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Foxconn Challenged as Global Reach Grows

Sarah Mishkin in Taipei and Samantha Pearson in São Paulo
Thursday, 3 Jan 2013 | 9:03 PM ET
Chinese workers make their way back to a Foxconn factory after lunch break in an industrial district of Foshan City, southern China's Guangdong province.
AFP | Getty Images
Chinese workers make their way back to a Foxconn factory after lunch break in an industrial district of Foshan City, southern China's Guangdong province.

In the barren industrial town of Jundia in southeastern Brazil last October, thousands of workers gathered outside the local Foxconn factory in protest. But while stressful working conditions and long hours have sparked riots, and even suicides, among Foxconn's staff in China, the gripe of the Brazilians was a little different: they did not like the food in the canteen.

Contract manufacturer Foxconn has embarked on an ambitious expansion plan in Brazil, which the country's government says could reach $12bn of investment. Many of the plants make Apple products to help avoid import taxes on electronic goods sent from China, home to most of Foxconn's iPhone and iPad factories.

But the new factories in Brazil, where unions are historically strong, have faced challenges. In addition to the October protest in Jundia, which employs 6,000, workers there have staged protests over everything from overcrowded transport to working hours and lack of career planning offered to employees.

(Read More: Amazon Preps Smartphone, With FoxConn's Help: Report)

"Strikes really aren't that normal around here – it seems to be a problem just with Foxconn," said one official at the mayor's office in Jundia.

Taiwan-based Hon Hai Precision, widely known by its trade name Foxconn, is the world's largest contract electronics manufacturer. Its name has become synonymous with the vast Chinese factory towns where hundreds of thousands of young workers churn out everything from Apple smartphones to Dell servers.

Yet the company is expanding outside of China, to places as diverse as the US, eastern Europe and Latin America. Recently, it confirmed that it is considering further expansion in the US after Tim Cook, the chief executive of its key customer Apple, said he planned to spend more on sourcing in its home market.

Working outside of China helps Foxconn's customers get quicker turnround and avoid some import taxes. It has also created a new set of challenges for the company, which employs more than 1m people worldwide and produced 81.6bn Taiwanese dollars ($2.8bn) in net profits in its last fiscal year on revenues of T$3.45tn.

Foxconn often enters new geographical markets by taking over and turning round old factories once owned by its customers, but its famously regimented style of management has sometimes caused clashes when applied to cultures far different from the Chinese factory floors it is most familiar with.

"They really want to employ-slash-deploy the management strategy that they had in China, and that just didn't work very well here," said one former senior manager in the US. "The Foxconn structure is very autocratic and can be, I think to some people, somewhat demeaning."

Such disagreements are familiar battlegrounds for Terry Gou, Foxconn's chairman, among whose management aphorisms is the line "a harsh environment is a good thing".

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Mr Gou built Foxconn into the preferred assembler for companies such as Apple by being demanding enough of himself and his staff that Foxconn's scale, precision and flexibility is now without rival in the world. That has led to clashes even in China, where workers are gradually awakening to their rights.

Pressure on quality control supervisors to avoid scratching the iPhone 5's aluminium case led to violent disputes with workers last year at Foxconn's Zhengzhou factory in China.

That came after a string of suicides in 2010 and another riot in 2012 brought widespread international criticism of Foxconn's labor practices.

Now, even as Foxconn continues building new factories in China, it is looking ever further afield. The company recently made investments in Brazil, Mexico and Turkey, and has said it is planning projects in the US, Indonesia and Malaysia.

"Many similar companies are starting to move from a global manufacturing strategy to a more regional strategy," said David Simchi-Levi, a professor at Massachusetts Institute of Technology specializing in supply chain management. "That's a completely different strategy from what we saw companies using 10-15 years ago."

For customers, Foxconn's factories outside China allow them to cut transportation costs, avoid many import taxes, and get quick turnaround on orders. For example, a company such as Dell might need to sell computers to a corporate buyer that requires particular hardware configurations.

"We are here to service customers, and that is why internationally we do final assembly," says one current Foxconn executive in Europe.

Foxconn's overseas expansion is not entirely new, as the company is already the second-largest exporter in the Czech Republic and has had operations there and in the US for more than a decade. Many of those operations started when Foxconn took over factories from consumer-facing customers such as Sony or Hewlett-Packard that wanted to cut costs by doing less of their own manufacturing.

Yet despite calls by the likes of Mr Cook to bring some manufacturing to the US, the vast majority of Foxconn's work will still be done in China, whose cheap and large workforce make it unique, industry analysts say.

Foreign minimum wage laws and higher costs of living mean Foxconn must pay its non-China workers more – starting at $550 a month in Brazil, compared with a basic salary of about $300 at its factory in Zhengzhou. Only a few tens of thousands of the company's 1.2m workers are based outside of mainland China and its headquarters in Taiwan, according to interviews with employees and company statements.

Despite occasional strikes in places such as Brazil, Foxconn's overseas operations have generally managed to avoid the violent conflicts experienced in China. Cultural differences are muted slightly as the majority of overseas managers are locals, say people familiar with its operations.

(Read More: Signs of Change Taking Hold in Electronics Factories in China)

Foxconn said: "We localise our staff, whether it is production line workers or senior management, as we strongly subscribe to having a good understanding of local culture."

For the factories Foxconn builds or invests in and their workers, ownership by the Taiwanese group can have its positives, too.

One former engineer in a plant bought from Motorola in Mexico said the new owners cut costs a lot – no more upmarket hotels while travelling, less spent on landscaping the facility – but also gave him more flexibility to try new projects to boost revenue.

And despite the frustrations of balancing the different cultures within Foxconn, said one manager who spent nearly 10 years in one of its US offices, the Taiwanese group's global presence and its ability to rely on foreign workers to liaise with foreign customers give it substantial advantages.

"Those people can get a fricking army together so fast . . . if they want business," she said. "Do they do it smoothly? Probably not, but they get it done."

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  • Matt Hunter is the senior technology editor at CNBC.com.

  • Cadie Thompson is a tech reporter for the Enterprise Team for CNBC.com.

  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.

  • Jon Fortt is an on-air editor. He covers the companies, start-ups, and trends that are driving innovation in the industry.

  • Lipton is CNBC's technology correspondent, working from CNBC's Silicon Valley bureau.

  • Mark is CNBC's Silicon Valley/San Francisco Bureau Chief covering technology and digital media.

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