From iPhones to computers, the manufacturing powerhouses behind many of the world’s electronics are preparing to move chunks of production away from China and toward such far-flung locales as Eastern Europe and Southeast Asia.
Hon Hai Precision Industry Co (鴻海精密) chairman Terry Gou (郭台銘) — who became a billionaire making Apple Inc gizmos — started the ball rolling when he opened a US$10 billion display plant in the heart of the US, a move that now seems prescient.
As tensions between the world’s two largest economies escalate, a growing cohort of his Taiwanese peers have drawn up plans to shift production abroad or are devising contingencies for costly new facilities.
Taiwan’s largest corporations form a crucial link in the global tech supply chain, assembling devices from sprawling Chinese production bases that the likes of HP Inc and Dell then slap their labels on. In the past week, corporate leaders, including the chief executive officers of Pegatron Corp (和碩) and Inventec Corp (英業達), said on earnings calls that they have come up with ways to mitigate the effects of a trade war.
“We have kicked off a mechanism to reduce our current risks stemming from trade disputes,” Pegatron chief executive officer Liao Syh-jang (廖賜政) said.
In the short run, the iPhone maker might add capacity in the Czech Republic, Mexico and in Taiwan. Longer term, the company might set up shop in India or Southeast Asia, chief financial officer Charles Lin (林秋炭) added.
The impending moves by Taiwan’s six largest contract electronics makers — Compal Electronics Inc (仁寶), Hon Hai, Inventec, Pegatron, Quanta Computer Inc (廣達) and Wistron Corp (緯創) — echo a trend that has quickened in recent years. Rising labor costs have led many to consider alternatives, including setting up smaller-scale facilities elsewhere to get closer to regional markets.
Now, they can add capacity in existing non-Chinese facilities when necessary, Quanta and Compal, which make laptops for most of the world’s major brands, said.
Compal vice chairman Ray Chen (陳瑞聰) said assembling notebooks outside China could cost at least 3 percent more per unit.
However, the alternative is unsavory: The firm’s gross margin stood at slightly more than 3 percent last quarter — wafer-thin profitability that tariffs could wipe out. It is an industry-wide phenomenon: rival Quanta’s gross margin was about 4.5 percent.
“We are making dynamic adjustments so even if new tariffs on the US$200 billion Chinese exports hit, we will be able to minimize damage,” Inventec chief executive officer David Ho (何代水) told analysts on Tuesday.
Ho oversees the unit that makes AirPods and HomePods, as well as smart speakers for Sonos Inc.
To be sure, many contingency plans have not been finalized, and executives are wary about committing, given the challenges in moving production permanently, both logistical and political. Many Taiwanese firms are reluctant to provoke China, which for the most part has been a welcoming host to corporations from Taiwan.
For now, there are few signs of a full-scale exodus.
Inventec for one is adding at least one new facility in China that is to begin production next year, Ho said.
However, US President Donald Trump’s sabre-rattling is definitely making them think.
Quanta chairman Barry Lam (林百里) said his company can boost manufacturing in California and Tennessee, or Germany.
Compal could do the same for Mexico, Poland, Taiwan or Vietnam, Chen said.
“Amid the tariff rhetoric, moving investment south is a solution that makes sense for companies as Chinese incentives gradually fall, the Taiwanese government promotes its southbound investment policy and Chinese labor costs get increasingly higher,” said Angela Hsieh (謝涵涵), regional economist for Barclays Bank in Singapore.
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