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Foxconn planning for 'inevitable' split between US-China markets

30% of Apple supplier's capacity now outside of China due to trade tensions

Foxconn has been ramping up its production capacity in a number of countries outside China, including India and Vietnam.   © Reuters

TAIPEI -- Foxconn, the world's largest contract manufacturer and Apple's most important supplier, said nearly one-third of its production capacity is now outside of China, a figure that will likely keep growing due to the "inevitable" decoupling of Chinese and American supply chains.

"The global trend toward a G2 [group of two] is inevitable. How to serve the two big markets is something that we've always been planning for," Foxconn Chairman Young Liu told an investors conference in Taipei on Wednesday, referring to the U.S. and China.

Liu said in addition to Foxconn's investment in the state of Wisconsin two years ago, the company has been increasing capacity in Mexico, Brazil, Southeast Asia and India to brace for further developments between the world's two largest economies. Foxconn has iPhone assembly capacity in India, where it makes the iPhone XR, the model launched in 2018, and recently began making the iPhone 11, the flagship model introduced in September last year. Foxconn also expanded its manufacturing capacity in Vietnam last year.

Foxconn is not the only tech supplier with its eye on India. Rival iPhone assembler Pegatron setup a subsidiary in the country last month to start building up its manufacturing capacity there. Smaller rival Wistron, which recently sold one of its iPhone facilities to emerging Chinese competitor Luxshare Precision Industry, announced on Wednesday that it plans to inject $45 million into its India facilities.

Foxconn, which also counts HP, Dell, Cisco, Nokia, Google and Tesla as its clients, has manufacturing footprints in 16 countries and was one of the earliest tech suppliers to respond to U.S.-China trade tensions. The company has moved the majority of its server and networking-related production away from China since 2018, when the Trump administration slapped punitive tariffs on certain Chinese imports. Foxconn, one of China's top exporters and employers, also raised its non-China production capacity from 25% in June last year to more than 30% currently.

The coronavirus, however, has slightly disrupted Foxconn's plans for production diversification this year. "There are a lot of uncertainties and many clients also have readjusted their production plans," Liu said.

"The forming of two sets of supply chains in the world is an inevitable trend in the coming future," he added. While India and Southeast Asian countries will become regional manufacturing hubs, he continued, "there will be no country to fully replace China as the global manufacturing powerhouse."

Liu's comments come as relations between the U.S. and China have turned even icier. Beijing this week sanctioned 11 U.S. citizens in retaliation for similar measures by Washington against Hong Kong and Chinese officials. And last week, U.S. President Donald Trump signed an executive order to ban Chinese apps TikTok and WeChat on national security grounds.

Apple, which contributes more than 50% of Foxconn's total revenue, could take a hit from Trump's ban on WeChat in the Chinese market, as users there say they would be willing to give up their iPhones in order to keep using the popular messaging app.

The geopolitical uncertainties further cloud the sales outlook for Apple's upcoming 5G iPhones, which already face production delays due to coronavirus.

Foxconn's net profit for the quarter through June grew 34% on the year to 22.88 billion New Taiwan dollars ($779 million), with revenue reaching NT$1.12 trillion, the second-highest for the same quarter in the company's history. Foxconn attributed the results to subsidies related to coronavirus offered by the local governments and clients. Stronger-than-expected demand for smartphones and game consoles also helped, according to the company.

Looking ahead, the company predicted more muted results for the three months through September.

"Overall our revenue this quarter will grow from the previous quarter, but it is estimated to drop by double-digit percentage from the same time last year," Liu said. He attributed the year-on-year decline to a client's delayed launch of new products, widely understood to be a reference to Apple's iPhone. Foxconn is the largest assembler of the new lineup.

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