Sino-US trade confrontation continues to heat up, AppleiPhoneWith the continued weakness of sales and the constant pressure from Trump, how does the 70% manufacturing business rooted in mainland China and exports to the US and other markets, how to maintain consistent economic cooperation and mutual benefit and win-win situation with China and the United States, It seems even more important.
In July 2017, Hon Hai’s former chairman, Guo Taiming, responded to Trump’s political views of “revitalizing the US manufacturing industry” and declared that Wisconsin would spend $10 billion to build the “Weigu Technology Park” by 2020. Due to the relatively high labor costs in the United States, factory construction has changed several times. Today, the local state government is reassessing the project.
At the same time, the information of "Foxconn's withdrawal from the mainland" became sensitive. On June 17, Hon Hai Group, a subsidiary of Hon Hai, issued a statement saying that “the relevant rumors are untrue information. At present, the production and operation of Foxconn’s various parks are carried out in an orderly manner, and no divestment occurs.” “Future, Foxconn will continue Take root in the mainland and deepen development."
Hon Hai has more than 40 production bases in mainland China, and the industrial industrialization of the Industrial Internet (601138.SH) was also listed on the Shanghai Stock Exchange on June 8, 2018. It is inevitable to take root in the mainland. However, as Guo Taiming said earlier, the Sino-US confrontation will continue, and the global supply chain of the manufacturing industry will be forced to re-arrange according to the mainland China and the United States, and the uncertainty will become greater.
In addition, the worldMobile phoneThe market is saturated, the labor costs in the mainland are increasing, and multiple factors are driving Hon Hai to accelerate the “Made in China” process for other manufacturing. Foxconn, like a large ship in the domestic manufacturing industry, took the lead in the tide of industrial transfer. At present, India and Vietnam are the first choice for some capacity transfer.
Order change: Apple-style micro,HuaweiTransfer order
As the world's largest electronics manufacturer, Hon Hai has a considerable part of its business that relies on Apple and China.
Hon Hai Kang Group (2038.HK) (hereinafter referred to as “Fuzhikang”), which is a subsidiary of Hon Hai, provides vertically integrated manufacturing services for the global mobile phone industry and system assembly business for OEM (original equipment manufacturer) business models. Workers are typical of Hon Hai’s main business model in the past. Its industry threshold is low, gross profit margin is low, and it is greatly affected by labor costs.
On August 9, Fuzhongkang’s mid-year report showed that the company achieved revenue of 6.389 billion U.S. dollars in the first half of the year, down 2.65% year-on-year. The inventory turnover rate decreased from 5.71 times to 5.34 times. In fact, after mid-2016, the Group's inventory turnover rate showed a general downward trend; the inventory turnover days also extended from 24.40 days to 33.68 days. Since the mid-2017 report, Fu Zhikang has had a negative net profit for five consecutive reporting periods.
It is not difficult to infer that at present, the scale of its business continues to shrink and is getting weaker.
On the one hand, the Chinese mobile phone market is facing shrinking pressure. According to China's ICT, in the first half of 2019, the total domestic mobile phone shipments were 186 million units, down 5.1% year-on-year, including 178 million 4G mobile phones, down 4.2% year-on-year. Fu Zhikang's main customers includeMillet, Huawei,OPPOAnd HMD (HMD global Oy), etc., which makes the group's performance greatly affected by the Chinese mobile phone market. Reflected in the financial report, the Group's inventory in the first half of the year was US$974 million, a year-on-year decrease of 30%.
Market research firm IDC report showed that global smartphone shipments in the second quarter fell by 2.3% year-on-year. For a long time, the bigger problem facing Fu Zhikang is that the global mobile phone market is saturated, and on the eve of the 4G to 5G exchange, more consumers are waiting to wait for 5G to mature.
On the other hand, Apple's stable "cash cow" role is by no means static. Since the end of last year, Apple has no longer announced iPhone sales, and its sales continue to be sluggish. In 2019, after a 15% decline in the first quarter and a 17% decline in the second quarter, the iPhone's third-quarter revenue was $25.99 billion, down 12% year-on-year. As the largest OEM company of Apple's mobile phone, Hon Hai's operation and performance are greatly affected by iPhone sales.
