Mr Gou's move fee: A massive shift affects Foxconn's profits

From the past Pianan Shenzhen to now spreading across China, Foxconn has more than 31 bases in mainland China in 2012. At the same time, the International foundry giant Hon Hai is moving its manufacturing plants overseas.

It is clear that Hon Hai is looking for the next pool of cheap labour, as the cost of coastal labour is generally rising.

More and more Love "sea"

As Hon Hai's chairman, Terry Gou, "where there is a market to go" business strategy, the pace of the exodus overseas is accelerating.

September 20, Hon Hai and the BRIC countries of São Paulo state Government signed a memorandum of cooperation to invest 14 million of billions of dollars to build Brazil's Foxconn industrial park. Foxconn plans to start production in 2014, with a full production in 2016. Currently, Hon Hai has 8 factories in Brazil.

Brazil is not the only option for Hon Hai overseas. Mr Gou earlier this year said it would expand its operations in Brazil and invest in Japan and Germany, and that the next step would be to look to Indonesia and Burma.

In mid-August, Hon Hai spokesman Gengiping confirmed to the media that Hon Hai is indeed assessing Indonesia's investments, and he expects to set up the first plant in Indonesia by the end of the year to produce handsets. Gita Vagavan, the Indonesian trade minister, said the company would set up a business in the country and invest 5 billion to 10 billion dollars in Indonesia over the next 5-10 years.

A person familiar with Hon Hai's industry has been actively looking for investment opportunities in Europe and the United States, with slow economic growth and rising wages in mainland China. The acceleration of investment in Brazil and Indonesia is mainly due to its low labour costs and huge market.

In fact, Hon Hai has started expanding overseas before investing in Brazil. July 6, 2010, Hon Hai Precision Technology Group announced that through the Singapore subsidiary to 36 million euros to obtain the original Sony Slovak LCD assembly plant stake, the cumulative shareholding of 90.1%. Together with the Mexican LCD TV assembly, which bought Sony at the end of last year, and media reports will buy the Spanish assembly plant again. Sources say that Africa, with its labour-rich resources, is also under the consideration of Mr Gou.

Luo Qingxi, a senior director of Paller Consulting, said Hon Hai's expansion on the one hand could be closer to a larger market, while reducing shipping time and tariffs. This is certainly good news for Foxconn, which is in dire need of cost-cutting.

Foxconn has not responded to Hon Hai's investment in Brazil, declaring that it will be subject to announcements.

Moving inland

Hon Hai's new investment in mainland China has been relatively meagre this year, compared with its frequent investments abroad.

In addition to Hon Hai's plans to take over Sharp's TV factory in Nanjing, August 20, Terry Gou said at the first World Congress that Foxconn will invest billions of dollars in the next 5 years to make Jincheng a global precision manufacturing capital. But Mr Gou's investment plan was reached with Shanxi Province in 2011.

Behind the investment plan is the massive migration of Foxconn from Shenzhen. In August 2010, Mr. Gou made it clear that, in addition to relocating the park to the west, he planned to return to Taiwan to find a place to relocate some of its plants to Taiwan to operate as an automated "unmanned factory".

After a period of time, Foxconn's massive downsizing of its initial production base in Shenzhen, from the coast to the interior, is undergoing huge changes.

The industry said that Foxconn's plan to relocate its factories to the mainland has been largely completed. Shenzhen Foxconn is recruiting every day because of Apple's orders. But Foxconn has gradually diverted its operations across the country. He said that Foxconn will not withdraw from Shenzhen, the future of Shenzhen, mainly as a research and development base and Apple-related business groups, the size of about 100,000 people.

Luo Qingxi Analysis said that factories such as Foxconn continue to invest in China's inland provinces, in order to find lower factor costs.

Inland provinces have also shown a welcome to Foxconn, with special attention to taxes, land, and factory-opening processes.

The cost behind the move

Behind the departure and migration of Hon Hai, the rising cost of coastal labor and the declining profits of foundry enterprises.

After "Jumping the door", Foxconn has always faced accusations of squeezing its employees. From June 1, 2010 onwards, Foxconn Group for the enterprise operators, line length, team leader salary adjustment, the overall salary level of employees increased by more than 30%.

In May this year, Mr Gou announced at the groundbreaking ceremony at Foxconn's China headquarters that it would make the salaries of mainland employees one-fold higher than the present. The move means that at the end of this year, the basic salary of Foxconn staff will be increased from the current 2200 yuan to 4000 yuan, up to 82%, the salary of the mainland employees is expected to exceed this part.

At the end of the 1980, it has become less obvious that a person's salary in Taiwan in China could employ 12-15 people in the mainland.

At the same time, South-East Asia's Indonesian payroll costs are the lowest in Asia. According to the Asian Development Bank, Indonesia's average monthly salary is only 113 dollars, less than half of Thailand, one-third of China. In recent years many footwear and textile companies have relocated their production operations from China and Vietnam to Indonesia.

Another Jean Honghai headache is the fact that corporate profits have been falling.

Although Foxconn has received a large number of orders from Apple, the company's profit margin of January-March this year was only 0.9% per cent, and at the beginning of the year Hon Hai released the figure at 2%, leading to a massive loss for Foxconn.

Foxconn International announced the first half of the results as of June 30, 2012, the period of Foxconn International total revenue of 2.504 billion U.S. dollars, compared with the same period of 2.994 billion U.S. dollars fell 16.37%, net loss of 226 million U.S. dollars, a year ago net loss of 17.648 million U.S. dollars. The company has suffered a first-half loss for four consecutive years.

On the other hand, Foxconn's massive migration has also had an impact on the decline in profits. The company's third-quarter net profit fell 9% from the same period last year, Hon Hai Precision's third-quarter earnings show in 2011. Hon Hai's main reason is that Foxconn's expansion in China's interior has led to a significant increase in corporate spending.

As a microcosm of contemporary Chinese manufacturing, the migration of Foxconn, an international foundry with millions of people, is a concern. At a moment of rising costs and serious losses, Hon Hai must shift to lower labour costs overseas and hinterland. However, the difficulty of Foxconn's hiring in the mainland has shown a rising trend in inland labour costs, and it is still to be seen whether the move tactic will help Hon Hai out of its plight overseas.