Foxconn’s New Manufacturing Plant in Wisconsin: A Huge Gamble on Uncertainty

摘要: On July 26th, Donald Trump announced that FOXCONN would invest $10 billion and open a new LCD plant in Wisconsin to keep its promise. What's Foxconn's consideration? What challenges does Foxconn have to face? What's the lesson for the Chinese manufacturing industry?

(Chinese Version)

On July 26th, Donald Trump announced that FOXCONN would invest $10 billion and open a new LCD plant in Wisconsin to keep its promise.

It is said that this is already the biggest foreign investment in the American business history. However, this is only the first part of Foxconn’s entire investment plan, which is expected to create from 3,000 more job opportunities to as much as 13,000. “He would make a great businessman anywhere in the world,” Donald spoke highly of Terry Gou, the founder and chairman of Foxconn.

Foxconn’s new plant in Wisconsin, a good thing for both Apple and the American manufacturing industry

For sure, Foxconn’s business would bring huge benefit to the American manufacturing industry and have significant demonstration and driving effect on the reshoring of the manufacturing industry to the US. Reviving the industry and alleviating the industrial hollowing might also become a major political achievement of Donald in his tenure.

For the US, the reshoring of the manufacturing industry would contribute to creating more job opportunities and restructuring the economic structure. Therefore, huge efforts have been put to attract high-quality foreign capital and manufacturing giants by the Donald administration. However, the challenges are also quite obvious: high labor cost and high automation degree.

Nevertheless, the American government has been pressuring Apple Inc. to bring the manufacturing business of Apple products back to the US since Obama administration, while Foxconn happened to be the biggest contract manufacturer and supplier of iPhone.

In this context, a Foxconn plant in the US would certainly help Apple bring part of its production capacity back and improve checks and balances with Foxconn. For example, Apple can cooperate with Foxconn to build new factories in the US, assign Apple’s executives and core technical personnel in these new plants and enhance its control over Foxconn. Besides, the new plant might have a demonstration effect on Apple’s contract manufacturers of other parts in its supply chain.

However, Apple came up with the idea to withdraw all its production lines in Asia back to the US as early as last year. However, no supplier showed any interest at that time, while Pegatron even officially rejected the offer. It was extremely difficult to complete the manufacturing process entirely in the US as the supply chain of the electronic manufacturing industry is too vast to move around, Tong Zixian, chairman of Pegatron Corp., once explained the reason why Apple’s suppliers were unwilling to open new plants in the US.

However, Foxconn’s decision might make many other Apple’s suppliers anxious, wondering if they should follow suit.

Besides, by bringing designers, engineers and plant workers together, Apple would be able to facilitate the communication among them, deepen their mutual understanding and potentially generate greater innovation, which is a good think for both Apple and the American manufacturing industry.

For Foxconn, opening new plants in the US is a necessary step in its industrial upgrading and transition. As a matter of fact, Foxconn has long been trying to get rid of its label as merely a “contract manufacturer”, let alone the potential brand premium and profit margin increase that a US plant could bring.

The recurring headache in the American manufacturing industry

Nevertheless, Foxconn’s new factory is far from enough to solve the recurring headache in the American manufacturing industry once and for all.

On the one hand, American companies have long been moving its manufacturing business overseas, keeping only R&D and design back home. As a result, the competitiveness of the American manufacturing industry has been declining since the 21st century, with fewer and fewer professional workers and technicians left.

On the other hand, the development of the manufacturing industry relies heavily on industrial clusters, while talents, technology and industrial chain infrastructure in the American manufacturing industry have already gradually been gone after the years of outflow of the industry.

Although political factors can affect global capital and investment in the short term, a certain set of economic rules will determine the long-term development and talent flow of the industry. After all, capital flows based on globalization and expansion, not political slogans.

For Foxconn, the problem with building plants in the US include: the lack of professional workers, raw materials, spare parts and supporting facilities, upstream supply chain and industrial cluster. Even if Foxconn could recruit enough professional workers, it could face an unbearable labor cost.

According to Die Welt, 1/4 of American factories have disappeared within the last two decades. It’s typical to have 200 startups in a town, each hiring around 50 employees. Therefore, it was no longer possible to see giant manufacturing factories in the US, Professor Friedman, author of World is Flat, once said.

Although Foxconn might be entitled to local, state and federal tax relief in the next few years, the hardest part remains how to recruit a large number of professional workers and win support from the industry chain. After all, industrial clusters are playing an increasingly important role in the manufacturing industry.

However, the region where the new plant will be established has nothing to do with Foxconn’s supply chain and industrial planning, let alone a fair number of professional workers and industrial clusters. In other words, Foxconn has to face not only many uncertainties, but also high infrastructure construction cost.

Therefore, Foxconn will have to start from the very beginning, train professional workers in the region and develop supporting industries, which might fundamentally facilitate the development of the American supply chain and create more job opportunities, whether directly or indirectly. Nevertheless, it is safe to say that Foxconn can bring more benefit to Wisconsin than the other way around.

Political gains might matter more than economic factors

In this sense, this new plant is more like a political gesture, than something decided after careful commercial consideration.

As a matter of fact, some research organizations pointed out that Foxconn’s move was a response to the increasing political pressure from the American government. In other words, it’s merely a matter of expediency. From the business perspective, it’s not at all rational to establish an LCD plant in the Midwest.

Moreover, it remains uncertain whether Americans can adapt to Foxconn’s corporate culture. After all, it’s no easy thing to get American workers go back to the production line and work like their counterparts in China, Vietnam and South East Asia.

Without taking into full consideration driving factors of any investment decision-making process, including industrial connection, demands, environment and industrial landscape, Foxconn’s decision does have a flattering touch.

