What the Factory Riots Mean for Chinese Manufacturing

Foxconn's (HKG: 2038) Taiyuan factory was shut down on Monday after a riot broke out on Sunday, sending 40 people to the hospital.

It isn't clear what started the riot, though some workers said it began as a fight between just a few workers and security guards. Workers seemed to agree that their relationship with the security guards had never been a good one.

And lately, things have gotten even worse.

The Taiyuan facility employs 79,000 people. Recently, however, a number of workers from factories in other parts of China had been transferred to Taiyuan. Some workers claimed it was to help with Apple's iPhone 5, which the company does supply, though the company would not confirm whether that specific factory was working on the iPhone.

But it seemed as though these workers, from factories in Shenzhen and other cities, had even more issues with the security guards.

From PC World:

These new transfers are less tolerant of Foxconn's security guards, explained a 20-year-old worker, who only wished to give his surname as Zhou. “I think some of these transfers were more extreme in their approach. The workers native to Taiyuan also probably couldn't take it any more with the guards,” he said.

The riot evolved into smashing cars and shattering windows. Zhou said:

“They were mainly after the security guards, but when they couldn't find them, the workers went off and smashed other things.”

But others say the security guards were just an outlet for a bigger problem. Another Foxconn employee, who had posted pictures of the riot online, told the New York Times:

“At first it was a conflict between the security guards and some workers. But I think the real reason is they were frustrated with life.”

A growing number of employees at Foxconn's plant are young and educated. These college graduates have a much better understanding of their rights, and they're not likely to quietly step aside when these rights are violated as workers from ten years ago.

Louis Woo, a spokesman for Foxconn, thinks the company's biggest growing problem is attracting workers.

From the Wall Street Journal:

“We cannot argue manufacturing jobs are exciting for workers. It's kind of boring and requires a lot of hard work...so we have to change that, rather than hoping the workers will change,” he [Woo] said. That is why the company is moving to automate more of its production lines, he said.

The decision to automate production lines is becoming universally popular. Robots could create an assembly line workforce that would work unlimited hours for no pay and with little room for error. Manufacturing companies are quickly catching on, and these Chinese companies do too, robots could displace millions of factory workers.

But Foxconn does have to deal with the problem of worker unrest, and it is not alone in these problems. Workers at factories and on assembly lines across the country are coming from this young, educated generation.

China's gross domestic product grew 7.6% in the second quarter, down from the rates around 9% it had been seeing.

Companies have been trying to compensate for the growing demand from workers. Hon Hai (TPE: 2317), Foxconn's parent company, has moved a number of factories inland to lower costs.

And the average wage for workers has risen 18.9% in just the last year.

Geoffrey Crothall, a spokesman for the China Labor Bulletin, said strikes and protests from workers and factories have been increasing across the country this year, often from workers demanding more wages from companies that are struggling to stay afloat.

The situation is still not as bad as 2010, when inflation was behind demands for higher pay.

But the fact that it's getting to that point is an indication that things are getting bad and employees are more aware.

And it could be a vicious cycle. As companies attempt to recover from a financial rut, workers will not want to see pay cuts. And these protests could spike even more.

Should China's factory sector continue to slow down, it could open up the opportunity for other nations to pick up the slack. In 2010, the U.S. was not far behind China in manufacturing, followed by Japan and Germany. If Chinese manufacturing really does slow to a dangerous extent, these nations might see their sectors grow.

Of course, it's also possible that the jobs from demanding factory workers will go to robots and automated system. When workers demand more rights and higher pay in this era of technology, technology will win.

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