Foxconn and Henan Province have been frequently discussed in recent years, with some arguing that Foxconn, representing low-end manufacturing, should leave, while others insist that it cannot depart due to its economic significance. These two factions often engage in heated debates.

News on the internet about "Foxconn withdrawing from Zhengzhou and shifting production to India, leaving millions of employees facing unemployment" has been rampant, with recent rumors claiming that "Foxconn panicked and returned to Zhengzhou with $1 billion."

So, which news is true? Today, let's find out. It must be said that the above media reports are adept at the "art of telling half-truths." They jump back and forth without revealing the actual situation. In brief, Foxconn has indeed shifted some of its mobile phone manufacturing to India, but it has not completely closed its Zhengzhou factory. The $1 billion investment in Zhengzhou by Foxconn is not for traditional manufacturing but for new energy vehicle-related businesses. The claim that Foxconn has fully returned is not true.

Should Foxconn Stay or Leave?

In the first half of this year, Henan's exports amounted to RMB 200.83 billion, a decrease of 19.1%. Exports of electromechanical products declined by 30.4% to RMB 111.28 billion.

In the first quarter of this year, Henan's mobile phone exports plummeted by 60.7% year-on-year, with export values also dropping by 61.7%. Foxconn was the most significantly affected, raising questions about whether it is indeed correct for Foxconn to remain.

However, neither Foxconn nor Zhengzhou share this sentiment. Those destined to leave cannot be retained, while those with room for development will find opportunities. So, how is Foxconn faring overseas?

Globalization: Relocation and Expansion Simultaneously

In August 2023, Foxconn planned to invest $600 million to establish two factories in Karnataka, India, with $350 million allocated for an Apple component factory. In December 2023, Foxconn announced an additional investment of at least $1 billion on top of its existing $1.6 billion commitment to expand Apple device production capacity in India. In June 2024, Foxconn invested approximately $383 million in a project in Bac Ninh, Vietnam, for the production, assembly, and processing of printed circuit boards. In July this year, it was reported that Foxconn would invest $551 million in two new projects in Vietnam.

Currently, Foxconn's performance in Vietnam stands out, with its 2022 annual report showing a post-tax profit exceeding RMB 2.1 billion for its Vietnamese factories. Factories in other markets are still in the investment and construction phase, generating no profits yet. Although RMB 2.1 billion pales in comparison to Foxconn's domestic operations, which often involve investments in the tens of billions, essential investments in new markets are necessary.

According to Caijing Magazine, the labor cost for an average worker in the Apple supply chain was between RMB 6,000 and 6,500 in China's Pearl River Delta region in 2023, compared to RMB 3,200 to 3,600 in Vietnam and approximately RMB 1,500 per month in India. The shift to Vietnam, India, and other countries was expected. However, some reports suggest that Vietnam's average wage costs have also risen to RMB 4,000-5,000. Determining which figure is closer to the truth is challenging, but it is undeniable that labor costs in Vietnam continue to rise, fueled by a property speculation boom and a shortage of labor due to widespread recruitment by various factories. The average overtime hours in tropical countries are also lower than those in temperate countries.

However, the potential consequences have not deterred companies from seeking gold in Vietnam, as the Vietnamese consumer market is still in its infancy, indicating significant growth potential. With a population of over 100 million, Vietnam's total vehicle sales last year were only 276,000 units, compared to approximately 1.2 million in Japan, which has a similar population. Even when compared to Thailand, Vietnam lags behind, with Thailand boasting a vehicle ownership rate of around 270 per 1,000 people, while Vietnam's rate is approximately 50 per 1,000. The logic behind investing in India is similar, as India is currently transitioning from feature phones to smartphones, with 4G networks just beginning to proliferate. Apple's market share in India is less than 2%, making it crucial for the company to increase its presence there rather than solely focusing on profit margins.

