In mathematics, catastrophe theory concerns how small changes in independent variables can have unexpectedly dramatic effects on a dependent variable. Typically, if you make small changes in, say, x and y, along an arbitrary surface, you expect the change in z to be small, too, independent of the direction of change. But sometimes, the direction of the change matters. Think of a bent-over cusp in the surface, like a breaking wave. As you approach the cusp you see a well-behaved continuous surface. Move parallel to the cusp and everything remains fine. But move toward the cusp, and the nice smooth function you think you’re following becomes discontinuous, and the change is catastrophic. Catastrophe theory has been used to analyze the onset of avalanches and the capsizing of ships.

Ken Werner
Senior Analyst and Editor

Without pushing the analogy too much, the Chinese manufacturing model seems to be approaching a catastrophic cusp, with some companies already having fallen off the edge.

When Foxconn (Hon Hai Precision Industry), the huge electronic contract manufacturer with headquarters in Taiwan but with large facilities in the manufacturing centers of southern China, finally responded to the epidemic of suicides and attempted suicides among its production workers, large boulders began moving very quickly. (I’m not saying that suicides are a small matter, but the consequences were nevertheless startling in their scope and speed.)

First, Hon Hai substantially raised salaries (twice) and announced plans to outsource management of its worker dormitories. Both before and after the Hon Hai scandal, a scattering of labor disruptions occurred throughout China. There weren’t that many, but it was a lot for China, where independent unions are not permitted and the government places a high value on industrial discipline. There were even some supporting comments from government officials for the idea of independent unions. Chinese manufacturers and their customers expressed concern about the effects of higher manufacturing costs. Pundits speculated about whether this marked the beginning of the end of China’s strategy of being the cut-rate sweat-shop for the developed world, especially since China was, almost simultaneously, allowing its currency to float against the dollar (but cautiously).

Then Hon Hai announced it would be building manufacturing facilities in western China, and would transfer up to 300,000 jobs from southern China to the impoverished west, where many of the company’s young workers come from. Presumably, the salary increases for workers in southern China will not be seen by workers in western China. Foxconn will complete moving these production lines by the end of September, industry sources said.

As it turns out, it is not only Hon Hai that’s rushing west. ("Western China" is a relative term. Wuhan is far closer to the eastern coast than it is to the country’s far western border.) On Tuesday, Digitimes, citing Taiwan industry sources, reported that Taiwanese TFT-LCD panel maker Chimei Innolux (CMI) has begun moving LCD monitor assembly lines from Shenzhen (southern China) to Chongqing and Wuhan (western China), which is where Foxconn is setting up its production bases. The move is being implemented so rapidly that production and shipment schedules have been disrupted, and CMI has been forced to ship some LCD monitors to customers by air, which killed any profit CMI would have made.

The western rush may preserve much of the Chinese model for a few more years, although it certainly makes supply lines longer. Still, all developing countries pass through the stage of unbridled capitalism and wind up with a better-paid class of industrial workers who can afford to buy higher-priced goods from domestic suppliers. (It feels strange to apply the term "unbridled capitalism" to China, but if the capitalist shoe fits….) It happened in Europe, the U.S., and Japan, and it will inevitably happen in China. But maybe not quite yet. It seems as if China is staying on the non-catastrophic side of the cusp for now — but it’s wobbling.