This post on Made in China first appeared in https://www.usine-digitale.fr/article/covid-19-vers-la-fin-du-tout-made-in-china-pour-les-fabricants-d-electronique.N950286. The copy posted below is originally in French and was Google-translated to English.
It is an old factory with a decrepit facade, on which climb some wild grasses. At the edge of this canal in the south of Taipei, only a watchman watches the ear. The plot has just been bought by the Taiwanese electronics manufacturer Pegatron to increase its production capacity in Taiwan. Reported by the financial media Bloomberg, the initiative is the latest in a series of investment projects outside of China announced by Taiwanese subcontractors.
From Apple to Samsung, these shadow firms manufacture, assemble and sometimes design products on behalf of major electronics brands. Most of these companies have their headquarters and a handful of factories in Taiwan. But the final assembly is mainly carried out on the other side of the strait. The Taiwanese giant Foxconn, the main assembler of the iPhone, thus employs more than a million workers in China, distributed in twelve giant factories.
“FACTORY CITIES” CHALLENGED BY THE PANDEMIC
This model, based on economies of scale, was severely tested by the COVID-19 crisis. Travel bans imposed by Chinese authorities have led to production delays, as evidenced by the shortage of Nintendo Switch, assembled by Foxconn. The firm also anticipates a 15% decrease in revenue for the first quarter of 2020.
“The ‘gigantic’ model takes a hell of a slap, straightforward analysis Pascal Viaud, managing director of UBIK, a company specializing in partnerships and industrial cooperation based in Taiwan. The sectors are aware of their dependence on China and the logistical risks that this implies. Some companies, especially the smaller ones, did not necessarily know this because it concerns their second or third level of subcontracting. ”
According to recent announcements from Taiwanese subcontractors, the COVID-19 epidemic would push major brands to rethink their production line. Wistron, another supplier to Apple, recently unveiled a budget of $ 1 billion for projects of new factories in India, Vietnam and Mexico. “Many signals from our customers let us think that’s what we need to do “, Wistron chief strategy officer Simon Lin said in a conference call reported by the Singaporean daily Straits Times. According to Bloomberg, Foxconn, for its part, planned an envelope of $ 17 billion for projects in India and Vietnam.
Foxconn’s headquarters in Taiwan
LOOKING FOR ALTERNATIVES TO CHINA
“China is becoming riskier for these companies, which may have felt that authorities withheld information during the epidemic, said Tony Nash, chief executive of Complete Intelligence, a business planning platform. costs and revenues of companies running on artificial intelligence. These companies are increasingly looking for alternatives to China. This is a classic risk reduction strategy already at work, but one that will seriously accelerate the next three years. ”
Kuan-lin (the first name has been changed) can testify to this. This salesperson works for a Taiwanese manufacturer whose client is a famous American brand of computers. For the past three weeks, the employee has been under constant pressure from his hierarchy and rarely leaves his office before 10 p.m. “Because of the epidemic, our client is asking us to speed up a project to build a factory in Mexico,” he explains, with dark circles and a pale complexion.
TRADE WAR WEIGHS ON SUBCONTRACTORS
The trend is not new. The trade war between China and the United States had already pushed part of the electronic production out of China. The manufacturers hoped to escape the sanctions of the Trump administration, applied to “Made in China” products. Depending on its Chinese factories, Foxconn had paid the price: according to calculations by the specialized media Bloomberg, the profits of the subcontractor fell by 24% for the period from October to December 2019.
“Competitors who did not have production lines in Taiwan have been disadvantaged by the trade war, confirms a manager of a Taiwanese electronics company which has a production tool on site. Thanks to our Taiwanese factory, we were able to reserve our products made in Taiwan for the American market. ”
With a skilled workforce and cutting-edge infrastructure, Taiwan is well placed to stand out. The Taiwanese government has elsewhere launched a vast plan to facilitate the return of factories to its soil. But the archipelago lacks space and has a limited comparative advantage. “Taiwan is suitable for high-end products, which can be sold more expensive, points out the same frame. For other products, manufacturing in Taiwan has an impact on profitability.”
TOWARDS REGIONALIZATION OF PRODUCTION
The most likely scenario seems to be that of a regionalization of production, which would jointly benefit several countries. “This is not going to be a massive departure from China, anticipates Tony Nash. For Asia, there will simply be more additional parts manufactured in Taiwan or Vietnam. For the American market, it could be Mexico.”
As a note from Deloitte suggests, this shift could also be accompanied by increased digitization of the production chain. Joined by L’Usine Digitale, Eddie Chang, head of finance at ASE Group, one of the Taiwanese behemoths for the assembly and testing of electronic circuits, confirms this future direction: “We are going to develop technologies enabling virtual teamwork and industrial automation. We also plan to increase the automation of our logistics to reduce human interactions”.
CHINA HAS NOT SAID ITS LAST WORD
However, the recent development of the epidemic calls for caution. In China, the main factories have returned to their pre-crisis operating level. Foxconn was able to restore production of the new iPhone SE with massive hires and inflated work premiums. “During the crisis in China, our factories were at 60% of their capacity, today we are not far from 100%”, confirms a sector executive whose factories are in Shenzhen.
At the same time, the countries presented as alternatives to China are in turn impacted by the epidemic. In India, where Apple produces its iPhones for the local market, Foxconn and Wistron have announced that they have suspended production until mid-April. The US state of Wisconsin, where a Foxconn factory is soon to come out of the ground, has seen in recent days a dizzying increase in the number of cases of contamination.
“The new turn that the COVID-19 crisis has taken is a game-changer,” says Aymeric Mariette, research officer at the France China Committee. The attitude [of electronics companies located in China] is now much more wait-and-see for relocations “. Apple CEO Tim Cook also defended himself at the end of February from any major movement, preferring to speak of “adjustment adjustments” linked to the crisis.
Especially since China will not let these companies slip through its fingers so easily. The strategic challenges are significant: the ecosystem of electronic suppliers has enabled Chinese brands, such as Huawei, to follow in the footsteps of American giants. “The Chinese authorities are carrying out charming offensives towards foreign investors in China, for example with the promise of equal treatment in access to financial aid, facilitation of investments or even the announcement of new reforms, analyzes Aymeric Mariette: China knows that it is now ahead of the other major world economies and intends to profit from it. ”