Whether it is Foxconn or Apple driving the relocation of some electronics industries to these countries is less important; the result is the same. The traditional labor-intensive electronics industry began relocating around 2015, and not just Foxconn but also leading domestic contract manufacturer Luxshare Precision has established production bases in Vietnam and Thailand. This cost- and market-driven industrial relocation is both unstoppable and unnecessary to impede.

Therefore, rather than debating whether traditional contract manufacturing facilities should remain, Zhengzhou and Foxconn have forged a new path by vigorously developing new energy vehicles and battery projects to find the next growth trajectory.

Another crucial point to understand is that global enterprises ultimately value strength, and relocation and expansion occur simultaneously. Among Apple's 190 major suppliers, the number of companies headquartered in Mainland China increased despite some exits. Notably, new entrants are primarily electronic component, new material, and ODM manufacturers, while exits were primarily in metal structural components.

It would be simplistic to conclude that Foxconn's closure of factories and overseas investments signify a complete departure from China. As Terry Gou, Chairman of Foxconn's parent company Hon Hai Precision Industry, said, any sizable industry will have multiple suppliers, and they will continue to expand globally through strategic layouts and the BOL model.

Both Zhengzhou and Foxconn Are Evolving

Zhengzhou still needs Foxconn, but it is no longer solely reliant on Foxconn as it was a decade ago. Zhengzhou has begun to export new products on a significant scale, including electric vehicles (EVs), which saw a 107.5% increase in exports to RMB 2.33 billion, accounting for 65.6% of Henan's new product exports. Official data shows that in the first half of this year, automobile exports from Henan amounted to RMB 14.73 billion, roughly a quarter of mobile phone exports. However, the automotive industry holds significant growth potential, with successes in Xi'an and Chongqing attracting even Foxconn.

Currently, numerous new energy vehicle projects, including those from BYD, SAIC Motor, Yutong, and FAW, have settled in Zhengzhou. According to the Zhengzhou Municipal Government's work report, Zhengzhou aims to produce over 700,000 new energy vehicles in 2024, driving total automobile production to exceed 1.4 million units and achieving an industrial scale of nearly RMB 400 billion.

01. Automobile Manufacturing: Foxconn's Long-Term Strategy

Foxconn's involvement in new energy vehicles is not a whim but a nearly two-decade strategic layout with promising outcomes.

Foxconn previously collaborated with NXP Semiconductors to develop a new-generation intelligent connected vehicle platform, encompassing electronic and electrical architectures, cybersecurity platforms, and seven application areas. Foxconn's subsidiary FIH Mobile (Hong Kong) Limited established an operation base in Hangzhou in April 2023, integrating Foxconn's supply chain and Zhengzhou factory to support vehicle manufacturing by its shareholders Hon Hai and Yulon Motor. By November 2023, Foxconn reported that 51 electric vehicle projects were underway, with 14 potential customers and 23 projects at various stages of negotiation.

Foxconn has high hopes for its Zhengzhou new energy vehicle base, aiming to "establish a world-class lighthouse factory showcasing manufacturing services for renowned domestic and international automotive brands." According to Hon Hai Group's roadmap earlier this year, Foxconn prepared for the mass production of its self-designed Model B vehicle by the end of the year, though rumors suggest it could be another brand's model.

Hence, Zhengzhou recently signed a RMB 1 billion investment agreement with Foxconn. The agreement outlines three specific projects:

1. Investment in a new business headquarters building in Zhengzhou, with phase one located in Zhengdong New Area, covering approximately 700 hectares and totaling RMB 1 billion.

2. Establishment of an electric vehicle prototyping center in the Airport Economic Zone.

3. Deployment of solid-state battery projects in the Airport Economic Zone.

02. Zhengzhou Foxconn's Transformation into a Technology and Capital-Intensive Giant

Foxconn's activities in Zhengzhou extend beyond automotive projects, as it transforms from a labor-intensive to a technology and capital-intensive giant.

