China Set To Lose Foxconn to Indonesia

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SHANGHAI – Reuters has reported that Taiwan’s Foxconn Technology Group, the major supplier of Apple’s iPhones and iPads, is set to relocate their high-end manufacturing to the United States and low-end manufacturing to Indonesia. As manufacturing prices in China rises, and labor unrest increases, Foxconn is looking to diversify its supply chain.

During the technology group’s annual party last Sunday, Chairman Terry Gou told employees that “the U.S. is a must-go market.”

Gou further stated that customers and partners have previously asked when Foxconn would open shop in the U.S. to access its advanced manufacturing potential. Meanwhile, continuing its diversification away from China, Indonesia will become a priority this year due to its low costs, yet modest manufacturing skills. We have also written about the potential for India to take on some of Foxconn’s production in a piece titled “Could India Manufacture the iPad?

Chris Devonshire-Ellis of Dezan Shira & Associates comments that “it brings home the reality that China is no longer a manufacturing or sourcing hub for global MNCs, and especially so for the IT sector. This trend will continue to grow and will affect other industries such as textiles and light manufacturing. We have already been seeing this in Vietnam and now this is spreading to other ASEAN nations. Indonesia is attractive for Foxconn due to its large labor market.”

Reuter’s further suggests that once situated in the U.S., Foxconn could take advantage of geographical proximity to develop new deals with partners such as Apple as they create new technology.

Foxconn’s interest in Indonesia is clear. Indonesia is one of the world’s most populous nations with some 260 million inhabitants. It is a member of ASEAN and as such has tax treaties and free trade agreements with China – meaning certain products can be made at comparatively cheaper wage levels and then exported to China duty free. Details of ASEAN’s FTA with China can be found on our ASEAN Briefing website here.

According to Indonesian government officials, Foxconn intends to invest US$10 billion over five years in conjunction with their Indonesian partner Erajaya Swasembada. The Indonesian government has reacted positively and will offer Foxconn a lucrative tax package with the goal to kick-start the plan (Foxconn has yet to confirm these details).

“We have seen over the past five years a shift in production away from China to ASEAN and India – which is why Dezan Shira & Associates has expanded out of China and now has offices in these regions,” Chris further stated. “We have been in India for six years now and in ASEAN for the same amount of time. As infrastructure in countries such as Indonesia, Vietnam and India improves, the manufacturing credibility gap between these countries and China’s productivity and previously low labor costs is now being eroded. If companies are able to bring production levels up to 70 percent of what can be achieved in China, lower wages in ASEAN and India dictate that it makes better economic and financial sense to relocate. This is exactly what Foxconn are doing.”

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or download the company brochure.

You can stay up to date with the latest business and investment trends across Asia by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.

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11 thoughts on “China Set To Lose Foxconn to Indonesia

    Renaud says:

    “China is no longer a manufacturing or sourcing hub for global MNCs, and especially so for the IT sector” – Maybe you mean that it is losing a bit of its preeminence, but it is still by far the primary sourcing hub (especially for electronics)?
    If we look at exports of finished electronic products (not components), I would be surprised if any country came even close to China.

    @Renaud: No, we mean that China is losing its pre-eminence, period. You categorize “finished” products and not components. Foxconn (and others such as Pou Chen in global footwear) have developed manufacturing hubs in China made up of several different manufacturers all within the same park. They feed the main Foxconn assembly plant. But those smaller component manufacturers are now faced with wage hikes of 15-20% per annum, and union issues over workers. They are being bled. So it is the component manufacturers that are under pressure and now struggling and cannot survive – and that means the Foxconn Mothership cannot either.

    The China focused consultants don’t like this news because all they have to sell is China, and they’ve been in denial the past five years. But it is happening and this is why my firm is in India and Vietnam and why I write this from (here’s a clue) Surabaya in Indonesia.

    Look at the ASEAN FTA with China. We provided a link in the main article. It means that ASEAN members can sell to China their product (if applicable under the FTA) at zero duty. If China consultants are not aware of what that means then they’d better find something else to do. The bottom line is this: You manufacture in China to service the China market. You manufacture in India or ASEAN (or maybe Mexico) to service the global market. The game has changed, and if you are not on top of the game, you will get run over. It’s not been an overnight thing, but it is an increasing trend, and those China consultants that don’t start thinking outside their comfy boxes will get a sharp and rude awakening, as will manufacturers that do not start to shift their production elsewhere into Asia. China is no longer the worlds manufacturing hub. Asia is.