According to the latest report from third-party market research firm Canalys, in the second quarter, the market share of Huawei's mobile phone China market reached 38.25%, an increase of 31% year-on-year. In contrast, Apple's market share fell by 14% year-on-year. Apple opened the "soft and hard" layout in the first quarter, with the growing service business to hedge the decline in hardware sales, this change will undoubtedly be transmitted to the foundry.
"There were not many Apple orders last year. Before I made Apple's production line, I quickly turned to Huawei." A Foxconn staff revealed to the Caijing reporter. Foxconn told the Caijing reporter that Foxconn does not comment on any customers and products. However, a number of Foxconn internal staff confirmed that Apple's orders did decline.
At the same time that Apple’s orders fell, Huawei’s orders continued to increase.
On May 16th, after the US government included Huawei in the “entity list”, Flextronics (which provides assembly services for Huawei base stations and mobile phones), the foundry established in Changsha not only stopped production and refused to ship, but also refused to return hundreds of millions of yuan. Equipment and materials. Subsequently, Huawei removed Flextronics from the supply chain and related orders to other foundries such as Foxconn.
In China, Fuzhikang's share price rose sharply due to the increase in orders by Huawei and the news that Foxconn was transferred to expand the production line. Yang Shu, secretary general of the Indian Chinese Mobile Phone Enterprise Association, revealed to the media that Huawei’s mobile phone OEM business in India was mainly undertaken by Flextronics and Foxconn. After Flextronics entered the blacklist, orders will be transferred to assembly plants such as Foxconn and Guanghong.
Earlier, some media reported that due to the strong growth of domestic customer demand, the overall output value of Foxconn Shenzhen Longhua and Guanlan Plants increased by 12% in the second quarter, and the output value in June increased by 4% in a single month.
Capacity transfer: the United States encounters resistance, India expands
Fuzhikang's internal orders have undergone structural changes, and the weak performance is unlikely to improve in the short term, making the mainland's production capacity more labor-intensive and tariff-cost pressures.
From September 1st, the United States will impose a 10% tariff on US$300 billion in Chinese goods, but Trump delayed the tariff increase date for some goods, including laptops and smartphones, on August 13. However, some changes have already taken place. In its semi-annual report released on August 9, Fu Zhikang said that they will expand their production needs and optimize their resources and production capacity in emerging markets such as India and Vietnam.
China is experiencing an industrial upgrade of “cage-for-bird”. "With the rise of national power and changes in production factors, Foxconn's capacity transfer is inevitable in line with industrial logic in the process of manufacturing transformation and upgrading." Chen Hang, chief analyst of Southwest Securities Electronics and New Economy, analyzed the "Financial" reporter .
"The interior of Hon Hai is also making adjustments. While promoting the industrial enrichment business related to 5G and communication equipment, more and more efficient low-end manufacturing will be moved out."JingdongThe high-end manufacturing industry represented by Fang et al. will continue to increase, and is now at the starting point of this general trend.
As Sino-US trade tensions continue to escalate, many analysts told the Caijing reporter that Foxconn and other manufacturers are making plans to move some of their production out of China.
As early as many years ago, Taiwan and other foundries were located in Vietnam and India. "The trade war has indirectly increased the power and pull of capacity transfer." A foundry industry analyst analyzed the "Financial" reporter, the domestic labor costs have been raised, and the tariffs are not directly pressured by the foundry, but will eventually pass through Apple. ,HPWhen the customer needs to reduce costs, the requirements for transferring capacity are transferred back to the foundry.
At present, a number of foundries including Foxconn are under pressure.
According to Taiwan's "Economic Daily" report, although Trump delays the imposition of tariffs on mainland electronic products, Taiwan's four major foundries are ready for short-term response measures. Quanta, Compal, Wistron, and NVIDIA will all be shipped from Taiwan, and the added cost will be borne by customers. If the tariff rises to 25%, some of the capacity will be transferred to Southeast Asia in the long run.
