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EconomicsNews

Foxconn moves manufacturing out of China

(IMAGE: SHUTTERSTOCK)

Apple’s (AAPL: NASDAQ) manufacturing partner Foxconn Technology Group (FXCNY: OTC US), which assembles Apple’s iPhone product in China, announced on Saturday that it has raised over $213 million for what it described as a “mega-development” in India. According to Bloomberg, the investment signals that Foxconn is moving the manufacturing of Apple products out of China.

Henry Byers, director of pricing and partnerships at Steam Logistics, said that the current trade dispute between the U.S. and China accelerated the process of some manufacturers moving their supply chains from China to lower-wage countries like India. This will enable manufacturers to report those countries as the “country of origin” of their products and potentially avoid U.S. import tariffs on Chinese goods implemented by the Trump Administration.

“The bigger you are in terms of market-share volume, the more exposed you are to have your manufacturing and assembly all in one country.” said Byers.

Byers said that Foxconn and other manufacturers have considered redirecting their supply chains to support manufacturing operations in countries including India and Vietnam for years. Wages have grown in China due to the country’s overall economic growth, causing labor-intensive manufacturing like the assembly of the iPhone to become more expensive. Byers said global economic history shows that the manufacturing sector will leave high-wage countries and move to low-wage countries.

“The first thing they’ve [manufacturers] done is really look at the assembly plants, and then export raw materials and component goods out of China to Vietnam and have them assembled there,” said Byers.

India, Vietnam and other lower-wage economies have received more attention from global manufacturing supply chains as they’ve opened their markets to foreign trade and investment.

According to a September 2018 report by McKinsey & Company, Vietnam’s manufacturing sector grew from 16 percent of its gross domestic product (GDP) in 2009 to 21 percent of its GDP in 2016. Foxconn, along with Intel, Samsung and Wintek have invested $15 billion in production facilities and partnerships with Vietnamese  manufacturers. McKinsey also found that Vietnamese exports increased 14 percent per year between 1996 and 2016 while the market capitalization of listed companies grew 9 percent per year during the same time period.

According to the report, Vietnam has been able to attract foreign, private capital through its rapid transition from a socialist economy to a deregulated capitalist economy. The McKinsey report also said that China’s focus on becoming a more capital-intensive (less labor through automation) manufacturing market would send labor-intensive manufacturing to countries where labor is cheaper.

Manufacturers of labor-intensive goods also want to reduce the exposure associated with China’s declining economic growth. China’s slowing economy hurt Apple’s sales and performance recently.

“They [manufacturers] want to diversify more.” said Ibrahiim Bayaan, chief economist at FreightWaves. “Part of this is tariff-related. The other part has to do with the slowing of the Chinese economy. With growth slowing there, it affects their [manufacturers’] revenues. It’s likely that this will affect many electronics companies, and the longer the trade war with the U.S. continues, the more companies will feel pressure to relocate out of China.”

In terms of exports, the McKinsey report said that Vietnam’s share of the labor-intensive manufacturing market grew by 1.5 percent, from 4.5 percent in 2014 to 6 percent in 2016. This made Vietnam the fastest-growing exporter of labor-intensive manufactured goods and the third-largest exporter of labor-intensive goods after China at 53 percent (down from 56 percent during that period) and India at 9 percent. India had the second-largest share growth in the labor-intensive manufacturing market at 0.7 percent between 2014 and 2016.

However, despite these developments and the recent decreases, these figures also show that China is still the largest player by far in the labor-intensive manufacturing market.

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