Within Foxconn's Zhengzhou Science and Technology Park, a futuristic "Factory of the Future" hides within an unassuming building. Featuring flickering LED screens, neatly arranged production lines, and robots moving amidst them, the entire production process, from raw material selection to product assembly and final inspection, can be fully automated. Known as "Lighthouse Factories," these facilities represent the pinnacle of intelligence and digitization in global manufacturing. Since the first selection in 2018, 153 "Lighthouse Factories" have been recognized globally, with 62 in China, including Foxconn's Zhengzhou Smart Interconnected Workshop.

After upgrades, the Smart Interconnected Workshop achieved a qualitative leap in smart manufacturing, with a 102% increase in production efficiency and a 27% improvement in overall equipment effectiveness (OEE), making it a global leader in manufacturing trends. "Lighthouse Factories" are not simply "unmanned factories"; instead, they replace humans in high-intensity, high-risk roles while still requiring skilled technicians.

Foxconn Zhengzhou Science and Technology Park's job postings reflect its transformation from a labor-intensive to a smart manufacturing enterprise. Positions are primarily for engineers in areas such as mechanism development, electrical development, project management, and data acquisition, requiring candidates with bachelor's degrees or higher in automation, machinery, computer science, or related fields. For Henan, a populous province, attracting high-quality STEM graduates is not a concern.

In March 2023, a RMB 2 billion smart warehousing project began construction in Zone M of Foxconn Zhengzhou Industrial Park. Upon completion, it will become an industry-leading smart logistics and warehousing base, achieving full automation, information automation, and refined management, enhancing warehouse management efficiency and injecting new momentum into Henan's goal of becoming a modern logistics powerhouse.

03. AI Servers Are Not Foxconn's Future

Some experts are skeptical about Foxconn's automotive ambitions, citing its relatively weak foundation and slim profit margins in domestic automotive contract manufacturing. They argue that Foxconn's rapidly expanding AI server business under its subsidiary Industrial Internet Co., Ltd. (FII) may hold more promise.

While FII has secured stable business through partnerships with companies like NVIDIA and established a presence in the AI server market, these collaborations have not significantly boosted its profit margins. Financial reports show that FII's gross margins were 8.35%, 8.31%, 7.26%, and 8.06% from 2020 to 2023, while net margins were 4.04%, 4.56%, 3.92%, and 4.41%, respectively.

Curiously, FII's revenue declined by 6.9% in 2023, a year when AI servers were in high demand. This raises doubts among investors about sustaining a 50% annual growth rate by 2030.

In reality, AI server manufacturing can be profitable. Leading domestic server company Inspur Information adopts a brand-focused service model, leveraging core patents and technological barriers to maintain gross margins above 10%. In contrast, FII relies primarily on OEM manufacturing, and despite occupying roughly 40% of the global AI server market, it only achieves a gross margin of around 5% in its cloud computing segment. For FII, focusing on scale and volume in the short term seems more realistic.

Currently, Foxconn's most promising venture lies not in AI-related businesses but in the new energy vehicle supply chain. Foxconn's decision to establish a new energy vehicle center in Zhengzhou underscores its optimism about the region's potential. Cost is never Foxconn's sole consideration; growth potential is just as crucial.

Closing Thoughts

Geopolitical risks undoubtedly impact Apple and Foxconn, but until these risks materialize, they primarily add to cost considerations. More practically, Zhengzhou needs Foxconn, and Foxconn cannot fully abandon Zhengzhou. Shared interests can foster long-term collaboration. Rather than dwelling on lost opportunities, grasping the next growth drivers is paramount.

Foxconn and Zhengzhou are inseparable.

References:

The Worst Nightmare for Apple's Supply Chain Has Come True - Source: Chief Innovation Insight

Recreating a 'Foxconn' in Henan Province - Source: Zhengguan News

Foxconn's Return to Henan: More Than Just a Story - Source: Benyuan Finance

How Long Can Industrial Internet Co., Ltd.'s Growth Last? - Source: 36Kr Pro

Is Technology the Essence or Merely the Veneer of Industrial Internet Co., Ltd.? - Source: Yiou