In Trade War of Words, Huawei Goes on Offensive

“Huawei won’t move manufacturing to America.”

The headline sounds, well, weird, almost like “Tiffany’s not robbed.”

But the crux of it is a tale of global politics and business tactics growing ever-more-fascinating by the day.

In short, at the Consumer Electronics Show this week, the head of Huawei’s consumer business group issued a statement saying the smartphone maker doesn’t think much of the incoming Trump administration’s habit of calling out companies that build and import product to the US.

While Trump has thus far had mostly automakers in his sights (GM, Toyota, Ford), Apple has been the poster child for the war of words over trade. By speaking out at CES, the world’s largest technology trade show, Huawei is among the first companies, and likely the biggest, to go on the offensive.

“If [companies] move all manufacturing to the U.S., some manufacturing is not good for US companies, because costs will likely increase,” said Richard Yu, who was also a keynote at the show. “If you move all that [low-cost] manufacturing to the US, you’ll damage the US.”

Huawei has an uneasy history with the US. Its head is a former Chinese military officer Ren Zhengfei, and the company was banned from supplying telecom equipment to US government buyers after a Congressional committee accused the firm of spying on behalf of China. It is also the third-largest smartphone OEM in the world, and given the easy nature of using those devices as tools for capturing user habits and data, that is hardly less troubling.

More complex, Huawei, like Apple, depends heavily on Foxconn as a contract manufacturer. Although based in Taiwan, Foxconn founder and chairman Terry Gou is a strong supporter of China. He also is reportedly considering a run for president in his native Taiwan, a move that if successful would likely strengthen the ties between the island and mainland — and potentially further complicate already precarious relations between China and the US.

Until the new administration is officially installed in two weeks, the machinations are mostly bluster. But the chatter shows no signs of abating, and the campaigns for — and now, against — Made in America are just starting to heat up.

Don’t Expect Apple to Fall for US Again

Analysis of the impact of Apple moving its production — or at least some of it — to the US will continue over the next several months but with the imminent change in US administration it could be peaking now.

Back and forth continues among various media sites debating whether Apple can or can’t, and should or shouldn’t, relocate some of its assembly.

Forbes today points to multiple studies, one by Syracuse and another by MIT (from June) that estimate assembly costs for a high-end domestically produced iPhone would rise 5% ($30 to $40). Other estimates peg it at closer to 13% ($100).

To be sure, there will be more of these types of discussions taking place. But much of the chatter disregards that Apple can’t do this alone. We have argued previously that Apple’s mastery of the supply chain has as much to do with its success as the occasionally startling hipness of its designs. The cool factor is subsidizing; keep in mind Apple has only 12% share of the cellphone market, and the tablet market — in which it once commanded a 90% stake — is now absolutely flooded with competitors and shrinking by the year. Apple’s net income has been falling with it, and the Watch Series 2, its latest entrant in the smartwatch sector, is not only losing share, the entire category is diving.

Capacity would not only be a huge issue, but the costs of scaling up are not included in any of the financial analyses I’ve read. The very real costs of $1 million or more per high-volume line would be to be absorbed — and passed on. (Zhengzhou is said to be the largest Foxconn/Apple factory in the world, with 94 lines currently running.) That’s not including the costs of finding and/or greenfielding factories, hiring, training, and so on. By the time all that is done, a new administration could be in place.

And then there’s the issue of taxes, which most reports fail to assess or even discuss. A New York Times article today, however, quotes a former chief of staff of the congressional Joint Committee on Taxation as saying: “US multinationals are the world leaders in tax avoidance strategies. In doing so, they create stateless income — income that has become unmoored from the countries to which it has an economic connection.”

Apple has stashed scores of billions of dollars offshore to avert a ginormous tax bill. The US corporate tax rate is third highest in the world on a top marginal basis, according to the Tax Foundation. This is a bit of a red herring — the lowest listed non-island nations are Uzbekistan and Turkmenistan, and no one is thinking of rushing there. But Ireland is among the lowest 20, a fact Apple has used to its advantage (although that could bite them, if the EU has its way).

All of this adds up to a very unlikely scenario that Apple will be motivated to relocate production. I could see a bit of highly publicized migration to what’s essentially a US showroom as a means to give politicians a “win” and displace some heat, but it would be trivial relative to the overall volume.

Update: Here’s yet another opinion, published on Dec. 29. And other, from the South China Post, asking whether China’s manufacturing is “hollowing out.”

Dec. 30 update: Foxconn’s CEO says will invest $8.8 billion in a new flat-panel display plant in China.

Foxconn in the Hen House?

At the risk of beating the drum once too often, I again call your attention to the ever-more-grandiose “plans” bandied about regarding Foxconn. The latest: A $7 billion investment into US electronics manufacturing that would lead to thousands of new jobs.

Right.

It’s quickly grown to the point where columnists are asking existing US-based EMS companies for their opinion — and plans for counter-attacking.

In fact, companies like Jabil has no reason to shift gears. Foxconn’s history is to make grand statements (or have the press make them for it) of billion-dollar investments, then do nothing. When it comes to investments, I will repeat past assertions to look at the gap between what Foxconn says and what it does.

All the countries mentioned in previous breathless anticipation — India, Vietnam, Brazil, Indonesia, the US(!) — are still waiting for the investments to materialize. My belief is that Foxconn makes these statements in order to take the wind of the bad press sails, then once the air is settled, it continues to expand where it always has — in China.

It costs perhaps $20 million to $30 million to bring a mid to large size greenfield plant online, depending on land costs, of course. Indeed, the rumored $7 billion investment in the US would be greater than the aggregate electronics assembly investment in the WORLD over the past 5+ years.

(Keep in mind Foxconn is not a semiconductor fabricator; if it were, $7 billion wouldn’t be out of the range of normal.)