"I have always been cautious and I am ready." For the move of the production line out of the mainland, Guangda Chairman Lin Baili said this at the legal person briefing on the 13th. Regarding the layout of the factory in Southeast Asia, Lin Baili responded, “Going to Southeast Asia is a certain option, but when I moved in, I have not decided yet. All the Southeast Asian factories have seen it, and the specific location is still under evaluation.”
In fact, on June 12, Liu Yangwei, the new chairman of Hon Hai, clearly stated at the legal briefing session of the Hong Kong Taipei headquarters that “if the customer needs, he has the ability to transfer the production line out of China.” According to its introduction, Hon Hai only About 25% of production capacity is located outside of China.
Hon Hai itself is a globally placed company. For its part, there are two destinations for capacity conversion or production migration from China – the United States and Vietnam, India and other low-cost countries. Previously, one was Trump's “Revitalization of Manufacturing” village in Mount Pleasant, Wisconsin, and the other was Guang'an Dongmei Industrial Park in Quang Ninh province in northern Vietnam.
Foxconn received a record subsidy in the United States, and the liquid crystal display factory that began preparations in 2017 was promoted by Guo Taiming. Trump also personally participated in the groundbreaking ceremony. He praised the largest greenfield investment of foreign companies in the history of the United States. It proves that his ability to revive the US manufacturing industry is "the eighth largest world miracle."
This is Guo Taiming's positive response to Trump's "revitalization of manufacturing" political views. In June this year, Guo Taiming will officially honor Foxconn's new chairman Liu Yangwei, focusing on the KMT primaries for the 2020 Taiwan leader. The US factory once became the capital of Guo Taiming's campaign.
However, two years later, the factory that Foxconn promised to build is shrinking. The factory construction has been stagnant for several times. It was originally planned to create 13,000 jobs. In 2018, only 178 were created; the 10.5 generation line originally claimed by the LCD panel factory was also adjusted to the 6th generation line. Foxconn executive Hu Guohui once told the media that compared to manufacturing LCD screens, Foxconn hopes to set up a technology center there, mainly for R&D facilities, packaging and assembly business.
On July 15, Guo Taiming lost in the Kuomintang 2020 primary election. Hon Hai, who has stepped into the "post-guo Taiming era", is still not sure whether he will continue to spare no effort to promote the "US factory plan." Currently, the Wisconsin government is reassessing its pros and cons.
Hu Guohui said that the labor costs in the United States are relatively high. Instead of producing LCD screens in the United States, it is better to produce in Greater China and Japan, then ship to Mexico for final assembly, and then import the finished products to the United States, the profits will be higher.
On August 5, both the onshore and offshore RMB exchange rates against the US dollar fell below the “7” integer mark. On August 14, after the company such as Huawei and Zhongke Shuguang, the US Department of Commerce's Bureau of Industry and Security (BIS) announced that CGN and its four affiliated companies were listed on the Entity List. The Sino-US confrontation has been extended from the trade sector to the technology and currency sectors, and the pressure on customers in the mainland plant area to transfer production capacity has increased.
In contrast, Vietnam and India are better options for the moment.
How far is “India/Vietnam manufacturing”?
Why are India and Vietnam?
The cost of Vietnam is low enough. It is close to the mainland and has a labor force of 57.5 million. It is one of the most abundant Southeast Asian countries. From 2012 to 2017, the average annual salary of Chinese manufacturing workers rose by 50% (National Bureau of Statistics). The average monthly salary of Vietnamese manufacturing workers is 216 US dollars (about 1524 yuan), less than half of Chinese workers (Japan Trade Promotion Agency data).
Fu Zhikang Zhongbao pointed out that many years ago, they had set up mobile phone assembly plants in India and Vietnam to help certain Chinese brand customers develop their business in Asia, overseas and China's overseas markets, and strive for greater market share. Under the guise of trade wars, many customers are interested in turning to Vietnam to seek manufacturing services to avoid potential tariff effects.
