Recent fallout from COVID lockdowns and inappropriate hiring practices at the Foxconn factory in Zhengzhou, Henan Province have made headlines not desired by the manufacturer of Apple iPhones. Shipments of iPhone 14s, Apple’s latest models, have been delayed, pulling down the stock price of one of the largest tech companies in the world.
Disruption in production and geopolitical uncertainties loom over the future of Foxconn factories in Zhengzhou and other cities. There is speculation that Foxconn might eventually move its Apple product capacities out of the Chinese mainland.
Fifteen years ago, when legendary icon Steve Jobs and his Apple Inc. launched the first iPhone, Foxconn, the better-known trade name of Hon Hai Precision Industry Co. based in Taiwan, was the sole manufacturer entrusted to assemble their highly coveted smartphone gadgets in Shenzhen for consumers around the world.
At that time, Foxconn was far from being a household name, despite the fact that it was already one of the largest employers in Shenzhen.
As a global leader in electronics manufacturing, Foxconn made contract electronic devices for its industrial clients whose brands appeared on the end products. Therefore, tens of millions of consumers were using products made by Foxconn but were unaware of the company.
A few years later, the huge demand for iPhones led Foxconn to expand to Zhengzhou in Central China’s Henan Province where it set up the largest Apple product assembling facility in the world.
There are three essential factors contributing to the huge Foxconn presence in China: the abundance of cheap labor, the integrity of the manufacturing supply chain and adjacency to a key market of its most high-profile client.
Labor in China is relatively cheap, but not very competitive compared to other countries in southeastern and southern Asia. Lower-end labor intensive sectors, such as clothing and footwear, have already seen some factories relocating to neighboring countries such as Vietnam, Thailand and Indonesia.
As the world’s manufacturing center, China has supply chain capabilities unmatched by any other country. This is the result of decades of economic prosperity and manufacturing upgrading. Setting up manufacturing facilities here is an easy-to-make business decision.
However, the industrial landscape is constantly evolving, and there is nothing to keep a similar story from happening in other parts of the world. India, for instance, is a developing giant that may pose a challenge down the road.
Foxconn factories in India have been making iPhones since 2017, but those were usually older models. In 2022 for the first time, Foxconn in India began manufacturing the latest model of iPhone 14. According to a JPMorgan analysis, Apple will move 5% of its global production for the iPhone 14 to India by late 2022, and Apple could also make 25% of all iPhones by 2025 in India.
This diversification of manufacturing locations is partly a move for Apple to potentially avoid disruptions in its supply chain due to its heavy reliance on main assembling bases in China.
Currently India still accounts for a small portion of profit for Apple, and China remains one of its major markets. But Apple makes only high-margin products, which makes it easy for the company to absorb shipping costs. Or they can simply pass on additional costs to end consumers. Apple customers are not the price-sensitive type anyway.
Establishing manufacturing facilities in China has been a profit-driven business decision for Foxconn. Only measures and approaches that make business sense will convince it to stay and even expand.
Frustration from COVID lockdowns is only a reflection of the dissatisfaction about the abuse of executive powers by local authorities. Disruption and interruption of economic activities will make any businessperson uncomfortable.
Earning visibility is finance lingo used to describe the business outlook of a company. External and macro factors are key variables to the profitability of an enterprise. Stable and predictable circumstances are craved by businesspeople who want to commit more capital and other resources to a local economy.
With China loosening up COVID measures, it is important that local governments make business-friendly environment available in order to stabilize their economic development, which in turn will stabilize the labor market and provide social stability.
(The author is an independent financial investor.)