Government announced lockdown at Zhengzhou Foxconn ignored

Government signals doubling-down but in reality capitulates.

View from China with an Austrian School of Economics Perspective

Today November 4th China’s National Health Commission announced that China now officially has 3,871 new ‘local’ Covid cases (704+3167). Guangzhou is the latest hotspot. This may not sound like much, but the real numbers are of course far higher and the trend continues to rise.

To no-one’s surprise, doubling and tripling down on nonsensical policies hasn’t accomplished anything other than creating more chaos.

Case in point: On November 2nd around noontime the Zhengzhou Airport Economic zone, where the giant Foxconn plant making iPhone 14s is located, announced yet another lockdown, this time in “silent” (静默) mode, meaning in theory no deliveries and a strict prohibition on moving in and out.

The government also announced that it was sending 200 staff to Foxconn to help revive PCR testing.

Yet as so often proves to be the case in China, the announcement proved to be more bark than bite.

Why is this?

Well, for one thing, one of the most important factors which decides on the fate of any aspiring bureaucrat in China is the economic performance of the entities within his scope of responsibility. That could be a city, a province or a state-run company. When push comes to shove and large amounts of money are at stake, often the money factor takes precedence over everything else.

Second, Chinese may on average be a patient people, but their patience is not unlimited. When enough people stop cooperating, there is little the government can do to stop them.

What we see happening in Zhengzhou illustrates both these phenomena.

Normal salary levels for temporary seasonal workers average around 20-30 RMB/hour. Yesterday November 3rd, despite the alleged strict lockdown, Foxconn management was offering temporary workers up to 65 RMB (~ US$9) per hour to lure people back. Cleaning staff can now get 300 per day to pick up trash, with guaranteed compensation of 150 RMB/day if they end up being quarantined.

Despite these incentives, workers are apparently still leaving in droves.

So much for this supposed ban on leaving and entering the area.

How did we get here?

After the announcement of election results last Monday the Hong Kong stock market fell by over 7%. The Hang Seng index dropped under its level on July 1, 1997, when Hong Kong was handed over to Chinese rule. HK-listed mainland stocks (中概股) fell by over 10%. Though all markets are manipulated, this was unequivocally seen as a vote of no confidence.

How much more financial pain are the governments in Beijing, the provincial and major city governments prepared to accept before they start making corrections to their policies?

Various rumors continue to swirl that some kind of policy reversal is in the works. According to a report on Nov. 2nd by Zero Hedge, these rumors were once again denied by Beijing.

Zhengzhou is one place where we can see this struggle in action. As we reported last week, these past few weeks Zhengzhou has once again been the subject of widespread lockdowns. While it is not a complete lockdown, apparently a large number of housing subdivisions have been affected.

Until recently, it looked like the government there might finally be running out of steam, with several actions and statements signaling a willingness to compromise with reality.

For example, one promising sign was an article published by the Zhengzhou health authorities. This article cited a February 2020 press conference in Beijing stating that:

“… the new coronavirus infection is a self-limiting disease. Self-limiting disease is a technical term referring to a category of pathogens which lead to clinical symptoms of limited duration These can include fever, coughing and a runny nose, but these symptoms do not last long. Even without treatment, the clinical symptoms will disappear without causing permanent damage to the body or leading to chronic infection."

In other words: It is not dangerous.

This statement represents a substantial departure from the official narrative thus far.

Zhengzhou, the capital of Henan province with 12 million + inhabitants, has had a string of disasters during the past two years. Not only is this the second time its inhabitants are being put through the lockdown wringer, but they had to endure the disastrous management of the floods of July 2021. At the time authorities failed to take action to prevent the usage of tunnels, resulting in the deaths of hundreds.

Zhengzhou is also the location of Foxconn’s largest plant producing iPhones, with 200,000+ staff allegedly generating 90% of Zhengzhou’s exports and 80% of all iPhone 14s. Like most of the rest of China, it also has some Covid cases. Big problem.

Fed-up Foxconn workers

Anatomy of a train wreck

While we may not have the dates exactly right, here is more or less the timeline of events over the course of the past few weeks.

It is a comedy of the absurd.

To understand what happened, it’s important to know that Foxconn seasonal workers derive most of their income not from their base salaries, but rather from bonuses for consistently showing up for work during a 3-month period. This bonus is the equivalent of roughly two month’s base salary. If they miss even one day, the financial penalty is huge.

Also: In theory workers are supposed to be living in company dormitories on site, but with 8 persons to a room, these are not so comfortable. As a result, approximately 50,000 people live in the nearby district of Zhangzhuang.

• On or around October 1st, the Foxconn management implemented daily PCR testing, but to save time and resources did so with 20 people sharing one test. This is common practice in many Chinese cities. It means however that — at least initially — a test producing a positive result due to one infected person will lead to 20 people being subject to quarantine. The idea behind this approach is that if only one of these 20 is actually infected, there will be a 1:1 re-test of these 20 people and the next day the remaining uninfected 19 will be released out of quarantine.

• That may sound rational in theory, but the details are messy. On October 13th, one person tested positive in one production hall. This meant not only that 20 people got sent into quarantine, but also that — just to be on the safe side — everyone sharing a dorm room with one of those 20 was confined to their dorm rooms. As more and more cases followed, productivity plummeted.

• The canteens were closed.

• On October 16th (the start of the party congress in Beijing), the Foxconn plant went into “closed-loop” mode, meaning that production would continue, but without workers traveling in and out. This was the first “lockdown”. At the same time the plant scaled down to only quarantining workers who tested positive.

• This closure meant however that workers living in Zhangzhuang could not go to work. The company declared that they had failed to show up for work, meaning that they could not receive their three-month full-time bonus. This created a lot of unhappiness.

• In order to reduce the number of workers impacted by quarantine, Foxconn changed from 20 workers sharing one test to individual PCR tests. This however made the testing into a massive bottleneck with workers having to wait in line for up to 4 hours each day. After millions of hours wasted in line, this eventually led to Foxconn giving up on PCR testing completely and replacing it with the quick antigen tests.

• The care offered to quarantined employees who fell sick was apparently minimal to non-existent. In some cases, workers complained that not even adequate food was provided.

• The employees who were initially quarantined were still paid their base salaries, but for those quarantined later on, even their base salaries were cancelled.

• At some point sentiment broke. A lot of staff decided that they had had enough. Over the course of the following week, the lousy treatment plus constant state-sponsored fear-mongering did their work. First, most of security guards fled the factory area. Soon groups of workers began to follow them.

• Countless videos (like this one) of workers scaling fences and trudging tens of kilometers on foot to get out began to populate Chinese and foreign social media. Interestingly, the local government seems to have made no serious effort to suppress these videos, a fact which hints that they were using them to apply pressure on the zero-Covid hawks in Beijing. (Remember we are talking about 200,000 people!)

• Two or three days after workers began leaving in large numbers, some of their home town governments finally began to arrange for vehicles to pick them up. However, they could not enter the area due to various restrictions on road traffic; instead, they could only wait at expressway exits. Eventually Foxconn also agreed to arrange transportation from the plant itself.

All in all, the result was a huge loss of face for both Foxconn and government.

According to the latest reports, production at the plant continues, but staffing levels are down to around 20%.

We can only guess how to allocate blame between the Foxconn management and the city government. Regardless of what the truth is, the Foxconn workers are not the only ones whose confidence they may find hard to recover: this loss of confidence is not just limited to Zhengzhou. It is a train wreck in progress all over China.