang throughout the introduction by his given name "Yasheng" instead of his family name "Huang," on second reference.

This week, the New York Times reported on escalating unrest among Chinese factory workers, who complain of long hours, miserable management and little pay. Many are striking to demand higher wages, shutting down major factories in what the Times calls a labor “contagion.”

Some are even committing suicide. The Times article “After Suicides, Scrutiny of China’s Grim Factories,” follows the suicide of 19-year-old Foxconn worker Ma Xiangqian, who jumped from his high-rise dormitory. In the article, Sloan professor Yasheng Huang explains the cultural and demographic forces that he says are making the Chinese factory system untenable.

Huang is a professor of international management at MIT and holds an a special-term professorship at the School of Management, Fudan University and an honorary professorship at Hunan University. His research interests include higher education, science advancement, and entrepreneurship in China, and he has authored a number of books relating to the modern Chinese economy, including “Capitalism With Chinese Characteristics.”

In this interview, Huang talks with The Tech about the Foxconn suicides, the Honda strikes, and what they mean for the Chinese factory model. He advises the MIT community on how it can help China transition to a more sustainable economy based on innovation.

The Tech: In the New York Times article on the current Foxconn worker suicides you said “The factory model has run into some serious limitations.” What are these limitations, and how are these limitations enforced?

Yasheng Huang: There are both external and internal limitations of the current factory model system. To begin with the external limitations, there’s the financial and economic instability in Europe and the slow recovery in the United States. In Europe, prices are pushing the value of the Euro down by 14 percent since January 2010 and since Chinese Yuan is linked to the US dollar, Euro has depreciated against the Chinese currency by 14 percent as well.

This will impact the Chinese exports to Europe. The European market is the largest export destination of the Chinese goods. It is definitely going to have a negative impact on the export model of China. In the United States, although the situation is improving, the unemployment is persistently high and it is likely that the personal savings rate in the United States will rise. This means a less robust consumption future for the Chinese products.

So these are the external limitations, but I think, it is probably more interesting to talk about the internal limitation that the model is facing. And, as you said, Foxconn and the Honda plants now are raising salaries. They have agreed to raise the salaries of the factory workers, and I think Foxconn has agreed to even double the wage of its workers.

TT: How recent are these raises?

YH: This is very recent. This is a result of the suicides at the Foxconn plant. Now they have responded by raising the salaries, and this is a dramatic increase of the salary level. It’s not going to make the Chinese export model completely ineffective, but because China has a very efficient supply chain—a network of suppliers operating in close proximity with each other—and it will be hard to replace these suppliers quickly in other countries. But nevertheless rising labor costs will, in due time, may motivate foreign firms to consider alternative sourcing sites.

The best-case scenario is that these wage increases occur in a gradual and orderly fashion rather than as a sudden jolt. You want to give everyone time to adjust and adapt to the new situation. But there is evidence that the pressures for wage increases are spreading to other regions of the country. Apparently a factory near Shanghai just went on strike. My prediction is that this will not be an isolated event. The reason is that in the past five to ten years despite China’s rapid GDP growth the wage growth has been extremely modest or even stagnant in several years. There is a huge pent-up demand for wage growth in the system.

If the wage growth is dramatic and sudden, then the export model is going to have some serious problems. The reason is that China’s export model relies overwhelmingly on really low and cheap labor costs, rather than on technology and innovations. So unlike the Japanese model, which has the Toyota way, zero inventory, just-in-time operation—all these management techniques that are very very efficient and uniquely Japanese. They also have technology…Even with all these things, Japanese economy did not the huge appreciation of the Japanese currency since the mid-1980s.

China has far fewer of these managerial and technological innovations. In the absence of these managerial and technological innovations, one of the things that’s working in the Chinese favor is the low labor costs. Now that is going to go away, so the old model is going to have some very, very substantial cost pressures. That may be OK if the US economy is booming, if the European economy is booming to absorb those cost increases, but that’s not what’s happening now.

TT: The Times article on the Foxconn situation reported that the factory worker that had committed suicide was paid something on the order of a dollar an hour. Is that typical in Chinese factories?

YH: Actually, Foxconn and Honda were among the highest-paying plants in Guangdong. At least they are better than the average. And the thing about the Chinese wage calculation is that it’s actually very tricky, because we don’t have very good data on the hours that they put in. The overtime, they put in a lot of overtime, but we don’t really have very good data on that. Typically we have monthly wage, and if we look at monthly wage, there’s some increase of monthly wage for the last five years, but we don’t know how many hours the workers are actually working. And so, per month is not the right unit to calculate the wage; the right unit is hourly wage.

We just don’t know how many hours they work. Together with some academics in Guangdong, we implemented a survey, “Rural Migrant Workers in 2009,” and we tried to ask those questions. It’s actually very difficult to get the right, honest answers because it’s a sensitive topic. But we do have some indications that the hours are very, very long. So in affect, the unit wage is actually extremely low and has not grown very fast in the past five years.

TT: In the case of the Foxconn factory worker who recently committed suicide, it was reported that his working conditions were just very harsh, he would work overtime a lot. Some of the factory workers would have to sleep on the factory floor at night. You mentioned that this export system has been in place for awhile. Why are these worker strikes and suicides happening now? Why are the wages finally rising now?