While Apple bears strong burden from the Donald administration, Foxconn relies heavily on Apple. To win more orders from Apple, it has no choice but to share its burden. Besides, answering Donald administration’s call might help Foxconn go further in the American market and build up its brand and international reputation.

However, it’s worth mentioning that although the American manufacturing industry is on the decline, the US is still world-leader in terms of R&D, technological accumulation and industry chain discourse power. Therefore, Foxconn has to rely on the American manufacturing industry and its technological accumulation in order to evolve into a manufacturing giant,

Due to strong manufacturing genes, most Foxconn workers are like “tiny screws” on its production lines. Seldom is Foxconn involved in the R&D upstream. Still, Foxconn might be able to attract leading tech talents, get further involved in the R&D process upstream and improve its innovative ability.

On the whole, the development of the manufacturing industry is strong affected by industrial clusters. Therefore, risks and opportunities co-exist in Foxconn’s adventure in the US. After all, it doesn’t mean that Foxconn can possess global supply ability simply by entering the US market. On the contrary, if Foxconn fails to adapt and elevate itself, it might easily be replaced by rivals with high-level industrial technology.

After the tax cut, many companies are willing to enter the US market. Although it may have a flattering touch a little bit, it has already become a global trend among manufacturing giants.

For example, Samsung Electronics announced earlier this year that it would invest $380 million and establish a home appliance manufacturing plant in South Carolina. This February, Intel announced that it would invest $7 billion to establish semi-conductor plants and manufacture 7-nanometer computer chips within the next three to four years.

On the one hand, this global trend might, to a degree, reflect the global demands to optimize resource distribution; on the other hand, it reflects these enterprises’ willingness to answer government calls and thus being endowed government subsidies. In addition, it might coincide with these enterprises’ needs to explore new development directions, improve their global competitiveness and attract leading tech talents.

What lesson can the Chinese manufacturing industry draw?

As we all know, the manufacturing industry has always been the very foundation of any country’s economy and an important guarantee of steady employment and people’s well-being. This may also help explain why the Donald administration took great efforts (including tax cut, lowering cost and favorable policies) to attract manufacturing giants.

During the 2016 Two Sessions, Cao Dewang, Chairman of Fuyao Glass, proposed that the Chinese manufacturing had been gradually losing its advantage due to rising labor cost, shipment cost, land cost, tax burden and raw material price. In comparison, China’s neighboring countries had been gradually gaining their advantages thanks to demographic bonus and late-development advantages.

Major costs, including energy cost, land cost, logistics cost and financial cost in the US are all much lower than those in China. The only exception is labor cost. He pointed out that China’s average land price was nine times higher than that in the US. If we take into consideration customs duties, we may find that manufacturing giants such as Foxconn could gain higher brand premium by manufacturing products in the US. It is in this sense that establishing plants in the US has become an increasingly cost-effective and feasible choice.

Statistics also suggest that part of investment into the manufacturing industry has moved to the US. According to the statistics from the Ministry of Commerce, manufacturing industry has surpassed financial industry and become the major investment target of Chinese enterprises in the US by 2015. Wang Shouwen, deputy Minister of Commerce, revealed that China’s foreign capital utilization scale throughout 2016 equaled to that of 2015. In other words, China’s attraction to foreign capital has ebbed away.

Furthermore, the manufacturing industry has always been stigmatized in China, giving people the impression of being “low-end”, “lagged-behind” “ignorant of workers’ well-beings”. Therefore, fewer Chinese young people are willing to enter the manufacturing industry. While tax burden in the real economy is comparatively high, margin rate is surprisingly low As a result, many people are unwilling to enter the real economy. Zong Qinghou, chairman of Wahaha Group, once complained.

Declining willingness towards the manufacturing industry and the unfavorable overall development environment towards real economy have hold many foreign investors wondering if it was the time to move plants to countries with more favorable development environment.

One of the reasons that the Chinese manufacturing industry fails to achieve industrial upgrading and transition from labor-intensive model to technology-intensive model, is that Chinese manufacturers didn’t put their revenue into advanced technology R&D or invest in other burgeoning industries such as real estate.

Today, it’s still unclear which industry can replace the real estate industry to boost economic growth in China. Moreover, an increasing number of Chinese clothes and toy manufacturers have followed the US’s path and moved their plants to countries with lower cost, such as Vietnam.

Besides, while consumer electronics manufacturers are also moving out of China, others are partially replacing workers with robots on production lines to reduce cost. In this sense, Donald administration’s call for the reshoring of the manufacturing industry is more like a warning to the Chinese manufacturing industry.

Unlike the US, which moved away from the manufacturing industry after its industrial base and technological development level reached a certain level, China’s manufacturing is declining because both talent, labor and capital are eyeing on more promising and profitable industries such as real estate and internet. In other words, proper respect towards the real economy and the manufacturing industry is lacking in China.

While the Donald administration has been actively attracting global manufacturing giants, major companies such as Samsung, Toshiba, Sony have all been pondering on the possibility to reduce their investment in China and turn their eyes on countries with even lower cost.

At the turn of Industry 4.0, if the development environment, cost and technology level in the China manufacturing industry fail to facilitate the development high-end manufacturing industry, manufacturing giants might increasingly turn to other countries with lower cost. Although they might not completely give up the Chinese manufacturing industry, they’ve already been looking for other alternatives.

As demographical bonus is dropping, it’s no longer useful to attract foreign capital by low labor cost and rich labor resource. Therefore, it is high time relevant parties stop to figure out the fundamental problems with the Chinese manufacturing industry and how to fix them.

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[The article is published and edited with authorization from the author @Wang Xinxi. Please note the source and hyperlink when reproduce.]        

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost. 

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