Ouch. First the suicides. Then the plant explosion. Now Foxconn International, the scandal-hit Taiwanese company that toils in the shadow of high-profile clients such as Apple, is being stripped of its blue-chip status after it was dropped on Tuesday from Hong Kong’s benchmark Hang Seng index.
In its place will be AIA, Asia’s largest listed life insurer and Hengan, a company best known in mainland China for its Space 7 brand of sanitary napkins and its Anerle brand of baby diapers. Hengan is also a major producer of toilet tissue.
The demotion caps a stunning reversal of fortunes for Foxconn, the world’s largest contract electronics manufacturer, which at its peak in 2006 had a market capitalisation of over HK$194bn ($25bn), when its shares were changing hands at HK$27 a pop.
On Tuesday, the stock closed at HK$3.90 a share.
Foxconn made its fortune on the back of the ‘Made in China’ model, producing goods for export at ultra-low costs in high volume and in quick time. But this business model came unstuck last year after a spat of highly publicised suicides at its Shenzhen campus forced the company to rise wages and put an end to its factory-town model. Both of these moves have squeezed the company’s narrow margins. Rising commodity prices have done the same.
As a result, the company posted a net loss of $218m (£135m) in 2010, compared with net income of $38.6m the year before.
Foxconn is the not the first export-focus company to be demoted from the Hang Seng.
Yue Yuen, another Taiwanese company that no one has heard of, but which makes a third of the world’s shoes for brands such as Nike and Timberland, was relegated from the index in 2009.
This leaves, Li & Fung, which sources goods for the likes of Wal-Mart, as the only export-focused company left on the index. But for how much longer?
Li & Fung’s stock is easily one of the worst performing on the Hang Seng so far this year, having dropped some 23 per cent since January.
Unlike Foxconn, Li is not a contract manufacturer. Instead it makes its money from commissions taken from both the companies from which it sources products and the mainly western retailers it supplies with those same products. Yet it has not been immune to some of the ailments that have afflicted Foxconn. As the FT reports, retail sales in Europe and the US have slowed, while rising labour costs in China – the source of almost three-fifths of its goods – and worldwide inflation in plastics and cotton prices have put its suppliers under pressure.
It is telling then, and perhaps a sign of the times, that Foxconn will be replaced by AIA and Hengan both of which target China as a market for their products rather than as a place to make goods cheaply for export.
China: the end of cheap, Foxconn edition, beyondbrics
China: the end of cheap?, beyondbrics
Chinese companies struggle to find workers, FT
Rising Chinese wages pose relocation risk, FT
Foxconn – In depth, FT
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