Chinese Profit Margins and the World’s Largest Human Migration

Travelling in China this spring I stayed in hostel dormitories for 25 Yuan a night (around 4$). Though you might have to put up with other guests snoring, the hostels are neat, clean, and almost always have a nice atmosphere about them. In addition, the hostel will provide you with clean bed sheets, a towel, free Wi-Fi, a safe locker, a fully stocked bathroom, and in some places a welcome drink. In whichever country you are, that kind of deal can only mean a business philosophy of very tight profit margins…

Being able to do business with such tight margins is one of the key strengths behind what is fast becoming China’s global economic take-over.

 [A view of one of China's main economic locomotives; Guangzhou in the Pearl River Delta]

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In China I also spent a few days in Guizhou province. Guizhou is one of China’s poorest provinces, but a very beautiful one. Being located near the centre of China, it is a province full of ethnic diversity, with the various facial features and skin complexions of the wide-reaching corners of China converging unto this province. The main city of Gui Yang, however, is grey and unattractive, making it – in my view – unbecoming of such colourfulness. And the colour does migrate…

Going there, I spent a good 12 twelve hours on a train hard seat from neighbouring province Guangxi. Despite all the details one’s senses can gorge themselves with in such a crowd, it was an exhausting day. It was the 1. May weekend and the train was packed beyond capacity. For all its flawed or, so as not to mince words unnecessarily, rapacious, working conditions, the many migrant workers of China often do get to travel home for this holiday – labour day. And Guizhou is one of the main origins of migrant workers.

A key aspect to why business profit margins can be squeezed so much.

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China has an estimated 130 million migrant workers. A large portion of these workers ends up in the many and huge factories and assembly plants in the Pearl River delta. It’s by far the single largest human migration of all time.

The company Foxconn employs well over 900.000 workers, with around 450.000 workers employed at their Shenzhen factory alone. You might have never heard of Foxconn, but it’s one of the biggest companies in the world. Assembling electronic gadgets on a large scale (being, among other things, the exclusive producer of iPads), this one company accounts for around 4% of China’s total exports, thus contributing heavily to China’s huge trade surpluses.

Being able to draw on such a seemingly never-ending flow of migrant workers who will reliably perform tasks for a wage I (and many others) probably wouldn’t be able to live on, Foxconn is able to squeeze its profit margins to a near minimum. It’s all about volume. Foxconn turns over goods on a very large scale, and gets by very well with a profit margin of only 4% (compared to e.g. Apple’s 27%). With such clout, and such masses of people to fuel it, you can’t really hope to beat them for a contract.

[The above three paragraphs are informed largely by the book Conor Woodman: Unfair Trade: The Shocking Truth behind ‘Ethical Business’, Random House Business Books, London, 2012]

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The working conditions for the migrant workers from Guizhou and other places are neglected, as one company only has to equal the conditions of the next, with few or no incentives to improve them. Most important is to keep churning out products that the droves of consumers are encouraged to “need”. These workers are, in large part, what enables China to maintain the economic growth it has witnessed for several years now - yet the benefits are far from trickling down in torrents.

The nadir was probably (or hopefully) reached in 2010 when a reported 18 Foxconn workers attempted suicide, allegedly in protest of their harsh and unkind working conditions that formed their reality; A dire social consequence of consumerism in overdrive. Ultimately, the responsibility lies, of course, with the Chinese themselves, but we are all part of the supply-demand chain.

Something to consider… Do we really “need” the latest flashy gadget from the shop’s window?