A combination of diminishing competitive advantage in China, American incentives and tariff threat may tip the balance in favour of a U.S. factory.
With a possibility that Foxconn will build a $7 billion factory in the United States, reports say that the company’s exploration of the country’s potential predates Trump’s administration.
Though the timing of this news indicates deference to the president’s call, choice for factory sites are not made simply to agree with or defy a presidential preference.
Back in December 2012, several reports like the one in PC Magazine quoted what Louis Woo, a Foxconn spokesman, told Bloomberg Businessweek in a phone interview: "We are looking at doing more manufacturing in the U.S. because, in general, customers want more to be done there."
This was a month after the reports about the company’s looking into the possibilities of some American cities as a site for its factory. Nothing has come to fruition, but it is very likely that the seed of possibility emerging at present was already planted over four years ago.
On the former, Yahoo Finance quotes Ann Lee, an authority on Chinese economic relations and adjunct professor of economics and finance at New York University: “I think this move is motivated by Trump and his 45% tariff on anything imported into the U.S.” By some accounts, the new factory may be a joint investment between Apple and Foxconn (which remains the largest manufacturer of iPhones and iPads). Though such a restriction on free trade can have a detrimental effect on the economy, other countries have also adopted some measure to deter imports as we’ve seen here.
Earlier, we had the reasons for keeping manufacturing in Asia with an argument. “Apart from the usual cost savings of using Chinese labour, 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.”
However, with a business as big as Foxconn, building a factory in China does not necessarily preclude building one in the United States. That is just what Nikkei Asian Review reported. Though it opted for the headline, Foxconn chooses to play the Trump game, the article clarifies that the chairman of Foxconn, Terry Gou, has been contemplating this kind of move for years.
It may just be that now the combination of incentives and disincentives would tip the balance in favour of an American factory. That is the combination of the threat of tariffs in the United States and the diminishing competitive advantage from low labour costs in China plus the lure of some American incentives.
Those extra costs could wipe out the benefit of cheaper labour in China, especially in light of the report published by Boston Consulting Group on Jan. 11 that the Nikkei Asian Review refers to. It says, “China's manufacturing cost advantage over the U.S. has shrunk to a mere 1%.”
On top of that, the costs of manufacturing in the U.S. have dropped. “Advances in information technology have improved productivity and the shale revolution has sent energy costs tumbling,” according to the report. Putting it all together, the report declares, "When indirect costs for shipping, inventory and other expenses are included, it is now less costly to manufacture a wide variety of goods in the U.S. if that is where they will be consumed."
In addition, for Foxconn, there is the expectation of substantial incentives to lure them into setting up a factory that would supply Americans with manufacturing jobs. The Nikkei Asian Review reports that Gou has said, "What we expect in the U.S. is cheap land and electricity."
While Apple’s supply chain still centres on Asia, the shift in direction for costs and incentives may mean that a shift, at least in part, to manufacturing in the U.S. could be feasible. However, to remain consistent about not jumping to conclusions, it should be noted that the talk about Foxconn’s factory is still just talk and nowhere near a done deal. Just days ago, Gou was already backing off firm plans, telling the Guardian that “There is such a plan, but it is not a promise. It is a wish.”