China, no longer the ‘Factory of World’

In the last decade, China earned the sobriquet ‘factory of the world’. Today, China is no longer the ‘factory of the world’. The iPhone-maker and a key supplier to Apple Inc. and a dozen other tech giants, Foxconn declared that China’s time as the factory to the world has finished because of the trade war.

The company plans to split the Chinese market and the US with gradually adding more capacity outside of China, the main base of production for gadgets from iPhones to Dell desktops and Nintendo Switches. Production outside China is now more than 30 per cent, up from 25 per cent last June.

The rate will increase as the company moves more manufacturing to Southeast Asia and other regions to avoid escalating tariffs on Chinese-made goods headed to US markets.

“No matter if it’s India, Southeast Asia or the Americas, there will be a manufacturing ecosystem in each but China’s ‘days as the world’s factory are done’,” said Young Liu, Chairman, Hon Hai Precision Industry Co. – known also as

Foxconn during the announcement of financial results on August 12.

Today, China contributes almost 20 per cent to world GDP and is basically the fulcrum of the global supply chain. According to German research supply chain consultant Kloepfel Consulting, “every third company has Chinese customers and 81 per cent of the companies rely on Chinese suppliers”. In addition to the wage advantage that China offered, it has also over the years built top of the line manufacturing facilities and infrastructure and invested heavily in research and development, enabling it to become the supply chain hub of the world.

Due to intensifying trade tensions between China and the US, device manufacturers are diversifying their production bases away from China. Last year, Liu had said that Apple’s most prized product, the iPhone, can be made outside China if needed. Liu’s comments affirm a growing feeling that the China-centric electronics supply chain will fragment over the longer term.

Taiwanese major Foxconn has been shaking up its traditionally China-focused operations. Hon Hai is among Apple assembly partners that plan to expand operations in India helping the iPhone maker grow its presence in the country of 1.3 billion and shift some of the US company’s supply chain outside of China as trade ties between the US and China continue to sour.

In India, Foxconn has already started assembling iPhone XR and iPhone 11 at its Chennai manufacturing plant while iPhone 7 is being assembled by Wistron in Bengaluru. The global mobile manufacturing giants Samsung, Foxconn and iPhone maker Pegatron have applied for the Centre’s production-linked manufacturing scheme for electronics in the country, informed Union Telecom and IT Minister Ravi Shankar Prasad on August 1.

China’s weakening global position is a blessing in disguise for India to attract more investment. Uttar Pradesh, which has a population the size of Brazil, is already forming an economic task force to attract firms keen to ditch China. India is also readying a pool of land twice the size of Luxembourg to offer companies that want to move manufacturing out of China, and has reached out to 1,000 American multinationals, Bloomberg reported in May.

Multinationals began moving production out of China gathered pace with increasing US-China trade tensions increased in recent years. Since June 2018, a month before the trade war began, the US goods imports from Vietnam have soared by more than 50 per cent and those from Taiwan by 30 per cent, according to calculations made by the South China Morning Post newspaper.

Japan created a $2 billion package for companies who would like to shift production back to Japan and $218.5 million for those seeking to move production to other countries.

With Covid-19 infecting millions across the world, China is facing an unprecedented global backlash that threatened its reign as the world’s factory of choice. Since the onset of the virus in December 2019, manufacturing activity in Wuhan, the epicentre of the virus came to a complete standstill, impacting businesses and even economies across the globe.

Since most of the companies across the world are dependent on China for a variety of products, the shutdown in China impacted them severely. It also brought to fore the high risk of having a concentrated or minimally diversified supply chain. India has sensed an opportunity and is keen to make inroads to a space it hopes China will vacate sooner rather than later..