Hon Hai Precision Industry, which operates under the trade name Foxconn Technology Group, is one of the world’s largest electronics manufacturing services (EMS) firms. It produces electronics products and components, such as Apple iPhones and Hewlett Packard computers, from dozens of plants in countries including the US, Mexico, Brazil, the UK, Ireland, Poland, Hungary, Russia, the Czech Republic, and its biggest export country, China.
The Taiwan-based company first set foot in China in 1988 when it opened a plant in Shenzhen. Since then it has established plants along dynamic coastal areas in the Pearl and Yangtze river deltas, Bohai Bay, the north-eastern province of Liaoning, and inland in the municipalities of Chongqing and Chengdu.
Foxconn’s Chinese factories recorded revenues of $17.15bn in the first quarter of 2010, a figure exceeding the total of its top 10 global competitors, according to iSuppli, a Los Angeles-based market research firm.
But escalating financial pressures and staffing issues in coastal areas have prompted the firm to shift production to more cost-effective locations inland, such as Henan and Sechuan provinces. The multi-billion-dollar investment plans will come as a major boost to these inner regions, transforming the local economies with thousands of new jobs.
The company’s biggest plant is located on the south-east coast at its Longhua plant in Shenzhen, also known as Foxconn City, a self-contained complex covering three square kilometres and housing factories, dormitories and other facilities for migrant workers, who eat, sleep and work there. However, a string of suicides at the Shenzhen plant this year has drawn attention to conditions for employees, many of whom are migrant workers. The company has resorted to fitting safety nets at the site to prevent suicidal workers from jumping to their deaths.
About half of the company’s 900,000 workers are located at Shenzhen, but this ratio will drop to one-third as the firm moves production to inland regions. With the Shenzhen plant focusing on R&D, Foxconn is expected to recruit up to 400,000 employees at the new plants, which are closer to the migrant workers’ family homes.
Taiyuan in Shanxi Province will target Apple iPad production, while Zhengzhou, the capital city of Henan Province, China’s most populous state, will produce Apple iPhones. Chengdu, the capital of the Sichuan Province, is designated for the production of laptops, tablet computers and set-top boxes, and Wuhan will focus on desktop computers. Meanwhile, Langfang in Hebei Province, near Beijing, will focus on mobile phone production, servicing multinational clients such as Nokia and Motorola.
Foxconn’s move into the Chinese hinterland highlights a growing trend of new investment away from the coast. According to Jing Ulrich, managing director and chairman for China equities and commodities at JPMorgan, foreign investors are increasingly moving inland, attracted by economic policy trends in China, favourable government incentives and a low-cost skilled labour force.
“Efforts to accelerate the development of inland regions have intensified in recent years as policymakers encourage the transfer of labour-intensive manufacturing into the nation’s inland provinces. This will raise household incomes and support efforts to rebalance the economy away from an excessive reliance on investments and net exports,” says Ms Ulrich.
“Thanks to relatively lower labour costs and various tax breaks, direct subsidies and land-use concessions, the growth in FDI flowing into China’s inner regions has exceeded that of coastal provinces since 2001. In addition, manufacturers operating in inland China may find affordable labour more abundant since migrant workers generally prefer to work closer to home.”
On average, the cost of hiring a college graduate in China is just Rmb3700 ($553) a month, or about one-seventh of the cost of hiring a graduate in the US. Global companies including Microsoft, IBM, Roche and Johnson & Johnson have all established R&D facilities in China and are reaping the benefits of not only lower costs but also accelerated product development cycles, according to Ms Ulrich.
The right credentials
The EMS industry has a particular set of needs that influences investment locations. Many companies in the sector have discovered that inland Chinese cities offer fertile ground for business.
“IT companies are moving to the hinterland primarily to cut costs to maintain profit margins and access domestic Chinese markets. In the second- or third-tier cities, they look for an established infrastructure that facilitates their logistics, a large city offering an abundant workforce for quick labour replacement when the worker turnover rate is high, and schools offering access to mechanical and technology-trained talent,” says Thomas Dinges, senior consultant of global EMS and original design manufacturer research practice for iSuppli Corporation.
