Wages of Outsourcing

When your major technology component supplier’s employees in China are killing themselves and low pay, job performance stress and quality of life conditions apparently are major contributing factors, labor provisions in current outsourcing contracts suddenly become exposed in a huge, public and dark way.

Questions abound, but here’s one: Is pushing for the for the lowest cost, transaction-based contract – mainly by enhancing profit margins at the expense of the people in your supply chain that are making you rich – a sustainable model?

Taiwanese IT giant Foxconn is one of Asia’s major contract electronics manufacturers, supplying components for computer companies such as HP, Sony, Dell and Apple. Its facility in Longhua, China employs about 300,000 workers, but since January at least 10 workers there have jumped to their deaths from the roof of the four-story dormitory on the Foxconn complex. At least two more deaths at Foxconn have been reported, one a suicide at another company location and the other a death from exhaustion. Statistically speaking the number of suicides at Foxconn is not unusual for young people in China, but the frequency of them this year is capturing worldwide attention and scrutiny. It is estimated that 90 percent of Foxconn’s workers are between 18 and 24 years old. They typically work 12-hour shifts and share living quarters with up to 10 co-workers.

While it’s probably inappropriate to blame the suicides solely on Foxconn working conditions, the symbolism of their actions is unmistakable. It set off protests in Hong Kong and Taiwan. Last month, nine Chinese social scientists published an open letter to Foxconn saying that the deaths “force us to question the future of the ‘factory of the world’ and the new generation of migrant workers.”

In recent days Foxconn has raised wages at plants in China by a total of nearly 70 percent, but even with that increase, workers’ monthly salaries are up to 2,000 yuan or $290! Excuse me, but that’s an embarrassment for both Foxconn and its high tech partners even  if those wages are, as Foxconn says, considered compliant with international standards. A Financial Times report yesterday said Foxconn expects its customers to help pay for the wage increase.

This turns the lens squarely on the supply chain management practices of the major U.S.-based tech firms that contract with Foxconn.

Meggin Thwing Eastman said in a recent RiskMetrics blog post that, “No one knows why these problems are coming to a head right now. But that doesn’t mean that these tragedies were entirely unpredictable. The historical record shows that some of the world’s most admired companies have effectively built poor labor practices into their business models. Now external pressure may force a change.”

Outsourcing to China’s huge manufacturing centers makes ultimate sense in a globalized world. But there is a downside exposed by the Foxconn story: Outsourcing is often criticized for the loss of domestic jobs and manufacturing ability as well a major reason behind China’s long-standing poor working conditions and awful human rights record.

Whether that view is fair or accurate is mostly irrelevant now because while the Foxconn saga is still playing out, it’s likely to become a watershed moment in the world of outsourcing that changes the way outsourcing deals are concluded. At least it should; a wake-up and a shakeup is needed.

Vested Outsourcing’s collaborative win-win approach to achieving desired outcomes is a very relevant and attractive model. Outsourcing might become more expensive for companies doing the outsourcing but their vendors’ workforces might just be happier, more productive —  and alive.

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