Foxconn to Build $8.8b Factory in China Despite Trump

Turning a deaf ear to President-elect Donald Trump’s call to move manufacturing to the U.S. – or face steep tariffs—Foxconn, the world’s largest technology manufacturer, recently announced its intention to build a new $8.8 billion factory in Guangzhou, China. The company has called the region an “investment treasure land.”

Canton Trade Fair. Image courtesy: Taro Taylor

Canton Trade Fair. Image courtesy: Taro Taylor

The new factory, a joint venture between Foxconn and Sharp, will produce large liquid-crystal displays (LCDs). Last year, Foxconn secured control of Japan's Sharp Corp. by investing $3.5 billion to acquire 66% of the company.

The new facility will focus on manufacturing large screen LCDs, in expectation of increased demand for Ultra High Definition TV sets, and will be operational by 2019.

In December 2015, Corning also announced the investment of $1.3 billion to build a factory in China to produce Gen 10.5 glass substrate for large LCDs.

The new Foxconn-Sharp factory will also produce Gen 10.5 glass (able to produce eight 65-inch LCD panels from a single piece of glass), including curved and flexible displays.

Apart from the usual cost savings of using Chinese labor, materials, and construction, Foxconn argues that the supply chain for high tech components is almost completely located in Asia, making it extremely costly and time consuming to ship them to the U.S. for final manufacturing and assembly.

Also, if Trump makes true on his intentions to raise tariffs on imports, then it should also include components such as raw materials, semiconductors, memories, LCDs, etc. That will, however, make manufacturing costs in the U.S. rise significantly and increase costs for consumers.

The biggest problem is the lack of high-end semiconductor manufacturing technology in the U.S., especially in LCD panels.

Back in 2010, the late Andy Grove, former Intel CEO, wrote in Businessweek:

American companies discovered that they could have their manufacturing and even their engineering done more cheaply overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

Grove went on to mention a friend who had joined a large VC firm as a partner: “His responsibility was to make sure that all the startups they funded had a 'China strategy,' meaning a plan to move what jobs they could to China. He was going around with an oil can, applying drops to the guillotine in case it was stuck.”

At that time, Asian manufacturers learned fast and started their own industry in key components such as LCDs, injection molding (a result of the massive investment in toy manufacturing in China), lithium-ion batteries, wireless cards, controller boards, flex circuitry, etc. American firms were only too happy to oblige, thinking they still had the high-end design and engineering of innovative products in their hands. But now Asian companies are leaders in those fields with their own products, and nobody can compete with them. With all those components being manufactured in Asia, who wants to import them to assemble the final product somewhere else?

In 2015, Reuters reported that the 2011 Foxconn agreement to make iPhones in Brazil only created a small fraction of the jobs the Brazilian government projected, mostly low skill assembly line jobs. “There is little sign that it has catalyzed Brazil's technology sector or created much of a local supply chain,” the report said. A Brazilian built iPhone costs about 20% more than one made in China.

Foxconn could make some small investments in the U.S. to appease Trump, and that will probably be enough to make headlines –or a tweet from the new president– praising the creation of more American jobs. Those factories, however, will be almost 100% run by robots, and monitored by only a handful of engineers. Additional jobs will be low-skill assembly work, leaving little room for skilled factory jobs.

It should be up to American companies to invest and bring manufacturing to the U.S. Andy Grove finished his article saying: “[…] the imperative for change is real and the choice is simple. If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”

Do you think the next four years will bring a boon to American electronics manufacturing? Let us know in the comments section below.

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