Is Foxconn Fleeing China? Sure Looks Like It. - Forbes

Terry Gou, chairman of Foxconn Tec at Foxconn's industrial complex in Longhua township in Shenzhen of Guangdong Province, China. (Image credit: Getty Images via @daylife)

Foxconn Technology Group sent Apple Inc. stock reeling on Wednesday.  Shares plunged 2.4% on reports that the world’s largest contract manufacturer of electronics—and Apple’s largest assembler—had imposed at its Chinese plants a hiring freeze lasting until at least the end of next month.  The Financial Timesattributed the unusual move to slowing production of the iPhone 5.

Foxconn, the trading name of Hon Hai Precision Industry, denied the FT report, stating that hiring was put on hold because an unusually high proportion of workers returned to their jobs after the long Lunar New Year break.  In Shenzhen, for instance, more than 97% of the 400,000 employees reported back to duty.  That, in the words of spokesman Louis Woo, was an “unprecedentedly high” rate.  In a statement, Foxconn said the freeze “is not related to any single customer and any speculation to the contrary is false and inaccurate.”

Reports in the Chinese-language media indicate the Financial Times got it mostly right, but the big story is not the percentage of returned workers or whether Apple’s phone sales are suffering.  The big story is what Terry Gou, Foxconn’s founder and chief executive, said about his upcoming investment plans.

Last Monday, Gou announced that Foxconn’s next major expansion push would be focused on Taiwan, where he wanted to put plants in New Taipei City, Taichung, and Kaohsiung.  This comes at a time when the company is putting off the expansion of one of its China facilities, in Zhengzhou.

Gou founded Foxconn in Taiwan in the 1970s, and moved manufacturing away from the island republic to Shenzhen at the end of the 1980s.  Now, he is beginning to reverse the process.  Moreover, Gou is committing even more funds outside China.  For instance, Foxconn will soon open facilities that will employ another 10,000 workers in Brazil.  At the same time, he is negotiating with authorities to commit as much as $10 billion to factories in Indonesia.

And then there is the good ole U.S.A., where Foxconn already makes server parts in California and Texas.  Said Louis Woo, the spokesman, “We are looking at doing more manufacturing in the U.S. because, in general, customers want more to be done there.”

One of those customers would, of course, be Apple.  CEO Tim Cook, in an interview last December, said his company will spend more than $100 million this year to build Mac computers in America.  “This doesn’t mean that Apple will do it ourselves, but we’ll be working with people and we’ll be investing our money,” he said.

The Apple boss did not give many details.  A few points, however, seem clear: Cook, with his reference to “people,” was looking to partner with Foxconn in the U.S., production would be shifted from China, and more than just final assembly will take place in America.

Foxconn, China’s largest private-sector employer, looks as if it should be firmly tied to the People’s Republic.  About 1.5 million of its 1.6 million workers are there, and its operations in Mexico and Europe seem marginal to its business.  Yet now it’s evident that, despite everything, the company’s growth will be outside China.

Why should Gou leave the country that made him rich and famous?  There are, for starters, spiraling wages, worker discontent, forced unionization, tough environmental enforcement.  But the big factor today—and the one no one thought about three years ago—is political risk.  Beijing wants territory controlled by its neighbors and, as a result, China is getting itself into nasty scrapes, especially with Japan.  Moreover, the Chinese have designs on the sovereign state of Taiwan, which they consider their 34th province.  For IT companies, China’s friction with these two countries is a problem because many of their products rely on Japanese and Taiwanese components.

And the Chinese have not only gone after neighbors.  Since late 2010, Beijing has sought to punish American, European Union, and Norwegian companies for perceived misdeeds of their governments.  In Norway’s case, it was the award of the Nobel Peace Prize to dissident Liu Xiaobo that started a multi-year Chinese war against salmon imports from the Scandinavian country.

Costs can always be passed on to customers or absorbed.  Supply chain disruptions, however, can kill a business.  Beijing’s retaliation last September against Japanese companies showed that China is no longer a reliable member of global supply chains.

Beijing, unfortunately, seems undeterred by the bad publicity it has earned from serial tantrums and hissy fits.  In October, even the dovish Ministry of Foreign Affairs got in on the act by formally announcing its Department of International Economy, an apparent attempt to throw China’s economic weight around.

As Beijing seeks to use its economic leverage to obtain geopolitical objectives, companies will have no choice but to reduce their China exposure.  This comes at a time when economic factors are already pushing foreign businesses away.

China attracted $9.3 billion in FDI—foreign direct investment—last month.  That figure is 7.3% less than the amount attracted in January 2012.  The falloff, the steepest since a 9.9% drop in November 2009, means that last month was the worst January in four years.

And the downward movement seen last month was not an aberration: 2012’s FDI of $111.7 billion was off from 2011’s $116.0 billion pace.

Because FDI is a proxy for foreign confidence in Chinese manufacturing, it looks as if business is beginning to have second thoughts about concentrating facilities in the People’s Republic.  And when even Foxconn is planning to move production back to Taiwan, we know there is trouble on the factory floor in China.

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