6 June 2011
By Katie Hunt
Business reporter, BBC News, Hong Kong
First came the suicides. Then came the fatal explosion.
Now the Taiwanese company that toils in the shadow of high-profile clients such as Apple is facing another blow - losing its blue-chip status.
Foxconn International will be removed from Hong Kong's benchmark Hang Seng index, which groups the city's biggest listed companies, on Tuesday.
Shares in the money-losing company have tumbled 10% since the move was announced on 12 May and could fall further as funds tracking the index's 46 constituents adjust their portfolios.
Foxconn's woes highlight the pressures China's low-cost manufacturers are grappling with as the country's deep and cheap labour pool begins to dry up.
Foxconn counts itself as one of a number of "hidden dragons" - the huge but little known companies that manufacture goods, largely in China, for the world's biggest brands in electronics, clothing, toys and home appliances.
For instance, few people are familiar with Yue Yuen Industrial Holdings but most people own a pair of their shoes. The Taiwanese company makes a third of the world's shoes for brands such as Nike, Timberland and Rockport.
Unlike its peers, Foxconn is now a familiar name to much of the world although its rise to prominence has been for all the wrong reasons.
A dozen suicides in 2009 and 2010 ignited concern about working conditions at Foxconn's gargantuan "factory towns" where employees work, sleep and eat.
Initially dismissive of the suicides, Foxconn has since raised pay and cut working hours for its workers - usually migrants from China's poorer provinces.
It has also set up a 24-hour counselling centre, attached suicide nets to factory livings quarters at its Shenzhen plants and invited monks in to ease tension.
However, a report last month by Hong Kong watchdog group, Students and Scholars Against Corporate Misbehaviour (Sacom), said that while Foxconn had fulfilled some of its promises, working conditions remained poor, particularly at the company's newer plants in the west of China.
At its plant in Chengdu, which exclusively produces Apple products, Sacom reported workers complained about dust, skin allergies, sore eyes and poor ventilation as well as long hours and miscalculation of wages.
Watchdog groups are concerned about worker safety. These concerns about plant safety were underscored on 20 May when an explosion at the Chengdu plant killed three people.
Rising wages in the wake of the suicides, as well as falling prices for smartphones, laptops and other gadgets, have undermined the Foxconn group's financial performance.
Its Hong Kong-listed unit Foxconn International posted a loss of $220m (£135m) in 2010.
"The year 2010 was an extremely difficult year for us," the company said in its annual report.
Like other manufacturers, it is moving production to China's inland provinces amid double-digit increases in wages in the Pearl River Delta - China's traditional manufacturing heartland.
Honhai Precision Industries, Foxconn's Taiwan listed company, has fared only a little better, with sluggish growth in its 2010 earnings.
According to estimates by Deutsche Bank, Honhai saw labour costs rise by more than 30% in 2010 - a rate expected to continue in 2011 before easing to about 20% in 2012.
But analysts say the company should perform better as it completes the relocation of its operations to plants in Sichuan in western China, where wages are about 15% lower. It is also building a plant in Henan.
Foxconn executives have also said the move inland might help prevent suicides, as workers will be closer to their home-towns.
Some observers say Foxconn has come under greater scrutiny than other manufacturers because of its high-profile link with Apple, but its working practices are no worse than the vast majority of factories in China's manufacturing heartlands.
"They pay workers on time and for overtime according to the regulations, and that's why workers always queue to work there," Geoffrey Crothall, a spokesman of China Labour Bulletin told Bloomberg Businessweek last year.
And other companies have faced labour unrest. Workers at a Honda plant in Guangdong staged a strike in May 2010 to demand higher wages.
In a survey published in 2010 by Oxfam Hong Kong, Foxconn ranked sixth for corporate social responsibility out of the 42 companies that then made up the Hang Seng index.
Oxfam praised Foxconn for giving 1% of its profits to charitable causes and highlighted its thorough monitoring of its supply chain.
The Hang Seng index now contains just one export-focused company - Li & Fung, which helps big names like Wal-Mart source goods cheaply.
Shoemaker Yue Yuen lost its blue-chip status in 2009.
Foxconn will be replaced by insurer AIA and nappy maker Hengan. Both companies target China as a market for their products rather than as a place to make goods cheaply for export.
Foxconn itself is considering such a switch in focus, with plans under way to open 10 large electronic stores in the Shanghai area by the end of 2011, in partnership with German retailer Metro.
It is a risky strategy for a contract manufacturer with no experience in China's cut-throat retail market - but higher salaries for China's workers will make buying the iPads, lap tops and gaming consoles that Foxconn produces more affordable.