Pay hike could cost Foxconn much higher

Pay hike could cost Foxconn much higher

It has been estimated that the pay rise may entail increased costs of US$300-500 million a year.

Foxconn, the world's largest contract manufacturer of electronics, has announced a raise in the basic pay for entry-level employees by 16-25%, effective from Feb. 1, representing the company's third major pay hike since 2010. After passing various technical tests, a basic-level worker will see their monthly pay jump from 1,800 yuan (US$285) to 2,200 yuan (US$235), compared with the 900 yuan (US$130) on offer three years ago. The company has also pledged to cut overtime hours.

The Taiwan-based company is stepping up promotion of the policy to cut overtime among its more than 1 million employees at its various factories in the mainland, which will be overseen by a supervising body consisting of labor union representatives, a human resources unit and a party organization.

An article in the New York Times says the pay rise is a demonstration that pressure from the international market and the concerns of western consumers are prompting a fundamental change in the "Foxconn" model, which may accelerate a change in the Chinese economy.

Statistics show that the monthly pay of basic-level employees at Foxconn's various production bases in China are comfortably above the local legal minimum wage. The company's financial statement for the first half of 2011 shows that the average monthly pay for its employees had reached 3,070 yuan (US$487), up 33% year-on-year.

The pay hike will put pressure on Foxonn's peers, many of which have been encountering difficulties in recruiting new laborers following the Chinese New Year holiday.

The capital market has reacted unfavorably to the pay hike, however, as Foxconn's share price at one point plunged 6.41% after the news was announced. It has been estimated that the pay rise may entail increased costs of US$300-500 million a year. A pay increase in 2010 boosted labor costs by 91%, compared with sales growth of 26% that year. A securities analyst has lowered the projected profits of Hon Hai Precision Industry, Foxconn's parent company, by 8% for this year and next year.

Hon Hai's consolidated financial statement shows that its gross profit margin dropped to 7.05% in the third quarter last year, down from 7.28% in the previous quarter.