Related actions have already begun. In October 2018, Hon Hai's Hongteng 6088 Precision Technology Announcement will transfer about NT$4 billion to acquire a stake in Vietnam's New Wing Interconnect Technology. In early January this year, Hon Hai announced that its subsidiary, Fugiang, spent US$14.8 million to purchase the right to use 250,000 square meters of land in Vietnam's Yunzhong Industrial Zone from FUHUA.
On June 25, according to local media reports in Vietnam, Mr. Zhuo Hong, head of the Foxconn Group in Vietnam, met with local provincial officials in Vietnam, saying that Hon Hai Foxconn plans to set up in Quang Ninh province in northern Vietnam.TVScreen assembly line. Hon Hai has a stronghold in the manufacture of apple products in Bac Giang, Vietnam. In addition, market participants speculate that Hon Hai is selling the land to FIT Hon Teng Ltd, which is responsible for the production of the iPhone's lines and connectors.
The above-mentioned foundry industry believes that the United States has always been behind the scenes of industrial transfer. “How to transfer 'Made in Japan' and 'Made in Korea' to China decades ago, how to force 'Made in China' to move out now.” The high labor costs in the United States will prevent most foundries from moving back, and Trump retreats. Second, choose a relatively familiar Vietnam outside of China.
India is close to the market. According to Counterpoint data from third-party market research organization, in the first quarter of 2019, the top five smartphone market share in India was Xiaomi (29%).Samsung(twenty three%),Vivo(12%), OPPO (7%), Realme (7%). In the second quarter, the Indian smartphone market continued to grow, with the top five rankings unchanged, and Xiaomi still ranked first with 28% market share.
In the first half of this year, due to the continued growth of the Indian business of Chinese brand customers, Fuzhikang's sales in India accounted for approximately 31% of its total sales. Fu Zhikang said that as one of India's largest contract manufacturers, it will expand India's local manufacturing services and component supply chain to attract more new Chinese customers in India to respond to the Indian market and export demand.
Hon Hai has a factory in India. In December 2017, Foxconn has five factories in Sri City, Andhra Pradesh, India, and nearly 15 million smartphones a year for millet and Nokia. In 2018, Fu Zhikang injected an additional US$1 million into the Indian business.
"(India, Vietnam) is further difficult to expand." A Taiwanese foundry executive told the Caijing reporter that "the industry is actually living with the tide, following the market, following the ecological chain and satisfying customers." The industry cannot simply look at the cost of labor. “Everyone knows that India’s labor costs are low. If it is measured solely by labor costs, why did Guo Taiming go to the US to build a factory?”
Take the iPhone as an example, its assembly, not only low-cost labor and government subsidies, but also a lot of supporting hardware and software facilities, need to cooperate with suppliers all over the world. To set up a factory in a selected place, the surrounding must have a complete ecological chain and a complete supply chain. India's iPhone production line is undercapacity, mainly because Apple's assembly precision for the iPhone is very high, and Indian workers need more time to learn to digest.
"Foxconn's massive withdrawal from China is unquestionable." Li Jin, chief researcher of the China Enterprise Research Institute, told the Caijing reporter that Vietnam and India needed high infrastructure and training staff at the initial cost. The investment was high. However, domestic raw materials and labor costs will only increase. For Foxconn, long-term pain is worse than short-term pain. Capacity transfer is only a matter of time.
This process may be quite slow.
At present, the problem facing Hon Hai is that 75% of the mainland's production capacity is subject to transfer pressure and can be transferred. The factories in the eastern part of the country are relatively easy to evacuate, and the central and western regions are still in the middle of industrialization. "The demographic dividend is not completed, and the role of the foundry economy in local economic growth, employment promotion, and industrial workers' transformation is still quite significant."
In recent years, many foreign giants such as Uniqlo, Nike, and Samsung have transferred some factories in China to Southeast Asia and India. "Foxconn, which has nearly one million employees in the mainland, faces greater compensation and resettlement issues during the evacuation process. The local government will also become a drag." Li Jin added.
From the perspective of maximizing profits, Hon Hai may have to move more and more “Made in China”, but it seems that Hon Hai needs patience for “Made in India” and “Made in Vietnam”.
The author is a reporter for Caijing, originally published on August 19, 2019, Caijing Magazine.