THREE RECENT CHANGING of hands of Chinese factories give a glimpse of the emerging shape of the new world of supply chains and highlight the contradictions and competition that lurks within as companies on both sides of the US-China divide navigate between national policy and commercial self-interest.
The transactions are:
- the 3.3 billion yuan ($477 million) deal in July by which the fast-rising Shenzhen-based Luxshare Precision Industry bought two electronics assembly plants from the No 3 Taiwanese iPhone assembler, Wistron;
- Hunan-based Lens Technology’s $1.4 billion acquisition this month of two factories from Catcher Technology, a Taiwanese firm that makes metal casings for the iPhone. Glass-maker Lens already supplies screen glass for iPhones; and
- the buyout announced this month by the No 2 Taiwanese iPhone assembler, Pegatron, of the remaining shares it does not own of Casetek Holdings, and take the unit private in a deal valued at $1 billion. Casetek is another precision metal chassis maker with factories mostly in and around Shanghai.
Two of the companies central to all the deals are not direct participants. They are Apple, the world’s most valuable tech company, and Foxconn, Taiwan’s No 1 iPhone assembler, the leader in contract electronics manufacture in China and long the linchpin of Apple’s global supply chain.
Apple’s CEO, Tim Cook, seen in the screenshot during a 2017 visit to a Luxshare factory that makes Apple’s AirPods, has been plain that his company is seeking to diversify its supply chain. Foxconn’s chairman, Young Liu, has been equally explicit that his company plans to split its operations to serve the China and US markets separately, declaring that ‘China’s time as factory to the world is finished’.
The commonalities in those two views make the Luxshare deal significant on several counts. While it follows a series of investments by Luxshare in Apple component makers, it moves the company to being an iPhone assembler for the first time since it became an Apple component supplier in 2012. As well as marking a significant milestone in its manufacturing capabilities and status, it also breaks the iPhone assembly monopoly of the Taiwanese trio of Foxconn, Pegatron and Wistron.
It also gives Apple some insurance that the iPhones (and other products) it sells in China can be made in China should producing in-market become essential because of deteriorating relations between Washington and Beijing and the import substitution drive implicit in the ‘dual circulation’ policy. China provides an estimated one-fifth of Apple’s global revenue. It needs to be able to defend that. That, in turn, gives credibility to suggestions that Luxhare’s expansion to let it become more deeply involved in Apple’s Chinese supply chain has the US multinational’s encouragement.
It is also worth noting that other US multinationals that Luxshare counts as customers include Microsoft, Google, Amazon, HP and Dell. That is an overlapping roster with Foxconn, which sees Luxshare as an emerging competitor to be taken seriously. Luxshare’s founder, Wang Laichun, was once a ‘factory girl’ at a Foxconn affiliate. A lot of Foxconn’s iconic founder Terry Gou has rubbed off on her, by all accounts. Luxshare’s market capitalisation is now larger than that of Foxconn’s parent Hai Hon Precision Industries, and Wang is now one of the wealthiest women in China.
India and Vietnam
Apple and the other US multinationals still have markets to serve outside China. Those increasingly demand supply chains that are not only non-Chinese but also not global. Foxconn is already manufacturing outside China and increasing its capacity to do so in order to avoid US tariffs on Chinese exports, and as insurance against future restrictions. It already assembles iPhones in India for the Indian market (thus avoiding India’s high customs duties on imported iPhones. Wistron is about to follow suit, one reason it felt able to sell of its assembly plants in China to Luxshare.
One of the new locations that Foxconn is looking at for expansion is in northern Vietnam. There, as it happens, it would be a near neighbour of another plant where Luxshare makes AirPods. Apple will also make some of its smartwatches at Luxshare factories in Vietnam and is considering one for iPhone assembly.
Luxshare, which established a company in India last year, is also reportedly considering building a plant in Mexico, where Foxconn and the other Taiwanese electronics manufacturers like Pegatron have been eyeing new locations, too. Foxconn already has a series of production lines there, which can take advantage of.tariff-free exports to North America under the new US-Mexico-Canada trade agreement.
This reconfiguration of global supply chains into regional and local ones also contains several self-contradictions that reflect the illogicalities of the decoupling of the US and Chinese economies in the tech sphere. Building up Luxshare gives Apple supply chain diversification, local production in China and, as a bonus, some bargaining power with Foxconn. However, Beijing sees Luxshare as a way to diminish the Taiwanese, and especially Foxconn’s sway over contract electronics manufacturing in China, to build an indigenous industry, and to tie in the China business of Apple and other multinationals, more closely to national economic management.
The Lens Technology deal falls into many of those categories, too. It is seeking to follow Luxshare in moving up from being a component supplier to Apple to an iPhone assembler, taking advantage of Beijing’s drive to foster indigenous technologies and the supply chains to turn them into products. Pegatron’s tightening grip on Casetek is a direct counter to that.
New Foxconn or next Huawei?
However, it is Luxshare that Beijing views as the leading candidate to dent Foxconn’s dominant presence. Thus it comes as no surprise that it is a leading recipient of subsidies from the 147.2 billion yuan fund set up last year to upgrade China’s manufacturing capability.
The perversity is that the more subsidies Luxshare gets, the cheaper it can sell its services to Apple, which means the cheaper Apple can sell its products, and not just in China. One risk is that that might put it on the same US radar that has been locked on Huawei Technologies.