China's days as world's factory over, says iPhone maker Foxconn

TAIPEI • A key supplier to Apple and a dozen other tech giants plans to split its supply chain between the Chinese market and the United States, declaring that China's time as factory to the world is finished because of the trade war.

Hon Hai Precision Industry chairman Liu Young-way said it is gradually adding more capacity outside of China, the main base of production for gadgets from iPhones to Dell desktops to Nintendo Switches. The proportion outside the country is now at 30 per cent, up from 25 per cent in June last year.

That ratio will rise as the firm - also known as Foxconn - moves more manufacturing to South-east Asia and other regions to avoid escalating tariffs on Chinese-made goods headed to US markets, Mr Liu told reporters after his company reported financial results.

"No matter if it's India, South-east Asia or the Americas, there will be a manufacturing ecosystem in each," Mr Liu said in a conference call with investors, adding that while China will still play a key role in Foxconn's manufacturing empire, the country's "days as the world's factory are done".

Foxconn said in a statement yesterday that, contrary to "inaccurate media reports", the management's comments during the call did not refer to any specific companies, facilities or products, and were intended to reflect macroeconomic and industry trends.

Intensifying trade tensions between Washington and Beijing have pushed device manufacturers to diversify their production bases away from China, and Mr Liu last year said Apple's most prized product, the iPhone, can be made outside China if needed. The two nations remain in trade talks, but Mr Liu's comments affirm a growing expectation that the China-centric electronics supply chain will fragment over the longer term.

The Taiwanese firm reported better-than-expected net income of NT$22.9 billion (S$1.07 billion) for the quarter ended in June, a period that saw increased demand for iPads and MacBooks. Revenue was NT$1.13 trillion, but Hon Hai warned it expects its third-quarter sales will be down by double digits relative to last year. Apple is expected to delay its iPhone launch this year.

Hon Hai is bouncing back from a record first-quarter profit slump as output at its factories recover and stay-home orders spur demand for home computing equipment.

The Covid-19 pandemic likely boosted iPad and Mac sales, even as Apple store closures weighed on iPhone sales, Apple chief executive Tim Cook said on July 31, after reporting quarterly revenue that crushed estimates. Apple accounts for half of Hon Hai's sales.

Even as Apple outperformed, Hon Hai's other customers have fared less well. Hong Kong-listed subsidiary FIH Mobile said in its Aug 7 earnings release that while Huawei's new phones have been popular in China, they missed expectations elsewhere following US sanctions. Another key customer, Xiaomi, suffered a backlash in the Indian market amid growing tensions between China and the South Asian country. FIH lost US$100 million (S$137 million) in the first half.

Foxconn has been shaking up its traditionally China-focused operations. It is among Apple assembly partners that plan to expand in India, potentially helping the iPhone maker grow its presence in the country of 1.3 billion and shift some of the US company's supply chain outside of China as ties between Washington and Beijing fray.

Chinese rivals are also posing a growing challenge. Local electronics titan Luxshare Precision Industry is poised to become the first Chinese home-grown iPhone assembler after sealing a deal last month to buy an Apple handset production plant from Wistron. While Hon Hai will keep assembly orders for premium iPhones, Luxshare will eat into the business for mid-to-entry-level Apple handsets, Fubon Securities analyst Arthur Liao wrote in a July 23 note.

Foxconn will work on its component business to maintain tech leadership and it also benefits from its long-term relationship with Apple, Mr Liu said in response to analysts' questions about Foxconn's competitive strategy against the rising Chinese supplier.

Orders could be further hit after US President Donald Trump issued an executive order barring US residents from doing business with Tencent Holdings' WeChat. Annual iPhone shipments could plunge by 25 per cent to 30 per cent if Apple is forced to remove the app from its global app stores, TF International Securities analyst Kuo Ming-chi warned in an Aug 9 note.

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A version of this article appeared in the print edition of The Straits Times on August 14, 2020, with the headline 'China's days as world's factory over, says iPhone maker Foxconn'. Print Edition | Subscribe