TAIPEI -- Google and Microsoft are accelerating efforts to shift production of their new phones, personal computers and other devices from China to Southeast Asia amid the worsening coronavirus outbreak, with factories in Vietnam and Thailand expected to be the beneficiaries, the Nikkei Asian Review has learned.
Google is set to begin production of its latest low-cost smartphone -- expected to be dubbed the Pixel 4A -- with its partners in northern Vietnam as soon as April. Google also plans to manufacture its next-generation flagship smartphone -- the Pixel 5, as it is expected to be called -- in the second half of 2020 directly from the Southeast Asian nation, two people with direct knowledge told Nikkei.
Both Google and Microsoft are pushing aggressively into consumer hardware products as part of the internet giants' strategy to lock more users into their ecosystems of software and cloud-based services, which they hope will in turn give them an edge in future technologies such as artificial intelligence computing. Google is the world's No. 2 smart speaker maker after Amazon and its Pixel phone, though ranked No. 6 in the U.S. market last year, grew more than 50% in shipments globally.
Google has asked a long-time manufacturing partner to help ready production lines in Thailand for its "smart home" related products, including voice-activated smart speakers like the Nest Mini. The first products are expected to start shipping in the first half of 2020, the sources said.
Microsoft, which began its foray into PC hardware in 2012, is scheduled to start producing its Surface line, including notebook and desktop computers, in northern Vietnam in the second quarter of this year at the earliest, another two sources familiar with the matter said. "The volume in Vietnam would be small at the beginning, but the output will pick up and this is the direction that Microsoft wants," a supply chain executive with direct knowledge of the matter told Nikkei.
Until now, most if not all Google smartphones and Microsoft-built computers have been made in China. The U.S.-China trade war caused many industries -- especially technology -- to consider the risks of overreliance on China for manufacturing. The coronavirus has only added to concerns about concentrating production too heavily in one place.
"The unexpected coronavirus hit will definitely push electronics builders to further seek production capacity outside their most cost-effective production base of China," a supply chain executive said. "No one could ignore risks after this. ... It's more than just cost -- it's about continuity of supply chain management."
Compared with hardware-focused tech brands like Apple, HP and Dell, internet companies such as Google and Microsoft are able to be much more agile in moving production out of China, the world's biggest electronics production hub, three supply chain executives told Nikkei. "These relative hardware newcomers really have a sense of the crisis since the trade conflict" between the U.S. and China, according to one source.
The person added that the companies continued with plans to shift production out of China even after Washington and Beijing inked the first-phase trade deal in January. "The coronavirus outbreak just reinforced their determination," the source said.
Google even asked its suppliers to evaluate the feasibility and cost implications to uninstall some production equipment and ship it from China to Vietnam via land, sea or air transportation after virus fears left production facilities unable to immediately return to work in February, one of the sources briefed on the matter said.
Microsoft also kicked off its production plan in Vietnam earlier than planned in the wake of the spreading epidemic, sources said.
Google and Microsoft have a much lighter burden than hardware heavyweights like Apple when it comes to diversifying production to lower the risk of over-centralization, market watchers said. Compared with Apple, which sells nearly 200 million smartphones a year, Google shipped only 7 million units in 2019, according to IDC data. Microsoft's entire Surface lineup shipped just 6 million units globally last year, far less than Apple's 17 million PCs.
Google started its effort to move some production out of China last year. It asked one of its partners to convert an old Nokia factory in the northern Vietnamese province of Bac Ninh to handle the production of Pixel phones, Nikkei first reported.
Another factory in the northern Vietnamese province of Vinh Phuc also has been approved by the American company to make smartphones, the Nikkei has learned. Working with multiple partners, Google also moved its data center server production to Taiwan last year and started to manufacture other smaller smart home products such as its Nest Wifi internet router in Vietnam at the end of last year.
But as electronics suppliers in China struggle to resume production amid the deadly coronavirus outbreak, Google and Microsoft's diversification efforts also face challenges as many of the parts and materials needed for final assembly are still made in the country.
"It's reasonable for companies like Google to want to speed up its pace of diversifying from China amid the coronavirus threat, while the trade war remains an uncertainty. But even if the final assembly process is outside of China, suppliers still need to ship some components from the country. ... It's a matter of the supply chain ecosystem, which takes time to rebuild," Joey Yen, a tech analyst at research company IDC, told Nikkei.
The Vietnamese government in early February suspended entry of Chinese nationals and foreigners who have visited China in the past 14 days to prevent the virus spreading. Hanoi has also suspended passenger flights to and from China and halted train transportation between the two countries, posing additional challenges for suppliers to ship components to the Southeast Asian country.
Samsung Electronics, the world's largest smartphone maker, has operated a smartphone supply chain in northern Vietnam for years but still relies on some components made in China. The South Korean company had even planned to fly electronics components for its smartphones from China to Vietnam after the border crossings of the two countries were temporarily closed to prevent the spread of the virus, the Nikkei reported.
Microsoft declined to comment. Google did not respond to Nikkei's request for comment as of publication.