“Quality university clusters in Wuhan and Chengdu have supplied mechanical and technology talent as well as facilitated R&D activities for multinational IT companies such as Intel, which has already expanded its R&D facilities in Chengdu over the years,” says Chang Liu, lecturer in international business at the Nottingham University Business School China.
Foxconn, in particular, opts for hinterland city locations based on government incentives, proximity to clients, and quality of relationships between the top executives and local governments, according to an IT veteran at the company who asked not to be identified. The availability of timely component supplies for an industry featuring high production and turnover rates is also crucial for Foxconn, he adds.
The veteran points out that Foxconn allows many of its young workers to work close to home to be near family, with the hope that social support networks will help them to feel happier, and help those with personal problems.
Foxconn’s product supply chain is long, potentially involving hundreds of unique components, and is generally labour-intensive. The company controls more than 10% of the material costs, handling mechanical components and services such as casings, surface treatment techniques, connectors and keypads, as well as assembly. Foxconn sources the remaining 90% of materials externally – these consist mainly of integrated circuits, display, memory and other electronic components, says Alen Lin, equity research analyst for BNP Paribas Securities (Asia).
“We do not expect the high-value portion of the supply chain, such as ICs, displays and other electronics components, to move with Foxconn [to the new plants], as these components are generally small and are manufactured in centralised locations given the high capital expenditure requirement,” says Mr Lin.
“The parts that need to move with Foxconn are the mechanical component manufacturing. These parts are generally more bulky and could complicate logistics if they were situated far from the assembly location.”
These technologically advanced industries are a shining beacon of hope for many inland Chinese cities, which are still lagging behind in developing more sophisticated and high valued-added industries such as IT.
While the government has not set up official incentive schemes for inland regions, politicians have offered Foxconn enviable packages, including government-built dormitories for workers, two-year subsidies with discounts on interest payment for plants, half-price 10-year water and electricity bills, and free land use for investments valued over $30m.
Meanwhile, some cities have revamped their local logistics networks, paving the way for Foxconn’s exports to the world. Wuhan is now connected to the coastal city of Guangzhou (near Shenzhen) by the world’s fastest train service, with trains reaching speeds of up to 194mph. The high-speed rail link has replaced Wuhan’s old export route through freight shipments on the Yangtze River to Shanghai, reducing export delivery times by up to seven days.
These economic goodwill gestures have certainly paid off for Wuhan. Since Foxconn commenced operations in Wuhan in 2008, the city’s export volume reached $773m in the first half of 2010, a 479.5% year-on-year increase.
One official at Chengdu Hi-tech Industrial Development Zone, which began its courtship of Foxconn in 2004, says the company’s $1bn investment in the photoelectric display industry, which the city is striving to develop will expand to a more impressive value chain incorporating thin film transistor-liquid crystal display (TFT-LCD) productions and creating 100,000 new jobs.
Henan Province, rich in minerals, will no doubt find itself another gold mine by successfully attracting Foxconn to set up the iPhone production lines and the accompanying jobs for its workers.
“We expect to transform Henan from low-value-added and heavy-industry-oriented industries into a high-value-added and IT-oriented province,” says Qingshu Li, president of Henan Provincial Bureau of Commerce.
iSuppli forecasts that Foxconn will account for more than half of the global EMS market revenue in 2011, from a 44.2% market share in 2009, due to increased orders from Apple for iPads and iPhones. iSuppli predicts that Apple will ship 12.9 million iPads in 2010, a number that will nearly triple to reach 36.5 million in 2011, while global iPhone shipments are expected to rise to 53.5 million in 2011, more than double the 25.1 million in 2009.
This means that Foxconn plants in Henan’s Zhengzhou, targeting a daily capacity of 200,000 phones in the first half of 2011, will be much more productive than Shenzhen’s Longhua plant, which currently rolls out 137,000 iPhones a day.
And at least 50 other Foxconn suppliers and peripheral companies will need to invest in the Henan region to underpin the industry. With up to 400,000 workers and industries to serve them, the regional capital city of Wuhan is set for a transformation. These factors will reveal the relatively obscure Henan Province to be a particularly attractive destination for foreign investors.
And when Foxconn arrives, it will not be long before other investors follow.