Foxconn: Out-Foxing Protectionism
The 800-lb gorilla of Chinese electronics contract manufacturing prepares for life under Donald Trump's trade policies
“We can’t continue to allow China to rape our country, and that’s what they’re doing” [1], according to Donald Trump, a prominent but by no means isolated proponent of protectionist trade policies. After decades of rapid post-war growth in international trade, a populist backlash threatens the global status quo and raises big questions for many businesses.
Perhaps no company fits the central casting stereotype of “evil Chinese corporation” as well as Foxconna, with its city-sized factories in cities such as Shenzhen where barracks, assembly lines, and suicide nets constitute the daily routine for hundreds of thousands of laborers producing electronics components [2]. Much of Foxconn’s production is ultimately for export to developing countries including the U.S.; Apple accounts for roughly half of Foxconn revenues, and companies such as Dell, HP, and Google rank as important customers [3].
Thus, the ability to export from China to the U.S. and elsewhere is the lifeblood of the Foxconn model. But as President Trump’s bellicose rhetoric suggests, this is less stable footing than in years past. Foxconn’s heavily China-concentrated manufacturing poses a risk in the current political environment, particularly considering the “hidden bounty of perks, tax breaks and subsidies” received from the Chinese government [4]. Single-digit gross margins [5] and significant customer concentration exacerbate the issue, as a punitive tariff could force the firm to either absorb losses or lose volume to other suppliers with different manufacturing exposure.
Foxconn, while perhaps evil, is also savvy and so has been working to get ahead of the problem. The company has diversified its footprint to include countries in Eastern Europe, Southeast Asia, and Latin America, though has faced growing pains throughout; Foxconn has been accused of massively under-delivering on expansion plans in Brazil and the U.S. and “is frequently plagued by labor disputes” over pay and other issues that are largely absent in China [6]. Most recent, and dramatic, was a recent decision to invest $10bn to construct a manufacturing facility in the United States; Wisconsin was selected over six other states in part by offering up to $3bn of tax incentives [7].
Automation also forms a key part of Foxconn’s strategy and should enable more production outside of China by decreasing labor requirements, thus mitigating the impact of higher wages and pickier workers outside of China. Executive Dai Jia-Peng describes a three-step journey to a future in which hardly any workers are required to supplement the efforts of robotic “Foxbots”; recent progress includes laying off 60,000 Chinese workers at one facility [8].
One important complication in the push to expand outside of China is the lack of supply chain infrastructure to provide necessary inputs and distribution; plans for a $1bn plant in Jakarta, Indonesia collapsed in part for this reason [9]. Trade expert Gary Gereffi, noting that “getting outside of China… is like jumping over any potential tariff wall” [10], explains that China benefits from its manufacturing clusters and tight integration with the East Asian manufacturing ecosystem. Constellations of “supply chain cities” that combine to form regional manufacturing clusters provide a level of operational efficiency that is impossible to replicate elsewhere in the short run, adding costs to international expansion [11].
Geographic diversification and automation will help to mitigate the impact of protectionist trade policies, but Foxconn still faces serious risks in the U.S. Complementary approaches for dealing with the threat in the U.S. could include:
- Rethinking production scale: constructing multiple, smaller facilities across the U.S. (provided volumes are above minimum efficient scale) could generate more support in Congress by creating jobs across more districts.
- Improving supply chain flexibility: the current supply chain appears optimized more for efficiency than for adaptability, which is inherently dangerous given political unpredictability. Working with suppliers and possibly customers such as Apple to develop the capability to quickly shift sites of production (e.g., to Vietnam facility if tariff is enacted against China) is important.
- Messaging: communication with policymakers and even consumers could become necessary if Chinese exports remains threatened. The price impact of tariffs on electronics is well understood; communicating the amount of consumer surplus destroyed in countries such as Argentina could dampen the populist fervor fueling the current Administration’s position on trade.
