Tag Archives: manufacturing

Fostering Luxshare As The Next Foxconn Suits Apple And Beijing

A screenshot of a Luxshare Precision press release about Apple chief executive Tim Cook visiting a Luxshare Airpods production line in 2017. Photo credit: courtesy Luxshare.

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.

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Offshoring Offshoring

Hewlett-Packard’s reported decision to shift production of some computers it sells in Japan from China to Akashima in Tokyo is a harbinger of the future for manufacturers. The calculation, according to the Nikkei, is that higher production costs – labor is four times more expensive in Japan than China – will be more than offset by productivity gains and closeness to market shortening the supply chain. The change has been sufficiently successful with HP’s desktops to apply it to its consumer notebooks. While the move goes against the conventional wisdom that China’s manufacturing will decamp to lower-cost countries like Vietnam and Indonesia, HP’s calculation is applicable to more developed markets than Japan. An important factor is the closeness of final assembly plants to component suppliers.

Footnote: At the other end of the value chain, rising costs and falling demand are continuing to squeeze manufacturers. Stanley Lau, deputy chairman of The Hong Kong Federation of Industries, says one-third of the 50,000 Hong Kong-owned factories in China (they are mainly in the Pearl River delta) could scale back operations or be shut by the end of the year.

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Manufacturing Outlooks Provide Faint Glimmer Of Optimism

China’s Purchasing Managers’ Index (PMI), an indicator of the outlook for manufacturing, showed an uptick for September, reversing the mostly downward trend of much of the year. As ever, we caution reading too much into a single month’s figures, but the official numbers, released early after a leak of the HSBC version, stand in contrast to much of the bearish sentiment about China’s economy seen over the past week as investors have been swept up in a global glumness that the world economy is heading for a double-dip recession.

The glass half-full is that if the slowdown in China’s growth is stabilizing, even temporarily, it provides some hope that it can sustain some global growth at least for a while. And when we peer deeply into the glass, we see that HSBC’s input-price sub index showed a slight increase, to 59.5 from 55.9, suggesting a possible brake to the decline in global commodity prices seen since April as demand has weakened. The glass half-empty is that manufacturing usually increases in September in preparation for the Golden Week holiday.

September PMIs from around the world, though sending mixed signals, follow other indicators that show that, even if a double-dip recession can be avoided, the slowdown in growth worldwide is becoming entrenched. Matters haven’t slid back to the nadir of the 2008-09 slump, but they are not far off.

The danger is that protectionist pressures will force those two points closer. In the U.S. Senate, legislation is being discussed that would make it easier for punitive tariffs to be imposed on countries deemed to being manipulating their currencies, for which read China. World leaders did well to get through the 2008-09 slump by collectively agreeing not to go down that beggar-thy-neighbor road. That consensus is considerably more fragile today.

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China’ Economy Slowing Nicely, But Watch The Pay Rises

Manufacturing continues to expand, according to the December Purchasing Managers’ Index compiled by HSBC (via Reuters), but its pace of expansion has started to slacken for the first time during this recovery. With our usual caveat about a single month’s figures, that may be taken as evidence for the widely held belief (ours included) that GDP growth will slow in 2011.

By how much is the question, of course. While we still believe that the answer will be, by not much, and that absent the implosion of any asset bubbles the economy is in good shape, the extent to which inflation moderates will play into the final outcome.  There are signs inflation may have peaked. One factor will be the success of price and supply controls on food. But we are also starting to look at wage pressures on inflation. Minimum wages are due to rise again in the new year — they will rise by 20% in Beijing for example — and these increases will to some extent work their way up from the bottom rung of the pay ladder. We suspect now that we won’t see any further interest-rate rises until after the January numbers are in and policymakers get a better sight of the inflation-adjusted growth prospects. We are in no doubt though that fighting inflation remains the top policy priority. Monetary tightening by other means will continue.

We also think we are seeing a greater willingness in the meantime to let the exchange rate bear more of the burden of dealing with the excess liquidity that is the root cause of the inflation. That is all relative in the sense that policymakers remain opposed to any rapid appreciation of the yuan, but it is no accident that the currency is closing out the year at a high against the dollar.