YH: So to answer your question, the export model has been around for the last twenty years, and maybe the situation has intensified since 2001. China has been heading in that direction since the mid-1990s, but they became more export-driven since 2001. There were always complaints about labor standards and labor conditions, but I think some of the recent developments in the Chinese economy have intensified some of the wage issues.

One is that the older generation of workers typically came directly from doing agriculture. Agriculture is much harder work as compared to factory labor. Yes, sleeping on the shop floor is not pleasant, but planting rice is much worse. So their perspective, the older generation’s perspective is different. If you look at the people who committed suicide, they are typically very young. They’re just between 19 and 24, you know, they’re just like you. And these are the people who have not spent a lot of time planting rice. They don’t have their parent’s perspectives, so there’s less tolerance of this level of stress and the style of the work.

The other thing is I think that in the last two years, even though the wages are growing, the prices are rising too. Because in China there’s the real estate boom, or bubble—my way of putting it is bubble—which is pulling up prices across the board, eating away at the purchasing power of these people. So even though there is some wages rise, so are the living expenses. There is evidence that China is emerging from a long deflationary phase since the late 1990s to an inflation phase. In the 1990s, the wage growth was extremely modest or even stagnant but at least you had falling prices on your side. But this is changing now. So that’s another source of anxiety and worry on the part of these workers.

The third thing, it’s actually related to the first thing, is that the older generation basically treated their factory jobs as a temporary arrangement. So their expectations are, “OK this is two years of hard work, five years of hard work, but at the end of that, you know, I’ve saved enough, I can go back to my home village and build a house, or whatever, maybe start a small business.”

The current generation of people don’t have that sort of time horizon. They expect to be in the city for a long time, and then they look around, and then they say “Gee, compared with the rich people in the city—they’re buying houses, they’re speculating about the real estate market—I’m doing terribly. And I don’t really have a long term future here, and yet, I don’t want to go back.” So that’s a very different kind of psychology as compared with someone who only expects to be in the city for only a few years and who considers himself as a rural resident. Surveys show that the current generation of rural migrant workers increasingly identify themselves as urban residents but minus all the benefits of being the real urban residents.

TT: You mentioned that the Japanese model isn’t having these same problems, largely because they focus so much more on technology and innovation. There are a lot of people here at MIT, both at Sloan who focus on business but also you have the EECS department, with people who are actually making innovations, in software, in hardware, that some of these factories like Foxconn might actually someday produce. How much do you think that the actual of design of these products might encourage or promote this type of factory work, or if there was anything that the people who are developing certain components of these products could be more aware of. And more generally, what could students at MIT, who are concerned by these types of issues, who might a be business student or an engineering student developing technology—what they might be able to do?

YH: One of the things that we do at Sloan School is we created a program called “China Lab” in 2008. The idea is to use very capable students who previously worked at McKinsey, Boston Consulting Group, and places like that, who are very good at consulting, to help local Chinese entrepreneurs. We sent them to China and they work with Chinese management students and with local entrepreneurs to devise marketing plans and human resource management, and things like that. We either charge nothing or charge only a nominal fee. The idea is not to make money but to help local entrepreneurs.

So I think there’s a role for MIT, both for the management side as well as for the technology side to help the local Chinese entrepreneurial businesses improve their technology, improve their management, so that they don’t simply develop on the basis of low cost labor. And by raising the salary increases of the workers, now they can innovate. Now they can use technology, use new business methods, and new production processes.

I cannot say with any level of specificity about other parts of MIT whether they can also help China make the transition. What I can say is that at Sloan school, we have involved ourselves in that process for some time now. We directly work with local Chinese entrepreneurs. And the whole idea is that we want to create business models that both the owners of the business as well as the workers can benefit from economic development. We don’t want to see that business owners benefit at the expense of the workers, and we don’t want to see only the workers benefiting at the expense of the business owners. We want to create a situation in which everybody benefits.

This is something that MIT students can do in China. MIT has some excellent programs such as the MISTI program and if I may say so, our China lab program. And by the way, in March 2009, I went out and organized a symposium in the heart of all these issues we are talking about today—the city in Guangdong known as Dongguan, which is the manufacturing hub of Guangdong. Dongguan is known for massive manufacturing operations at the cutthroat prices wage levels. I wanted our students to share their views on technology and management with entrepreneurs in Dongguan and how to use technology, how to use these innovations to solve specific challenges, and to think of ways of not just squeezing in more hours on workers, but to do business better and more efficiently. So that’s a fairly concrete example of what MIT can do to be helpful. The symposium was very well received and the organizers have kept asking me to organize another one.

Obviously, China is a huge country and we can only do a few things at a time, but yes, I agree with you. MIT can be a very good player in that process, if we are more proactive. We have excellent students, we have excellent professors, we have tons of experience in creating entrepreneurial successes. What we don’t have is enough resources. China is huge but our China Lab each year can only help 12 companies. I can do 50 companies in Guangdong alone if I have the resources. We need to raise resources to support these activities more. What we don’t’ have, I have to say, is the resource support for doing these things. And we don’t have an organized platform at the MIT level to do these things. For example, I would love to involve our talented engineering students in China Lab. Individual schools are doing this or are doing that, but we don’t really have an MIT approach.