All of this is no easy task for a company whose core competency is the low-cost contract manufacture of electronic components at massive scale, especially given razor-thin margins that leave little room for error. How can Foxconn effectively balance efficiency and flexibility to become nimbler while protecting themselves from low-cost entrants willing to produce solely in China and ignore the political risk? Is it a mistake to allocate capital for the long-term to address what could be a passing protectionist movement? How important is public perception in developed countries such as the U.S.? The way Foxconn answers these and other trade-related questions could well determine the success of the business over the next decade.
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a Formally registered as Hon Hai Precision Industry Co., Ltd., doing business as Foxconn Technology Group
1 Diamond, Jeremy. “Trump: ‘We can’t continue to allow China to rape our country’ “. CNN. 2 May 2016. Accessed 13 November 2017. http://www.cnn.com/2016/05/01/politics/donald-trump-china-rape/index.html
2 Merchant, Brian. “Life and Death in Apple’s Forbidden City.” The Guardian. 18 June 2017. Accessed 8 November 2017. https://www.theguardian.com/technology/2017/jun/18/foxconn-life-death-forbidden-city-longhua-suicide-apple-iphone-brian-merchant-one-device-extract
3 Lucas, Louise. “Foxconn owner posts first revenue fall in two decades” Financial Times. 11 January 2017. Accessed 13 November 2017. https://www.ft.com/content/1261eec6-d7df-11e6-944b-e7eb37a6aa8e
4 Barboza, David. “How China Built an ‘iPhone City’ With Billions in Perks for Apple’s Partner”. New York Times. 29 December 2016. Accessed 13 November 2017. https://www.nytimes.com/2016/12/29/technology/apple-iphone-china-foxconn.html
5 Company public financial filings, accessed via CapIQ 13 November 2017
6 Barboza, David. “Before Wisconsin, Foxconn Vowed Big Spending in Brazil. Few Jobs Have Come.” New York Times. 20 September 2017. Accessed 13 November 2017. https://www.nytimes.com/2017/09/20/business/foxconn-trump-wisconsin.html
7 Lowrey, Annie. “Foxconned”. The Atlantic. 27 July 2017. Accessed 13 November 2017. https://www.theatlantic.com/business/archive/2017/07/foxconned/535170/
8 Morris, David. “iPhone manufacturer Foxconn aims for full automation of Chinese factories.” Fortune. 31 December 2016. Accessed 13 November 2017. http://fortune.com/2016/12/31/foxconn-iphone-automation-goal/
9 Barboza, David. “Before Wisconsin, Foxconn Vowed Big Spending in Brazil. Few Jobs Have Come.” New York Times. 20 September 2017. Accessed 13 November 2017. https://www.nytimes.com/2017/09/20/business/foxconn-trump-wisconsin.html
10 Barboza, David. “Before Wisconsin, Foxconn Vowed Big Spending in Brazil. Few Jobs Have Come.” New York Times. 20 September 2017. Accessed 13 November 2017. https://www.nytimes.com/2017/09/20/business/foxconn-trump-wisconsin.html
11 Gereffi, Gary and Lee, Joonkoo. “Why the World Suddenly Cares about Global Supply Chains”. World Economic Forum. July 2012. Accessed 13 November 2017. http://reports.weforum.org/manufacturing-growth/why-the-world-suddenly-cares-about-global-supply-chains/
Cover photo: Gordon, Scott and Knutsen, Kristian. From: Gordon, Scott. “Wisconsin Enters New Territory With $3 Billion Foxconn Deal”. WisContext. 4 August 2017. Accessed 14 November 2017. https://www.wiscontext.org/wisconsin-enters-new-territory-3-billion-foxconn-deal
Embedded factory photo: Spiess, Kevin. “Foxconn orders massive nets to catch jumping factory workers.” Neoseeker. 27 May 2010. Accessed 14 November 2017. http://www.neoseeker.com/news/13976-foxconn-orders-massive-nets-to-catch-jumping-factory-workers/
I’d be curious whether automation could eventually completely disrupt Foxconn’s business model – perhaps completely reversing the incentive to outsource manufacturing to low-wage countries. In the case where automation is an existential threat, then investing in state-of-the-art automated facilities in the US could solve both protectionism and automated competition issues simultaneously.
