Less China, More America
China anchored and assured Foxconn’s growth after the Communist economy opened up and as Western companies began outsourcing production to the Far East. Foxconn, which since it was founded 40 years ago by Gou has distinguished itself by offering low-cost contract manufacturing services to companies like Apple Inc., Hewlett-Packard and Cisco, benefitted greatly from China’s embrace of Western economic policies. It quickly eclipsed rivals like Flextronics International Ltd., Jabil and Sanmina to become the No. 1 global EMS provider.
Gou believes Foxconn’s revenue ($132 billion for 2013) can continue to grow at a double-digit rate over the next years. The company’s monthly sales are higher in cases than the annual revenue of many of its competitors. In December, for example, the company reported sales of NT$490 billion ($16.1 billion), well ahead of the annual sales of Sanmina ($5.9 billion), Celestica ($6.5 billion for 2012) and Benchmark ($2.5 billion). The closest competitors Flextronics and Jabil Circuit had revenue of $23.6 billion and $18 billion, respectively, for their fiscal 2013 period.
Yet, the EMS market is quite fickle, a fact recognized by Gou, who reportedly told employees at a company party that the “U.S. is a must-go market.” Some of the production practices it uses in Asia and the dormitory accommodation it provides for employees in China will be anathema to employees in North America. The company will also have to scramble to fill manufacturing positions in the hundreds of thousands if it really wants to make high-volume consumer electronic products in Western plants. Plus, Chinese wages, though rising, are still well below the minimum wage in North America, meaning further pressures on margins. (See: China Set to Pull Manufacturing Bait & Foxconn eyes factories in US, Indonesia as China’s lustre fades).
In the last five years as its profile grew Foxconn has been embroiled in numerous controversies related to its manufacturing activities in China, safety issues, working conditions and labor compensations. The concerns identified by labor rights activists have received extensive coverage in foreign press because the company is the primary contractor to Apple, now one of the world’s biggest consumer electronics manufacturers. In response to the complaints Foxconn has had to jack up salaries at many of its Chinese facilities, sometime at a double-digit clip per year, a development that has chewed into the company’s operating margins.
In addition to the hike in its operating costs Foxconn is also being confronted by a new reality in the changing needs of its customers. After the heady rush to establish operations in China many OEMs are stepping back to consider the total cost of manufacturing in the Far East, thousands of miles from many of their end-customers in North America and Europe. The total cost of ownership (TCO) calculation have not always been in favor of China and other Far East locations due to the additional costs and limitations imposed by shipping and other logistics issues.
Furthermore, Western OEMs have become very concerned about China’s belligerent attitude towards Asian neighbors like Japan and the Philippines as they tussle over territories and maritime activities. This backdrop – coupled with nationalistic propaganda over offshoring of manufacturing and the resulting increase in unemployment rates – has turned local production into a viable proposition for many Western companies. Large enterprises like GE, Google and Apple, for example, have announced they want to make more of their products in the United States, which could imperil operations at heavily pro-China companies like Foxconn.
That’s why having manufacturing operations outside of China and in the United States as well as neighboring countries like Mexico and Canada represents an opportunity for Foxconn to retain current contracts and win new ones. The company plans to enter the automotive market and has opened discussions with Germany’s BMW and Audi. It is also planning to renew plans to keep costs low and avoid labor related problems by using more automation in its plants. (See: Hon Hai Negotiates Manufacturing Partnership With Audi, BMW).