    Xin Nian Hao and invest in some research before its too late. China for China. Asia for Global.
    Best wishes
    Chris

    Jamie Gwynn says:

    Strong words from CDE. Feisty as always. That said many of us have followed his firms progression over the years and if he’s right the rest of us better start a radical rethink.
    It is hard to argue with Chris when he’s set up in India and Asia and seems to be prospering with clients and a alternative China portfolio.
    Maybe we should listen for a change instead of trying to resist the message. If we add bird flu, pollution, rising costs and punch ups with neighbors it isn’t positive after all.
    It seems valid food for thought for the new year of the horse whether us China Hands like it or not.
    Disturbing yet a challenge and if Foxconn really are going it may be the start of an exodus.
    I’m uneasy. I suspect many “China Hands” may be too if we’re honest.

    John Lone says:

    @Chris Devonshire-Ellis: Thank you very much for a thoughtful insight about china and the rest Asia. I am 100 percent agreed with assessment. Samsung and other big companies are already diverse their manufacturing bases away from china to else where or back in the US due to increasing wages and unhealthy business environments. Chinese want to pay more but they do not know how to innovate or hold on into those important key manufacturing bases, they are just imitators and become very aggressive on territorial claims against its neighbors.

    @Jamie, John: Thanks for your words. Yes, it is happening. Many of the China consultants hate this as it is competition for them and they’ve been in denial. Much of the media content written about China has also been tardy in picking up on these trends. I wrote about the dangers in being too China-Centric here: https://www.china-briefing.com/news/2012/04/13/has-your-china-business-become-too-china-centric.html
    I was in Manila last week and that too is booming – a lot of FDI going in there that is either leaking from China or is new production that ten years ago would have gone to China but today is not. China is becoming hard work for too small margins and the global supply chain related manufacturers are looking for options now. As I said, China for China. Asia for Global.
    – Chris

    Renaud says:

    @ Chris: “China for China. Asia for Global.” is a motto for big companies.
    Maybe I see this differently because we service only SMEs.

    So, from the point of view of the SME importer (who doesn’t buy from Foxconn), I will write again that China is by far the pre-eminent sourcing hub for electronics. If you walk the electronics trade shows in HK you will see that at least 95% of the booths offer only made-in-China products.

    I am not debating the fact that things are changing. I am adding a bit of nuance to this article.
    You write that China is “losing its pre-eminence”. That sounds pretty dramatic. Does it mean other countries such as Indonesia already export more electronics? Or maybe that China’s export values of electronics are going down? Is this happening? I don’t think so.

    I also don’t understand your attack on China consultants. Aren’t you trying to be more controversial than needed?
    For the record, what we sell is mostly in China, but we’ve been selling services in Vietnam and India continuously for more than 5 years. I know there are other places in Asia and I know they are not just for holiday…

    Renaud says:

    By the way, not all China-based companies are “in denial”.
    We are organizing a conference soon on the topic “Profitable Sourcing – Strategies to survive in a more expensive China” with the European Chamber.
    We’ll certainly evoke the Foxconn case in the panel discussion. But we’re also inviting an economist who will give us a balanced view of the macro trends.
    More information on http://www.europeanchamber.com.cn/en/upcoming-events/6367

    Hey Renaud – Don’t take it personally huh? As for ‘attacking’ China consultants, not at all – on the provisio that they understand what is going on. Far too many however do not. Knowledge of the ASEAN FTA with China is sorely lacking amongst many. Even well established blogs about China Law still go on about topics done and dusted and well understood 15 years ago. Yet this data is still wheeled out and regurgitated as something new. This is old news.
    The “new” news is what’s happening. And that means global production is shifting. And don’t shoot the messenger. This is Foxconn we’re talking about. And I run a practice that deal with these issues – 12 China offices, 2 in Vietnam, 3 in India, 1 in Singapore and we’re looking at Indonesia and Philippines. Why do I do that? Why do I spend money on that? And why is it sustainable? My firms business is increasing in China – don’t get me wrong – but as an overall percentage compared to the rest of Asia is decreasing. And I deal with SME’s too.
    Food for thought.
    Best wishes
    Chris

    Renaud says:

    I will agree that the ASEAN FTA, and its probable consequences in the next ten years, are not something people based in China talk about when having a beer 🙂

    The thing is, the ASEAN-China FTA is applicable now and will be expanded next year. That’s why manufacturing is moving to cheaper Asian locations within ASEAN – because you can export that cheaper-than-China production back into China duty free.
    I wouldn’t talk about over a beer either but it is astonishing how many people still don’t get it or realise that bilateral or multilateral tax structures also dictate where manufacturing goes. – CDE

    Ash Bardwarj says:

    An interesting article, well argued. My view are similar to those of the author.

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