My other thought is that wages are increasing even in countries like China, whilst real blue collar wages in the US have stayed stagnant for decades. Given the huge tax breaks that are becoming available for companies willing to build in the west, it perhaps is becoming increasingly economical to make in the US again.
I appreciate the proposed idea of messaging and think this is one of the cases in which building coalitions and cooperating directly with your end-customers might be a very wise strategy. I think that the answer to the question “How important is public perception in developed countries such as the U.S” is “Very important”. However, I wonder if Foxconn, as a China based company should communicate the consequences to the American public, or if it must cooperate with its American customers such as Apple, to gain credibility. As I think that the latter option is more logical and feasible, this strategy seems to be more complicated: one of the main reasons of Trump being elected was the outrage of many Americans over Wall Street, Corporate America and those who have been benefited by globalization. Consequently, I’m not sure that companies such as Apple can benefit from cooperating with Foxconn to convey the message of the hit to consumer surplus derived from the new tariffs- they can easily be depicted as biased. An alternative might be recruiting neutral, prominent key opinion leaders who are not recognized with a specific corporate (for example, influential tech bloggers) and provide them with data of the damage caused to American households by the new tariffs. The social media may do the rest. This seems to me as a safe and effective PR strategy.
I agree with Sam that Foxconn is stuck between a rock and a hard place as Trump continues to up the ante on isolationist rhetoric which will likely lead to legislation or policies. I wonder, however, the extent to which this, combined with the example of Tesla, may cause US companies to not only seek to move their operations back home, but also bring more capabilities in house. While it is still early days for the young car company, they have at least provided some hope that high end products can be successfully designed and manufactured in the US by the same company – with the advent of new technologies and automation, is the need for companies like Foxconn simply declining?
You asked: “Is it a mistake to allocate capital for the long-term to address what could be a passing protectionist movement?” I think the answer to this question is yes and would pose the question back, “Are there any benefits from a government relations perspective of shifting production into developed economies?” Protectionism is simply bad economics, assuming proper social safety nets and educational transition programs are in place. So given the natural trajectory of global progress (absent hiccups like current US leadership), I think I would want to bet on a tilt back towards globalization.
If Foxconn did bet on protectionism being here to stay, given the natural cost disadvantage of manufacturing in developed economies, the transition to robotic production will only be hastened. If Foxconn builds plants in the U.S., these should be robotics first factories. In turn, will cause Foxconn to be castigated as now the evil Chinese company who is leading the charge on automating all global productions?
As Patrick said, I think Foxconn is in a extremely tricky spot; however, investing to keep pace with bad policy is likely bad policy itself and one with likely unintended consequences. No matter what Foxconn, or similar companies do, they will always be a soundbite as long as there are unscrupulous politicians looking for scapegoats.
I agree with all of your solutions and believe that improving supply chain flexibility is one of the most important ones. Another angle to think about is creating a manufacturing ecosystem that is similar to the East Asian one you mentioned, but elsewhere and closer to areas of higher demand, such as in South America. This would allow for testing of new operating models such as the use of Foxbots, closer to where demand is, but without risking the survival of any plants in the US that are created partially to provide job opportunities for Americans.
Ultimately, it’s not possible to predict how the political winds will blow in the future. Given the long-term trend towards globalization and free trade, it seems plausible that the current protectionist movement won’t last, but I wouldn’t bet the business on that. It therefore seems prudent to establish a few footholds in different geographies to insure against a range of possible scenarios. Given that protectionism may die down, it’s worth maintaining Foxconn’s core assets in China. But it’s also worth beginning to expand in the U.S. Building out a U.S.-based team and an understanding of the U.S. market would facilitate a pivot towards producing in the U.S. in the future, if that turns out to be warranted. It may be worth doing the same in a handful of lower cost geographies for further risk mitigation.