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Monday, November 29, 2010

The Makers: "It's a matter of time."

The past two evenings I had dinner with an in-law (let's call him my uncle-in-law) who is a senior executive at Foxconn (makers of the iPhone and iPad, among other things). He holds engineering degrees from leading universities in Taiwan and the US and has residences in the US, Taiwan and China. Over the years I have had a number of interesting conversations with him about economic and technological development in China.

When I arrived in Taiwan a few months ago I got in trouble by remarking how little things had changed here since my last visit about 5 years ago. Locals here are sensitive about this slowdown in the pace of development. I suspect it is due to the massive flow of talent and capital to mainland China from Taiwan. (I could probably quantify the financial side of this by looking at FDI in China originating from Taiwan in the last 5-10 years and comparing it to Taiwan's GDP and domestic investment in the same period.) Ambitious businesspeople know that the biggest fortunes are to be made there, and Taiwanese companies (like Foxconn) have played an important role in China's economic miracle. But we've recently passed a tipping point -- Taiwanese in China now often feel like "small potatoes" and notice that mainlanders now possess a surfeit of money, ambition and even knowhow.

Some notes from conversation with my uncle.

Foxconn recently almost doubled wages for workers in China.

Foxconn recently added several hundred thousand workers, bringing its headcount to well over 1 million.

Foxconn will expand into the interior of China, where wages are lower. Vietnam and other low-wage competitors lack the necessary infrastructure to compete. [The infrastructure in China is really first rate. In some cases it is superior to what is found in the US or Taiwan!]

My uncle characterizes engineers educated in China as "smart" but poorly trained. He claims that after the difficult college entrance exams university students tend to take it easy, and that the current generation of faculty in China are unworthy of their students (many of these faculty were poorly educated due to the Cultural Revolution). [In my own experience with PRC physicists I would say things are improving.] He noted that recent graduates can be made into good engineers after a year or two of training, but that they lack practical knowledge at first. [I would guess US corporate engineers might say the same of our graduates!] He said something like "sure, they know thermodynamics and circuit theory, but they can't set up a process line..."

My uncle is worried about prospects for the US -- he sees the technology gap between China and the US as almost closed and wonders how America can compete against Chinese workers making much lower wages. He didn't deny that the US is still more innovative, but noted that the gains from this innovation (i.e., jobs and commercial industries) are now captured by those with manufacturing capability. In other words, a key bit of innovation might make a few people (e.g., at a startup) rich, but down the line someone has to actually manufacture and ship products, which creates jobs and wealth at a much larger scale. He is certain that will be done in China. I tried to point out that this is counter to the conventional US mythology (Apple gets the big margins, Foxconn's profit is pennies per iThingy shipped), but he just said "It's a matter of time."

My uncle is confident that the PRC government can control inflation and other social problems in the near term. He characterizes the leadership as corrupt but effective. He also noted that younger Chinese are not willing to work as hard or suffer as much as their parents did. Foxconn had to deal with this by changing overtime policies -- the previous generation of workers would take all the overtime they could get, whereas the younger generation balks at too much.

Coincidentally, another aunt and uncle passed through town yesterday, from Los Angeles, on their way to Shanghai to buy an apartment. Real estate costs in Shanghai and Taipei are ridiculous -- many new apartments (roughly 100 square meters) cost over $1M US! My Foxconn uncle characterizes this as a bubble and notes that many workers have become "slaves to their apartments".

Related: NYTimes economics reporter David Leonhardt on the growing consumer economy in China. Slide show.

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