Foxconn Likely To Move Some Of Its Manufacturing Out Of China

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Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) has done it before, and can do it again.

The world’s go-to electronic contract manufacturing conglomerate had a humble beginning in Taiwan where it was founded by the dynamic Terry Gou during the 70’s.

But Gou shifted Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF)’s manufacturing operations from Taiwan to China in the 1980’s and embarked on a blistering period of growth offering electronic manufacturing services to the world’s elite device manufacturers.

Why China then?

Gou’s strategy was to take advantage of low-cost Chinese manufacturing, concentrate on a few top-class customers and offer them exceptional quality control and service. Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) also vertically integrated to be able to offer cost effective end-product solutions to its customers. As a result, it has the muscle to quote much lower rates than its rivals. Its status as a manufacturing partner to Apple Inc. (NASDAQ:AAPL) catapulted it to the highest echelons of global electronic contract manufacturing.

But that is all changing.

China no longer a manufacturing Shangri-la

According to a recent estimate by Lu Ting, a Bank of America economist, wages in China could rise 11% in 2014 – that’s on top of a 10.7% jump in 2013. Add to that increasingly militant labor, tough environmental regulations and a strengthening currency, and you have a potent mix of reasons to shift manufacturing out of China.

Gou is on record publicly announcing last year in February that he was putting on hold an expansion at one of his Chinese locations, and that he would once again make a thrust to expand back into Taiwan. The Forbes article on the development ascribed the reasons to “spiraling wages, worker discontent, forced unionization, tough environmental enforcement” as well as a brand new problem – Chinese sabre-rattling against neighbors such as Japan and Taiwan.

A year has passed since, and the above factors may have only escalated in scale.

Foxconn to move to Indonesia…even the US

It’s no surprise then that Reuters reported today Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF) was mulling manufacturing bases in Indonesia as well as the United States, as announced by Gou to his employees on Sunday. More than costs and regulatory difficulties, the thought of disruptions to his beloved supply chain due to China’s international hostilities may have driven Gou to consider these options.

According to Reuters, Indonesia is the best qualified country, in Gou’s opinion, to replace China as a global electronic manufacturing hub.

Gou reportedly told employees that Foxconn Technology Co., Ltd. (TPE:2354) (OTCMKTS:FXCOF)’s annual revenues could touch $333B in the next ten years.

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