Tech Decoupling By Any Other Name

CHINA’S NEW DATA-PROTECTION law came into effect on November 1, the same day that the US internet company Yahoo! said it was quitting the Chinese market, citing an increasingly challenging business and legal environment. Its media brands, such as Engadget and TechCrunch, two tech news sites, are also no longer accessible in China.

Even before being acquired by private equity group Apollo Global Management earlier this year, Yahoo! was for some time sliming what was left of its China business after a complicated history involving Alibaba. However, in decamping completely, it follows Microsoft, which pulled its business-focused social network LinkedIn from the country in mid-October, also citing growing compliance requirements.

LinkedIn had run into criticism in the United States for bowing to Beijing’s censorship rules in blocking the accounts of several journalists critical of China’s policies. In March, Chinese authorities had suspended it from taking new user registrations for 30 days for failing to censor political content. In a US court case in 2020, it was shown to have been used by Chinese intelligence services to recruit overseas sources.

LinkedIn had operated in China since 2014, the only one of the leading Western social media sites left there, although it has struggled for a foothold against local rivals. Google withdrew from China in 2010, saying it prefered not to censor searches.

The Personal Information Protection Law is a proximate cause. Foreign and domestic entities processing user information, such as through web cookies and services — must now have representation within China responsible for compliance. They also have onerous new responsibilities to acquire security clearances to move data across national borders. Companies are at risk of fines of up to 5% of a company’s annual turnover for compliance failures.

Beyond the new data protection law is a thickening atmosphere of control. Last month, Apple removed two popular religious apps from its App Store in China. It is thought to have been removing apps Beijing does not like without fuss for some years. It has never made any secret that it follows the laws of the countries it operates in, even where it disagrees with them.

Apple, however, has a different operating relationship in China than Yahoo! or LinkedIn because of its hardware manufacturing and sales ($14.6 billion in Greater China in the three months to end-September) there.

It will need to tread a fine line between protecting those local sales and supply chains, which will depend on Beijing’s blessing, and its reputation elsewhere in the world if it censors the apps in its App Store. Complicating its path forward is that it does not want to choose between its hardware and App Store businesses in China, which would set a precedent for its hardware customers to download apps on an iPhone away from the App Store. That way lies ruin for its Mac ecosystem, which is so reinforcingly lucrative for it.

For Microsoft, which has been in China since 1992 and derives only some 2% of its annual sales there, its R&D operations and network of local partners are its most valuable assets in China. If protecting them meant shuttering LinkedIn, which likely provided only a slither of its China revenue, it would have been an easy decision. Microsoft plans to replace LinkedIn with a jobs only site later this year.

More broadly, foreign tech firms are being swept up in the measures that authorities are applying to rein in the power of the platform tech and online media companies across a swathe of internet activities, from fintech to gaming. Epic Games, creator of Fortnite, has stopped taking new user registrations and says it will end its services in China from November 15.

This is what decoupling looks like in practice.

Fostering Luxshare As The Next Foxconn Suits Apple And Beijing

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.

Future-proofing

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. 

Reconfiguration conundrums

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.

In Memoriam: Steve Jobs

Steve Jobs, 1956-2011

Apple just opened stores in Shanghai and Hong Kong, two of its largest anywhere. Tim Cook, the company’s chief executive, noted earlier in the week that the Shanghai store had had as many visitors–100,000–in its first weekend as its Los Angeles store had in its first month while the Hong Kong one sold more Macs on opening day than any other Apple store had. All of which is a roundabout way of expressing how global the was the transforming cultural and commercial influence of Steve Jobs, who died yesterday after a seven-year battle with pancreatic cancer at the age of 56.

This Bystander first read the sad but not unexpected news on an iPad. This post was typed on a MacBook. An iPhone and an iPod lie nearby. We use iTunes and the App Store, and other products and services from companies Apple’s have spawned. We still have a Newton in a cupboard somewhere, so we might be a little Mac-centric. But it was not just in the tech toys that Jobs expressed his genius but in how he made what they did a seamless and stylish part of our daily lives, and profoundly changed how we live those daily lives as a result. He also made a wildly successful business out of it. Apple is America’s second most valuable company by market capitalization.

Right from the start (Apple was founded in 1976), Jobs could “think different” (though the tag line didn’t come until 1997). Jobs’s realization that his time was limited may have driven the remarkable explosion of his creative and business talents in the last seven years of his life. We recall a remark we once heard in the early days of the Internet, “the future is already here; it is just randomly distributed”. With an inspired combination of vision, talent and drive, Jobs could see the future first and do more to make it a coherent part of today than anyone.

Sina.com has posted a comprehensive tribute (in Chinese) and an evocative slide show of Jobs’s life and achievements. The products and the man who conceived them are so iconic it barely needs commentary, in itself a testimony to his legacy.

We also like this infographic of Apple in China, a reminder that it is not all cool, shiny stores.

Foxconn Expands Inland Production Capacity

Foxconn, the Taiwanese-owned electronics contractor whose Shenzhen plants were hit by a wave of suicides earlier this year, is to expand its presence in Chengdu with a new assembly plant there, the latest of a number of new inland factories. Foxconn is owned by Hon Hai Group and numbers some of the best known global technology brands among its customers such as Apple, HP, Sony and Nokia.

Since the suicides put the company into the international spotlight it has opened new assembly plants in Henan, Hebei, Shanxi and Hubei provinces as well as raising wages and improving living conditions for workers at its giant Shenzhen operations. The Chengdu plant is expected to produce advanced panels for LCD TVs and tablet PCs. Foxconn has already has started producing Apple’s iPads there and the new plant will let it expand production of these. Hon Hai has reportedly allocated $275 million for investment in six new Chinese plants, most of them inland.

ChiPhone

Intriguing snippet over on MacNN: one in ten of Apple’s oh-so-fashionable iPhones – some 400,000 handsets — are being used in China. The twist is that the iPhone isn’t sold in China. So any iPhones being used there must have been imported on the grey market and unlocked.

The MacNN report quotes In-Stat, a research consultancy, quoting numbers from China Mobile. Apple’s discussions with China Mobile, China’s largest mobile telco, about becoming the official carrier in China, reportedly broke off last month. China Mobile won’t accept the revenue sharing deal Apple insisted on with its partners in the U.S. and Europe.