What will happen when Apple reduces its dependence on China?

Sep 27, 2020 Hardware HUAWEI

Changes in "Made in China"

The production of Apple's products is moving out of China.

On September 7, India's Science and Technology Minister Prasa said that Apple has shifted eight foundries from China to India. This is just a microcosm of the industry shift.

Wistron sold its Apple foundry in mainland China and turned around to take new orders for iPhones in India, and began hiring on a large scale. A few days later, Foxconn, another company that does foundry work for Apple, revealed a set of figures: last year, they manufactured and assembled about 75% of their products in mainland China, this year it was down to 70%.

The figures quickly sparked a round of debate: will China lose its status as the "world's factory"?

Is Foxconn, the world's largest foundry, about to start pulling out of China? Foxconn Industrial Internet chairman Li Junqi told GeekPark (ID: geekpark) that their strategy remains rooted in the continent, "In order to respond to the needs of customers in the global market, we have R&D and manufacturing locations in 11 countries and regions, it's not something we've done in the past few years, we did it more than a decade ago."

In the past, almost all iPhone, iPad and other Apple products were manufactured and assembled in China and then exported to various countries.

In the future, it may be different. Some supply chain sources have told GeekPark (ID: geekpark) that Apple may continue to move more of its production lines out of China, leaving only 30 percent of its overall production dedicated to the Chinese market. This kind of shift is happening to other foreign brands as well. It seems that China's position as the "world's factory" is really shaking.

However, does it matter whether China is the "world's factory" or not?

 

The new landscape under the choices

The "world's factory" may seem far away from our daily lives, but where various industrial products are produced and assembled is important to governments and the general public.

There are many interests behind the relocation of a factory. For example, in 2010, after Foxconn settled in Zhengzhou, it recruited 130,000 employees in one year, solving a large number of employment problems in Henan. A year later, it boosted processing trade, mechanical and electrical products and other related exports by about 50 percent each. By 2019, Zhengzhou Foxconn's exports reached total 219.9 billion yuan and imports reached total 113.8 billion yuan, accounting for 81 percent of Zhengzhou's total imports and exports.

Bringing in Foxconn often also attracts its many suppliers along for the ride, which amounts to bringing in a complete industrial ecology. In turn, it continues to boost employment and increase government revenue.

Not only does Chinese government understand this, but so do other countries. In the past, China has attracted a large number of foreign brands and manufacturers to set up factories in China, gradually forming a complete supplier cluster, thanks to its abundant cheap labor and preferential tax policies. China's position as the world's factory has become stronger and stronger. Now, China's industrial output value accounts for 30% of the world's total, with auto parts, home appliances and service robots accounting for more than 30% of exports, and the photovoltaic industry reaching 70%.

However, this balance seems to be being disrupted by the epidemic and increasing trade friction between China and the U.S. The U.S. has begun to impose higher tariffs on products imported from China in order to curb China's economic growth.

This is especially true of products in electronics and communications. Tim Cook has started complaining over the last two years that the US government is always targeting Apple, for example, that iPhones assembled in China and shipped to the US will be subject to higher tariffs. 

The same goes for other brands, which often have to pay higher tariffs if they want to sell to the U.S. or its allied countries. For example, the network communications equipment of Cisco have been moved from Guangxi to be manufactured in Vietnam.

The brands and their OEMs have figured out a new way: they build two supply chains, one for the United States and its allies, and one for China and other countries.

Luxshare Precision started setting up factories in India and Vietnam a few years ago. Chairman Wang Laichun said in 2019 that the company would continue to move affected products to Vietnam or other countries if necessary in order to solve the problems caused by the tariff war between the two largest economies. According to her plan, Vietnam will host one-third of the production capacity of Luxshare Precision in the future.

Other developing countries, seeing the opportunity, actively offer an olive branch.

In April, India unveiled a new strategy for attracting investment, announcing that it would take $6 billion and cheap land to attract companies about the electronics chain.

In June, Vietnam and the European Union signed a free trade agreement that will eliminate or reduce tariffs by 99 percent. In fact, Samsung has completely shifted its overseas production focus to Vietnam, along with its supply chain partners, after closing factories in mainland China. But with limited land and a population of 100 million, Vietnam's carrying capacity is bound to be limited.

Another hot place is Mexico, which in July signed a trade agreement with the U.S. to export goods to the U.S. at zero tariffs. Mexico is also characterized by an abundance of cheap labor, as Foxconn previously had five factories there.

The CEO of a local real estate agency said his company is currently helping two Chinese companies, one in the automotive sector and the other in manufacturing, relocate to Mexico's industrial cluster. "Chinese manufacturers who want to keep their market share in North America have no choice," he says.

Labor and supply chain costs vary from country to country, which inevitably affects the overall cost structure, and in turn affects pricing and profits.

Pegatron chairman Tung Tzu-hsien said in an interview that no other country offers such an attractive investment environment as China used to, with a large workforce, policies supported by generations of officials, and many nearby suppliers. "Where do we go next? I don't know."

However, in the context of the US-China trade friction, the only way is to look for emergency responses.

 

Finding new ideas and new balances in globalization

Forty-five years ago, Foxconn founder Guo Taiming grew his business from a small rented workshop into a multinational industrial giant. It took root in mainland China and attracted orders from around the world.

The rise of Chinese manufacturing from the 1990s onwards is in fact a reflection of China's globalization process. The corresponding question to how to retain manufacturing is how Chinese companies can continue to go global. Only by moving in and out can we close the loop of China's globalization.

Nowadays, whether it is the call for the supply chain to return, the blockade of TikTok and Huawei overseas, or the decoupling caused by the epidemic, the globalization environment faced by Chinese companies has never been tougher. After so many years, in both large developed markets and emerging countries, sometimes people still feel threatened and afraid of large Chinese companies," said Diane Wang Shutong, the CEO of DHgate, a cross-border B2B e-commerce company. 

China's status and international influence has changed compared to decades ago, and Chinese companies are playing an increasingly important role. Each country has its own politics, economy, and culture, and she feels that Chinese companies need to find new postures and models to integrate globally as a way to dispel the unease and distrust of their partners.

If anything, TikTok's face of being blocked in the US is another crucial battle for Chinese companies to go international after Huawei. Then, rethinking their position, shifting their posture and path, is another self-test for Chinese companies going global.

This is an article from WeChat official accounts GeekPark (ID: geekpark), written by Zhao Weipeng, translated by Chris Yuan.