 

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Manufacturing Slows As Economy Moderates Growth Rate

Manufacturing increased more slowly than expected in May, according to the latest Purchasing Managers Index, prompting fears that China’s economy overall may be moderating its growth rate. That should come with our customary warning about not putting too much store in one month’s figures, especially as manufacturing output usually slows in May, but we did note earlier that PC sales were weakening and that the Labor Day holiday had seen lackluster retail sales for phones and TVs, suggesting that inventories are starting to back up.

At the same time, real estate property sales n Beijing, Shanghai and Shenzhen are down, too, suggesting that the crackdown on property speculation is taking effect. All of which, in turn, suggests there will be no urgency among policymakers to raise interest rates or let the yuan appreciate against the dollar.

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An Early Sign Of Slowing Growth?

A straw in the wind from the electronics industry about how strong recovery will remain in the second half of this year:  we are hearing reports that PC orders are weakening, not just in China but from across the region, which will have a knock-on effect on chip makers. Our man with the robot soldering iron tells us that OEM makers are also seeing demand from Europe drop for all sorts of components and, for chip makers, slowing demand from Chinese car makers (which is a more concerning coalmine canary). This follows lackluster Labor Day retail sales in China for phones and TVs. So it seems that inventories are starting to back up.

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Manufacturing Continues Its Tentative Recovery

Manufacturing output continues to increase. Not by much, to be sure, but an increase none the less. For the third consecutive month, the purchasing managers’ index was above 50, the dividing line between expansion and contraction. May’s number was 53.1, down slightly from April’s 53.3, but May’s number is often lower than April’s and there has been some running down of inventories. Retail sales and fixed asset investment more than exports are behind the demand for manufactured goods, stimulus spending at work as roads, railways and airports start getting built. But the export component of the PMI moved above 50 for the first time in 11 months.

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Another Sign of Economic Spring

One more crocus on the lawn: the purchasing managers index for March rose for the first time in six months; the index, a measure of manufacturing activity, also broke through the the 50 level that divides contraction from expansion. The usual caveats about treating a single month’s numbers with caution, but it is a sign, along with recent strong lending and investment data, that the 4 trillion yuan stimulus package is taking effect, especially in the state-owned sector.

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Nike Cuts China Suppliers

Here’s a straw in the wind, and a bad one at that. Nike is dropping three of its China suppliers because of the global slowdown in demand for its sports shoes and apparel, and saying that more may follow as part of a global restructuring now in review. Nike uses 180 suppliers in China, so four represents a tiny portion — less than 2% — but the company has weathered the fall off in consumer demand in rich countries better than most, at least until now.

All three suppliers make shoes and rely heavily on Nike for orders. Their contracts will be wound down over the next six months to a year to give them time to find new customers. Tough task right now, unless they can turn to the domestic market. Otherwise they will join the growing ranks of export-oriented companies — 62,000 in Guangdong alone last year — shuttering their doors for good.

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Signs Of China’s Growth Slump Ending, And Stimulus 2

More signs of economic spring–or at least the ending of winter– and that last November’s 4 trillion yuan stimulus package is having some effect. The Purchasing Managers Index, a benchmark of manufacturing activity, rose for the third consecutive month in February, though at 49 it is still below the 50 score that marks the difference between contraction and expansion. But it is well above the 38.8 recorded in November and new orders rose for the first time in five months.

Prime Minister Wen Jiabao is widely expected to announce a top-up to the stimulus package when he addresses the National People’s Congress. That top-up may well amount to more than the original package, according to some private economists, though we’ll have to read the small print carefully to see how much is genuine new money, how much is repackaging of old and how much is government-sponsorship of infrastructure projects that will need private or provincial money to break ground. That speaks to the reality that while short term stimulus to the domestic economy can help its slowdown bottom out, whether the 8% target expansion rate for the economy can be hit for the year still depends on recoveries in the markets for China’s exports.

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