Foxconn’s Future Shows How Taiwan Gains from China’s Pain – TheStreet.com

by admin on June 20, 2019

Taiwan stands to gain on two fronts due to China’s worsening headaches: the commercial, and the political.

The trade war has hurt Taiwan’s exports in the short haul, but over the long haul will benefit its manufacturing sector in particular.

Meanwhile, the ongoing demonstrations in Hong Kong over the erosion of “One Country, Two Systems” have made it very clear ahead of a presidential election next year that Taiwan should not under any circumstances accept China’s offer of the same scheme.

Back to business, first.

Companies such as Apple Inc. (AAPL) supplier Foxconn Technology Group (HNHPF) have a problem on their hands because the bulk of their production is in cheap China. But, equally, they have an obvious solution. They can relocate production by moving it back home.

Foxconn (full name: Hon Hai Precision Industry) is Apple’s largest contract manufacturer and currently makes most of its iPhones in mainland China. But the company’s new chairman, Liu Young, told an investor briefing in Taipei this week that it could meet demand outside China if necessary.

“Twenty-five percent of our production capacity is outside of China, and we can help Apple respond to its needs in the U.S. market,” Liu said, according to Bloomberg. “We have enough capacity to meet Apple’s demand.”

Southeast Asia is the No. 1 choice for Taiwanese producers looking to shift production out of mainland China, according to a survey last December by Taiwan’s National Development Council and Chung-Hua Institution for Economic Research. Taiwan ranks No. 2. More than half of Taiwanese manufacturers said they already have moved production or intend to do so as a result of the China-U.S. trade war.

Foxconn is also bulking up its production in India. Apple has asked it and fellow suppliers Pegatron HK:4938 and Wistron T:3231, which also assemble iPhones, as well as MacBook maker Quanta Computer (QUCCF) , iPad maker Compal Electronics (CMPCY) and AirPods makers Inventec T:2356, Luxshare-ICT SZ:002475 and GoerTek SZ:002241 to evaluate the cost of moving production from China to elsewhere in Asia, according to the Nikkei.

It’s not politically popular inside China, of course. Liu, who was elected chairman after Foxconn founder Terry Gou decided to run for president of Taiwan, told Reuters on Friday that he was not aware of requests from clients to move production outside of China.

Gou said at a Taipei press conference in May that Foxconn would shut down operations on the mainland should Beijing threaten its factories if Gou is elected Taiwan’s president.

Foxconn then said the “rumors about Foxconn quitting mainland China are not true,” in its official WeChat account – giving it plenty of wiggle room to repurpose production there for non-U.S. clients. It has more than 1 million employees in China.

The rumors are there for reasons beyond Gou’s comments. Foxconn has been forced to idle production on several assembly lines because they make smartphones for Huawei Technologies, which has cut its handset orders. Huawei is contending with its own prominent place in the trade war. On Monday, Huawei founder Ren Zhengfei said it has taken a US$30 billion hit to revenue, slashing its 2019 target to around US$100 billion from an original US$125 billion to US$130 billion.

Production on the move

Alphabet Inc. (GOOGL) already has moved much of its production of its U.S.-destined motherboards to Taiwan, according to Bloomberg. That helps it avoid a 25% tariff on the boards if they’re made in China.

Such “reshoring” is picking up pace in Taiwan. The planned investment announced through the end of May would already be significant enough to boost Taiwan’s gross domestic product by 0.4 percentage points per year.

Taiwan has suffered an immediate slowdown in exports as a result of the trade war. Export growth that was running at 6.3% in second quarter of 2018 fell to just 1.0% in first quarter of 2019. Mind you, that’s still growth.

Look a little closer at the numbers and you’ll see that shipments to the United States are growing fast. While exports into China are falling more than 10% year on year, they are up 20% into the United States.

It is almost purely in response to the trade war. Shipments of goods impacted by the second round of trade tariffs, 10% higher duties aimed at US$200 billion in Chinese goods, are up close to 50%. The most significant increases are in products such as desktop computers, servers, circuit boards, and equipment for both networks and telecommunications.

The Taiwanese government very sensibly has moved to support this reshoring. It has initiated a three-year action plan to welcome overseas Taiwanese businesses that want to invest back into Taiwan. This action plan provides tailored services for Taiwanese companies to help them find land at concessionary rents, water, electricity, manpower through an employment subsidy, tax consultation, and capital, with swift access and preferential lending rates to a pool of T$20 billion.

Fresh investment means jobs

The investment announced so far should create 31,000 jobs, equal to 0.3% of the 2018 labor pool in Taiwan. The lack of labor and higher wage costs have been key drivers pushing Taiwanese producers to build factories overseas. The reshoring tends to be in capital-intensive, high-value, robotized manufacturing. Such a manufacturing worker or an engineer is still 40% to 50% cheaper to hire than their equivalent in South Korea, Société Générale says in a report on reshoring.

The government has already approved inward investment of T$330 billion, again as of the end of May, which is equivalent to 11% of all private investment in 2018. The government has doubled its target from T$250 billion to T$500 billion.

Tech and electronics makers have been the main takers. It’s generally high value-added production in segments such as semiconductors, servers, electric vehicles and lenses. There are early signs, SocGen notes in its report, of a “network effect” as suppliers move first, taking the manufacturers back with them.

Gou made his last official appearance at Foxconn on Friday, saying goodbye to employees and shareholders. Liu will lead a nine-person committee to replace the founder.

“I have faith in them. They will do better than me,” Gou said Friday, then handed the mike to a committee member and left the room, according to the Nikkei.

Gou is running for the presidential nomination of the opposition Kuomintang party. The KMT favors closer ties to China than current Taiwanese President Tsai Ing-wen, who heads the Democratic Progressive Party.

Political winds change

The current political crisis in Hong Kong has encouraged all the presidential candidates in Taiwan to toughen their stance toward China. Beijing, which insists on a fable that Taiwan is a renegade province, has long encouraged Taiwan to accept the same “One Country, Two Systems” concept deployed in Hong Kong.

But “One Country, Two Systems” is increasingly “One Country, One System” in Hong Kong. It is a bill to link the legal systems in China and Hong Kong by allowing rendition of suspects from one to the other that has brought millions of people out into the streets in demonstration in Hong Kong.

Organizers estimate 2 million people out of a total population of 7.4 million attended a protest rally last Sunday. Demonstrators have again been surrounding the government Friday as this story is written, and also were disrupting activities at police headquarters and numerous other government facilities on Friday. Taiwanese businesses and politicians are both watching, warily.

It is unlikely, given the high cost of labor, that many companies from Taiwan will shift production to their ultimate market, the United States. But that’s exactly what politically savvy Foxconn is doing.

Foxconn has committed to building a 13,000-employee factory in Wisconsin, receiving US$4.5 billion in government incentives to do so. It says it will hire up to 2,000 U.S. workers by the end of 2020. That plant will make LCD panels, servers and networking products.

Founder Gou may well end up heading Taiwan if the political nous he demonstrated in announcing that move is anything to go by.

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