iPhone, laptop manufacturers prep for a US-China trade war

US President Donald Trump (left) and Foxconn Chairman Terry Gou tour a Foxconn facility at the Wisconsin Valley Science and Technology Park on June 28, 2018.
US President Donald Trump (left) and Foxconn Chairman Terry Gou tour a Foxconn facility at the Wisconsin Valley Science and Technology Park on June 28, 2018. PHOTO: AFP

TAIPEI (BLOOMBERG) - From iPhones to computers, the manufacturing powerhouses behind much of the world's electronics are preparing to move chunks of production away from China and towards locales such as Eastern Europe and South-east Asia.

Foxconn Technology Group chairman Terry Gou - who became a billionaire by dint of making Apple Inc's gizmos - started the ball rolling when he opened a US$10 billion (S$13.7 billion) display plant in the heart of America, a move that now seems prescient. As tensions between the world's two largest economies escalate, a growing cohort of his Taiwanese peers have drawn up plans to shift production abroad or are devising contingencies for costly new facilities.

Taiwan's largest corporations form a crucial link in the global tech supply chain, assembling devices from sprawling Chinese production bases that the likes of HP and Dell then slap their labels on. In the past week, corporate leaders, including the chief executives of Pegatron Corp and Inventec Corp, declared on earnings calls that they have come up with ways to mitigate the impact of a trade war.

While United States President Donald Trump hasn't zeroed in on consumer electronics, the fear is they will be included among the next US$200 billion of Chinese-made goods - wiping out already razor-thin margins in the process.

"We have kicked off a mechanism to reduce our current risks stemming from trade disputes," said Mr Liao Syh-Jang, chief executive of iPhone maker Pegatron. In the short run, it may add capacity in the Czech Republic, Mexico and at home. Longer term, the company may set up shop in India or South-east Asia, chief financial officer Charles Lin added.

Taiwan's six largest contract electronics makers - Compal Electronics Inc, Foxconn flagship Hon Hai Precision Industry Co, Inventec, Pegatron, Quanta Computer Inc, and Wistron Corp - raked in NT$9.11 trillion (S$407 billion) of revenue in 2017, or roughly the gross domestic product of Pakistan.

While government data shows that Taiwanese companies' investments in China peaked in 2010, they remain a formidable presence: 15 of the top 20 exporters from the Asian country to the US in 2016 originated in Taiwan, according to a state-run customs data website. Every one of those 15 were subsidiaries of the six contract manufacturers.

Their impending moves echo a trend that has quickened in recent years. Rising labour costs led many to consider alternatives, including setting up smaller-scale facilities elsewhere to get closer to regional markets. Now, those beach-heads serve as expansion bases.

"It will be important for Taiwanese companies to diversify their production, as trade disputes between US and China are not going away soon," said Mr Wu Chung-shu, president of Taipei's Chung-Hua Institution for Economic Research.

Others preparing to take the leap include Inventec, an important Apple supplier, as well as Quanta and Compal. The latter two, which make laptops for most of the world's major brands, said they can add capacity in existing non-Chinese facilities when necessary.

Compal vice-chairman Ray Chen said assembling notebooks outside of China could cost at least 3 per cent more per unit. But the alternative is unsavoury: Its gross margin stood at slightly above 3 per cent last quarter, wafer-thin profitability that tariffs could wipe out. It is an industry-wide phenomenon: rival Quanta's was about 4.5 per cent.

"We are making dynamic adjustments so even if new tariffs on the US$200 billion Chinese exports hit, we will be able to minimise damage," Inventec executive David Ho told analysts on Tuesday. Mr Ho oversees the unit that makes AirPods and HomePods as well as smart speakers for Sonos Inc.

To be sure, many contingency plans haven't been finalised, and executives are wary about committing, given the challenges in moving production permanently, both logistical and political. Many Taiwanese firms are reluctant to provoke China, which for the most part has been a welcoming host to corporations from an island it considers part of the country.

And there are few signs for now of a full-scale exodus. Inventec, for one, is adding at least one new facility in China that will begin production next year, Mr Ho said.

But Mr Trump's sabre-rattling is definitely getting them thinking. Quanta chairman Barry Lam said his company can boost manufacturing in California and Tennessee or Germany. Compal's Chen said the same for Mexico, Poland, Taiwan or Vietnam.

"Amid the tariff rhetoric, moving investment south is a solution that makes sense for companies, as Chinese incentives gradually fall, the Taiwanese government promotes its southbound investment policy and Chinese labour costs get increasingly higher," said Ms Angela Hsieh, regional economist for Barclays Bank in Singapore.