China Said to Be Concerned About Foxconn’s U.S. Intentions (1)

(Bloomberg) -- China’s government has conveyed its concern over Foxconn Technology Group billionaire Terry Gou’s plan to expand the Apple Inc. assembler’s operations in the U.S. after President-elect Donald Trump takes office, people familiar with the matter said.

A high-ranking Chinese official recently expressed Beijing’s concerns directly to Gou, the people said, asking not to be identified because the conversation was private. In response, the Taiwanese billionaire told the senior bureaucrat he won’t withdraw capital from China. The U.S. investment plan hasn’t been finalized and is dependent on the policies of the incoming administration, Gou said, according to the people.

China is pivotal to Foxconn’s massive electronics assembly operation, which cranks out more iPhones and iPads than any other in the world. One of China’s largest employers, Foxconn has said it’s in preliminary discussions to broaden its investment in the U.S., without elaborating. Trump has often articulated his vision of bringing manufacturing jobs back to America from China, which became the world’s factory floor thanks to cheap labor and central policy support. And he’s singled out Apple in the past.

A potential strategic shift by Foxconn unnerves Chinese authorities because the company employs roughly a million workers across the country. Major factory job cuts have been known to trigger protests in the past, even as maintaining social stability remains among the top priorities of the ruling Communist Party.

“Gou wants officials to know that he still sees China as a market of greatest importance,” said James Yan, Beijing-based research director for Counterpoint. “Foxconn very much relies on China for both assembly and consumer businesses and its suppliers are also in Asian countries. That is not going to change at least in the next five years.”

Foxconn announced the potential expansion hours after a pledge from SoftBank Group Corp.’s Masayoshi Son to invest $50 billion in the U.S. and create 50,000 jobs. A document Son held up for reporters after a December meeting with the President-elect included the words “Foxconn” and “$7 billion” alongside SoftBank’s numbers. Shares of the Japanese company dropped as much as 2.5 percent in Tokyo on Tuesday. Hon Hai Precision Industry Co., Foxconn’s main listed arm, rose 0.6 percent.

It remains unclear how SoftBank and Foxconn may be working together, or what sort of promises may have been made to Trump. Gou told the Chinese official he was invited to the former reality TV star’s Jan. 20 inauguration but didn’t plan on attending, according to the people familiar with the matter.

Read more about how Foxconn and SoftBank figure in Trump’s America.

The Taiwan Affairs Office of the State Council and the Association for Relations Across the Taiwan Straits, the two mainland Chinese organizations that handle relations with Taipei, didn’t answer calls seeking comment. Foxconn didn’t respond to e-mailed requests for comment and calls to company spokesmen went unanswered.

Foxconn now operates factories in Chinese cities including Zhengzhou, Shenzhen, Taiyuan and Wuhan. But rising wages and persistent worker shortages are prompting electronics manufacturers look elsewhere: Lenovo Group Ltd. and OPPO are among those that have set up facilities in Southeast Asia, for instance. Foxconn itself has been increasing its use of robots to reduce its reliance on migrant labor, and studying plans to increase its footprint in India.

Any shift back to the U.S. may involve Apple, which now accounts for about half of Hon Hai’s revenue. Apple Chief Executive Officer Tim Cook, however, told 60 Minutes in 2015 that the U.S. simply lacks enough skilled workers in advanced manufacturing.

Then there’s cost. The components of an entry-level iPhone 7, which sells for $649, cost $224.80, according to research firm IHS Inc. Assembling those parts into a finished product, mostly in China, costs about $10 now, Jason Dedrick, a professor at Syracuse University, has estimated. Doing that work in the U.S. would add $30 to $40, he reckons.

Foxconn’s rivals however are reportedly open to the possibility. Pegatron Corp., another major assembler of Apple products, can expand its U.S. capacity three- to five-fold if necessary, a Taiwanese financial outlet cited Chairman Tung Tzu-Hsien as saying on Sunday.

“Foxconn may expand its research and development as well as some high-precision manufacturing to the U.S.,” Yan said. “But the main part of the assembly business will stay in China.”

(Updates with Hon Hai’s shares in sixth paragraph.)

To contact Bloomberg News staff for this story: Gao Yuan in Beijing at ygao199@bloomberg.net, Steven Yang in Beijing at kyang74@bloomberg.net. To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net, Edwin Chan, Reed Stevenson

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