Aggressive local competition and rising geopolitical risk make the contract electronics manufacturing giant’s China dependency more precarious than ever.
Hon Hai Precision Manufacturing Co., better known as Foxconn, is the largest private employer in China and has long depended on the country as its manufacturing base. As recently as 2018, Foxconn assembled half of the world’s iPhones at a massive factory in Henan Province.
Yet in recent years, Chinese manufacturers have aggressively moved into the Apple supply chain long dominated by Taiwanese suppliers and Foxconn in particular. According to Nikkei Asia, in 2020 Chinese suppliers to Apple outnumbered Taiwanese firms for the first time: 51 and 48, respectively.
“In Apple’s supply chain, Chinese manufacturer Luxshare has been Foxconn’s strongest competitor, as the company’s share of the Apple supply chain for hardware products including iPhone and Apple Watch is expected to keep rising in the next few years,” says Rachel Liao, a senior industry analyst at the semi-governmental Market Intelligence & Consulting Institute. For example, Luxshare produces Apple’s AirPods. The Chinese company also obtained about 3% of iPhone 13 Pro assembly orders in 2021, a share that is expected to increase to 5% in 2022, Liao adds.
Luxshare is not just competing with Foxconn in smartphones; the Chinese firm is also moving into the fast-growing electric vehicles (EV) industry, where Foxconn hopes to carve out a new niche. In February, Luxshare established a US$267 million EV joint venture with Chery group, one of China’s largest automakers.
Foxconn has lofty EV ambitions. In March, Chairman Young Liu said that by 2025 the company intends to reach 5% of the EV market share globally, with production capacity of 500,000 to 700,000 vehicles a year.
Initially, Foxconn seemed to be focusing on the China EV market, the world’s largest. In 2021, China’s electric vehicle sales surged 169% to a record 2.99 million units, accounting for almost 15% of overall vehicle sales in the country, according to the China Passenger Car Association (CPCA).
Foxconn announced in early 2021 that it would invest in the Chinese-German EV startup Byton. The planned investment – reportedly US$200 million – would be used to launch mass production of the Byton M-Byte by the first quarter of 2022.
But in September 2021, the tie-up with Byton hit a snag due to the Chinese startup’s poor financial condition, reported Nikkei Asia. It is unclear if Foxconn has other China EV investments of note, although in early 2020 the company said it planned to form a joint venture with Fiat Chrysler Automobiles NV to develop and make electric vehicles in China. Otherwise, its prospects in the country’s EV market – large and fast-growing but ultracompetitive – are uncertain.
“Taiwanese manufacturers are good at [automotive] component manufacturing and OEM production,” says Caroline Chen, a research manager at the Taipei-based market research firm TrendForce. She notes that electric vehicles require more chips than traditional vehicles, “which means automotive semiconductors present a big opportunity for Taiwan.”
Traditionally, Foxconn’s forte is not in chipmaking, but it has expanded into that segment in recent years. Last year, it acquired local chipmaker Macronix’s Hsinchu facility, which will likely be used to develop silicon carbide chips for automotive applications.
Regarding the China EV market, Foxconn will also have to consider that “China has endeavored to achieve self-sufficiency in chips for all sectors, including electric vehicles,” says MIC’s Eric Tu, an industry analyst.
Stepping up diversification
Given steadily rising labor costs in China, Foxconn started to shift some manufacturing capacity to lower-cost destinations in Asia more than a decade ago. The company accelerated those efforts after the U.S.-China trade dispute began in 2018. Though Apple products ultimately received tariff waivers, that situation may not be permanent. It is thus seen as prudent for Apple and its suppliers to reduce reliance on China.
“Due to geopolitical tensions in recent years, Apple has gradually moved assembly plants of iPhones to other countries, such as India,” notes MIC’s Liao. While the assembly of new iPhones is still mainly based in China, India has also started mass production of some models such as the iPhone 12. “It is expected that Foxconn will keep expanding its production capacity in India in the future, and mass production of the iPhone 13 in India will likely kick off around mid-2022,” Liao says.
Foxconn has also signaled its intent to participate in India’s development of a domestic semiconductor ecosystem, a US$30 billion initiative. It is the first foreign manufacturer to do so. In February, the Taiwanese company announced it would cooperate with Indian natural resources conglomerate Vedanta to build a semiconductor fab in the subcontinent. Vedanta will be the majority shareholder in the joint venture while Foxconn will hold a minority stake, the two companies said in a statement.
At the same time, Foxconn is expanding production capacity in Vietnam, where it had already invested US$1.5 billion by 2021. Early last year, the Vietnamese government approved Foxconn’s bid to build a US$270 million plant in Vietnam for the assembly of notebook computers and tablets. The Taiwanese manufacturer reportedly set up the facility at the request of Apple, which aims to better mitigate the risks it faces from U.S.-China trade tensions.
When Apple shifts production outside of China, Foxconn often benefits. However, China remains the U.S. tech giant’s paramount manufacturing base. With that in mind, it could be harder for Foxconn in the long run to compete with Chinese manufacturers on their home turf, especially as Chinese leader Xi Jinping is focused on developing technological self-sufficiency. In December, online technology news site The Information reported that Apple in 2016 inked a secret five-year, US$275 billion investment deal with China, likely one of the reasons Luxshare and other Chinese suppliers have become a much bigger part of the California tech giant’s supply chain in recent years. Under the terms of the agreement, Apple promised to work with Chinese manufacturers to create “the most advanced manufacturing technologies.”
Meanwhile, the business environment for Taiwanese firms in China is becoming more difficult amid strained cross-Strait relations. In November, Chinese regulators fined two Chinese subsidiaries of Taiwan’s Far Eastern Group ¥88.6 million (US$13.9 million) for alleged environmental protection, fire safety, and taxation compliance violations.
Beijing may also have been sending a political message to the company, which has previously donated to campaigns in Taiwan of both Democratic Progressive Party (DPP) and Chinese Nationalist Party (KMT) candidates. China “will absolutely not allow people who support Taiwan independence or destroy cross-Taiwan Strait relations, who dare bite the hand that feeds them, to make money in the mainland,” Taiwan Affairs Office spokesperson Zhu Fenglian said in November.
To be sure, Foxconn is known for the strong relationships it has built up in China over its 35 years of operating in the country. The company and a charity run by its founder Terry Gou were able to secure millions of Pfizer-BioNTech vaccines for Taiwan last year through Shanghai-based Fosun Pharma, which has the rights to distribute them in China, Hong Kong, Macau, and Taiwan, after a deal involving the Taiwanese government and BioNTech fell through.
That said, cross-Strait relations are at their lowest point in decades, and to Taiwanese the possibility of war seems a little less remote following Russia’s invasion of Ukraine. Given Foxconn’s preference for discretion, it is difficult to assess its readiness for a sharp increase in tensions with China. However, the company “does have an ability to pivot quickly to changes in the operating environment, to invest large amounts of money quickly, and to retain the trust of its clients, which will be useful should tensions between China and Taiwan rapidly increase,” says Ross Darrell Feingold, a Taipei-based lawyer and political risk analyst.
Feingold is not sanguine about the prospects for cross-Strait relations in the years to come. Even if the KMT, which is viewed more favorably by Beijing than the DPP, wins the presidency and/or a majority in the legislature in 2024, “there is little reason to believe such would result in China changing its views toward Taiwan or its policies that put pressure on Taiwan,” he says. “Unless China renounces the use of force against Taiwan or Taiwan creates a military capability that deters China, tensions are likely to continue to increase.” Such a prospect could bode ill for Foxconn and other Taiwanese manufacturers with extensive operations in China.