Foxconn & the Organic Composition of Capital

“Foxconn, the world’s largest contract electronics manufacturer by revenue, plans to increase the use of robots in its factories 100-fold to 1m within three years, according to Terry Gou, chairman and chief executive.” (Financial Times, 1 August 2011)

Taiwanese company Foxconn has already made an appearance on this blog. Last time it was to give an example of how the exploitation of Chinese workers helps boost the profits of foreign companies.[1] Here it is to illustrate what Marx called the rising ‘organic composition’ of capital.

Marx’s theory of value analyses the form that social labour takes when workers have to sell their labour-power to capitalists,[2], the owners of the means of production. The sole motive for capitalist production is profit, and this is derived from workers receiving less value for hiring out their labour than they add to the value of the product when working. Competition forces capitalists to raise productivity in order to cut costs. But raising productivity means more things are made per worker in a given time, so this will increase the mass of means of production (raw materials, machinery, etc) compared to the number of workers employed and the labour they perform. Alongside this rise in what Marx called the ‘technical composition’ of capital, the value of the means of production will also tend to increase relative to the amount of the wage bill. The concept of the rising ‘organic composition’ of capital is used to refer to the process of capital accumulation where both the technical and the value compositions rise together.[3]

This combined ‘organic’ concept of the composition of capital is critical for understanding what happens to capitalist profitability. While the number of hours of surplus-labour determines the amount of the profit, the rate of profit is measured by this amount divided by the value of the total capital invested. Take the example of a typical worker. There is a limit to the amount of surplus-labour that can be performed which is set by the total working day. Yet there is no definite limit to the mass of raw materials and machinery that he or she can work with. So, over time, there is a tendency for the rate of profit to fall per worker, and in general across the capitalist economy. This is because the mass of profit will tend not to rise as much as the value of the capital invested in means of production. As the rate of profit falls, the system becomes more prone to crises. Marx’s theory shows how capitalism places limits on increasing productivity and is a barrier to social progress.[4]

Of course, there are many factors that affect how this trend works out in reality. It can be misleading to focus on particular examples, but Foxconn’s investment plans clearly show this dynamic at work. This company runs huge factories employing a total of a million workers in China alone. If its decisions are exceptional, it is only in their magnitude. The Financial Times report cited above gives the following details:[5]

·       Foxconn currently uses just 10,000 robots, below the normal level expected. The number of robots will increase to 300,000 next year and to 1 million in three years. This is a response both to the need to increase productivity and to the higher wages that Foxconn is forced to pay due to labour shortages, adverse publicity from the suicides of workers at its plants, etc.

·       Wages for the poorest paid (migrant) workers rose by 30-40 per cent last year and are expected to increase by another 20-30 per cent annually until at least 2013 (though this would still leave wages at barely a quarter of those in the US). This is in addition to an expansion of the workforce by several hundred thousand.

No further details were given in the FT report, but it can be estimated that while the company’s wage bill could rise by a factor of 3 in the next few years (higher wages and more workers), the number of robots will increase by a factor of 100. Other elements of the means of production may not increase by anything like as much as the extra cost of the robots, but the total investment in means of production could easily rise by a factor of 10. That would definitely increase the ‘organic composition’ of capital.

The impact of the investment on Foxconn’s profitability remains to be seen. Companies that innovate usually gain a competitive advantage that can boost profits for a while, until others do likewise. But Foxconn is subordinate to the demands of powerful companies like Apple, Dell, SonyEricsson, Nokia and others, so this is less guaranteed. Foxconn actually reported a loss of $220m in 2010, after only a small profit in 2009. This may be creative accounting as much as reality, since Taiwan’s Foxconn International Holdings is incorporated in the Cayman Islands!

Foxconn appears to be shifting away from brutal worker exploitation, based on long hours, terrible conditions and minimal pay, to a strategy that depends more on boosting productivity with further huge capital investments. Details are difficult to get, but one report indicated a $2bn investment in a new factory in China, which gives an idea of the scale of Foxconn’s operations.[6] The end result is a rising organic composition of capital.

Tony Norfield, 2 August 2011

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[1] See ‘What the “China price” Really Means’, 4 June 2011.

[2] The theory of value is a theory of the social organisation of labour under capitalism, extending to an analysis of the forms and dynamic of the system, including the theory of crisis.

[3] Marx introduces this concept in Chapter 25, ‘The general law of capitalist accumulation’, of Volume 1 of Capital. In Volume 3 he develops the analysis to explain the trend in the rate of profit and crisis.

[4] It is important to recognise that the limit to increasing productivity here is a capitalist-determined limit that comes from declining profitability. This is not a limit that comes from technological barriers on how far productivity might be raised.

[5] The bullet points are my interpolations from the article, based on other reports. The link to the FT article is: http://www.ft.com/cms/s/2/e5d9866e-bc25-11e0-80e0-00144feabdc0.html#ixzz1TnCPPKlc

[6] Bloomberg News, ‘Foxconn to Invest $2 Billion in New China Plant, Xinhua Reports’, 22 October 2010.