China's factory floor revolution

FT.com

The riot at Foxconn's Taiyuan factory in northern China last week is said to have started with a drunken fight between two workers. It escalated when security guards weighed in aggressively and grew completely out of hand after 5000 police were dispatched to quell 2000 angry workers. About 40 people ended up in hospital.

Foxconn, a Taiwanese contract manufacturer that employs one million workers in China, has been under pressure over conditions in its factories since a spate of suicides at its Shenzhen plant a few years ago. Since then the company has increased wages and made other changes to improve its image and to ease relations with sometimes restless employees.

A report this year by the Fair Labour Association, a US group, found that Foxconn had addressed many of its labour issues but still found evidence of "serious and pressing noncompliances”, including hours of overtime that exceeded Chinese legal limits. That report did not cover the Taiyuan factory, which has recently ramped up production, possibly to meet orders for the launch of Apple's iPhone 5. Foxconn has attracted most of the attention because of its enormous size and the work it does for famous brands, including Dell, Sony, Hewlett-Packard and, of course, Apple. Yet Foxconn is probably a better employee than many of its peers. Rising tension on China's shop floor is symptomatic of far more sweeping and fundamental trends than can be fixed by tweaking wages or working conditions.

The most fundamental change is demographics. China can no longer rely on an endless stream of pliant migrant workers happy to accept exhausting and monotonous work. According to the Asian Development Bank, between 1975 and 2005 China's working-age population nearly doubled from 407 million to 786 million. The actual leap in productive workers was greater still, since the population surge closely coincided with Deng Xiaoping's economic reforms, which released tens of millions from the countryside to work in urban factories. That turned people who had been surplus labour on inefficient farms into productive members of the global workforce.

The good news is that this massive increase in labour input goes a long way to explaining China's remarkable 30-year growth record. The bad news is it's over. China's population has been ageing since 2000, according to UN definitions. From 2015, when the working-age population will start to shrink, the demographic dividend China has enjoyed for so long will crank into rapid reverse.

This is all happening much quicker than in other countries that trod a similar development path. Yolanda Fernandez Lommen, in a 2010 ADB working paper, calculates that China started ageing when its real per capita income was $4000. That compares with $14,900 in Japan and $16,200 in South Korea.

At factory-floor level, that means the balance has been tilted in favour of labour at a much earlier stage of development. Jobs are easier to come by and workers far less beholden to their employers. Despite the sharp slowdown in China's headline growth, it is noticeable that unemployment has hardly budged.

Today's workers are less willing to tolerate long hours of drudgery. Dissatisfaction is compounded by a growing awareness of the lifestyle richer Chinese are leading. True, factory wages are now rising by as much as 20 per cent a year. But for an increasing number of workers, that does not compensate for the feeling that they are being exploited in dead-end jobs.

There is another, more subtle, demographic influence at work. The one-child policy, introduced in 1979, explains China's sudden ageing. It also explains a shortage of women. A traditional preference for male children means millions of female foetuses have been aborted. As a result, there are 119 boys born for every 100 girls, against a natural ratio of about 104. The preference for males is receding but the effects will be felt for decades to come.

In factories, one result is a gradual increase in male workers, less easily corralled than the predominantly female workforce that used to line factory floors. Alexandra Harney, author of The China Price, has been visiting Chinese factories for a decade. A few years ago she began to notice she was interviewing more and more men. Recently, a young woman told her: "Our generation doesn't work in factories.”

In a fascinating Bloomberg column, Ms Harney writes that Chinese factories do a terrible job of training their workers or offering them a credible career path. Instead, they want what she calls "just-in-time workers”, who can be hired and fired to fit the demands of each new order cycle. "The question for me,” she says, referring to the need for more manufacturing value-added, "is how China moves up the ladder".

That's a huge question for China. It's not such a small one for factory owners either. Foxconn founder Terry Gou has already announced plans to install one million robots in his factories in three years. Foxconn is also diversifying, investing in plants in Brazil, Mexico and eastern Europe. Indonesia has been trying to woo Mr Gou to set up a plant there. Installing robots and moving to other countries is one response to Chinese demographics. Far harder will be to figure out how to design factories where workers can build more sophisticated products and a career at the same time.

Copyright The Financial Times Limited 2012.