Finally, understand that Foxconn founder and chairman Terry Gou has been tied to higher office in his native Taiwan, perhaps even running for president in that nation’s 2020 elections. That this is being touted in the national-party-leaning China Post suggests the Chinese government approves.

Taiwan, be it a sovereign nation or a breakaway province, is less enthralled, seeing Gou as a puppet of the mainland.

Past is prologue. I don’t expect Foxconn to grow beyond what it already has in place in the US.

Apple to US a Supply Chain Hurdle

It was, to paraphrase Homer, the headline that launched a thousand blogs: “Apple Could Make iPhones in US in Future: Sources.”

Cue all the breathless op-eds.

It won’t happen.

Not because Apple doesn’t care about the US. And not because Tim Cook, struggling as mightily as any billionaire could to fill the shoes of Steve Jobs, has something against American workers.

But it’s simply not that simple.

In 2013, to great acclaim, Google opened a handset plant in Dallas, where it hoped to employ nearly 4,000 workers, proving once and for all America could compete in high-volume cellphone manufacturing.

Not two years later, the search giant shuttered the site.

Almost all the components used in the various Apple iPhones are made in Japan, Korea, Taiwan or China. For the geographically challenged, that’s an ocean way from the US. Manufacturing is a supply-chain business; no company makes everything themselves. And most of Apple’s suppliers are foreign-owned. Apple is not exactly known for its generosity. Those suppliers won’t be willing to spend the billions it would take to relocate just to keep what in some cases is not much better than break-even business.

Even the unnamed source for the initial Nikkei Asian Review report acknowledges that Foxconn would be hit by a sharp rise — perhaps 50% — in production costs. “Making iPhones in the US means the cost will more than double,” the source said.

The notion, especially, that Taiwanese stalwarts Foxconn and Pegatron would suddenly build giant factories in the US is far-fetched as well. Remember that $40 million investment Foxconn said it would make a couple years ago? Pennsylvania is still waiting.

Indeed, they are likely salivating at the possibility of new US trade barriers, even for a key customer like Apple. Why? Because Apple’s gross profit margin is breaching 40%, while those of their ODM suppliers are around 10% or less. With the design, manufacturing and supply chain knowledge so firmly in the hands of the ODMs, should events conspire to make Apple slide, they are well-positioned to pick up the slack.

 

As We Were Saying

And in today’s headlines from India:

  • Foxconn Likely to Shy Away from $5 bn Investment in Maharashtra“: “Although the world’s largest contract electronics manufacturer — which makes Apple’s iPhone and iPad — had entered into a pact with the state government in August last year, the company is yet to start its production unit in the ‘absence’ of customers.”

As we were saying

Foxconn India: Still a Pipe Dream

It’s been a year (more actually) since India announced — to great fanfare — a memorandum of understanding with Foxconn to invest $5 billion over the next five years in the nation. For India, it seemed like a marriage made in heaven: the world’s largest electronics manufacturer would be an ideal partner for its goal to develop a local end-to-end supply chain that could not only serve its burgeoning domestic population but also provide a steady stream of exports to the rest of the world.

Yet as the Times of India points out today, the bride is still waiting at the altar.

As we said at the time, Indian officials shouldn’t hold their breath waiting for the relationship to be consummated. Foxconn is really good at promising huge investments, only to fall short in the end.

Actually, we’ve been saying this for years. Foxconn is Chinese to the core. It may on occasion have dalliances with other countries, but it always returns to its mate. Suitors, take note.

 

OEM/EMS Barrier Permanently Cut

For years we’ve been told that EMS companies are in the service business only and would never develop their own products. In one of the first interviews I did, back in late 1991, then IPC director Tony Hilvers — a leading proponent of the then-emerging CM industry (it wasn’t even called EMS then; that term was coined by Sue Mucha the following year) — insisted to me that contract assemblers wouldn’t go down the product development and branding path because it would put them in position of competing with their customers.

We can bury that old saw. With today’s news that Foxconn has, at long last, bought Sharp (for the low, low price of $3.4 billion), the loop between EMS and OEM has been drawn taut.

Not that this is ground-breaking in practice. Certainly, many, many EMS companies have, through acquisition or otherwise, developed and marketed their own products. Our 2009 EMS Company of the Year had a healthy, branded keyboard product line. And we estimated in this space in 2012 that 15 to 20% of the (then) 2,400 companies listed in our EMS directory did some degree of ODM/OEM work.

Going further, we wrote in 2015 we felt the line between EMS and ODM has been “permanently crossed.” But the Foxconn-Sharp marriage takes it to an entirely different scale.

Whether the Sharp name stays on its product lines, which range from Aquos televisions to smartphones to solar panels, and includes the OLED technology so prized by Apple that it compelled Foxconn to write the check in the first place, remains to be seen.

Either way, there’s no going back. EMS is now OEM. Going forward, who is the customer they will serve? And knowing the line keeping their suppliers from their end-customers has been permanently breached, will this spur OEMs  to reestablish their assembly operations?

Foxconn Labor Strategy Emblematic of China’s Growing Influence

A pair of University of Padua researchers have written a really interesting comparison of Foxconn’s management practices in Turkey and the Czech Republic versus those in China.

Among the findings:

  • Foxconn relies heavily on a temporary work staff in the CR, where 40% of its 9,000 workers are temporary, but all its 350 staff in Turkey are direct.
  • In both countries, Foxconn’s strategy is to drive down labor costs.
  • Foxconn leans heavily on the respective countries for financial support in the way of tax rebates, worker hiring rebates, tax holidays and other incentives.
  • Foxconn actively seeks to minimize the influence of worker unions.

The researchers say the emergence of China is having a direct impact on labor practices elsewhere, and global production is inseparable from “social reproduction.” It’s worth a read.