Could Donald Trump’s tariffs be the start of a new world electronics order for China?

For decades, China has been the world’s hi-tech assembly plant but a trade war with the US could put many manufacturers out of business or force them to set up operations elsewhere

PUBLISHED : Tuesday, 19 June, 2018, 7:03pm
UPDATED : Wednesday, 20 June, 2018, 9:06am

When Taiwan-based electronics titan Foxconn opened its first factory in the southern Chinese city of Shenzhen 30 years ago the links in the global manufacturing chain were being firmly welded into place.

An American or Japanese company would develop a new cutting-edge device, the key components would be shipped to assemblers in China like Foxconn and the finished product would be sent to consumers around the world.

China’s position in the chain has remained largely the same in the decades since, becoming the main place to assemble increasingly complex electronics, thanks to the country’s skilled labour pool, world-class infrastructure and formidable deep well of suppliers.

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That system has enabled Foxconn, with its million-strong workforce and sprawling network of plants putting together products like Apple’s iPhones, to become the single biggest exporter from China last year, according to Chinese consultancy AskCI Consulting.

It has also enabled China as a whole to rack up – at least on paper – a massive surplus with many of its trading partners, particularly the United States.

But that could change, with US President Donald Trump threatening tariffs that would make brands shift orders to assemblers in other countries. Observers and industry insiders say China-based contract manufacturers that count on American customers could be forced to set up shop elsewhere to stay in the assembly game, a shift that would have huge repercussions for China.

Much of China’s economic base is built on a system of “original equipment manufacturers” (OEM), a network of low-cost and highly flexible suppliers for sectors ranging from toys and textiles to smartphones.

OEM products are designed mainly by customers in the US and the European Union and sold under the customers’ label.

Assemblers of electronics products are the biggest players in China’s OEM system, accounting for nine of the country’s top 10 exporters last year, according to AskCI. Together they shipped more than US$256 billion worth of electronics to the United States in 2017, roughly half of the US’ imports from China that year, according to China’s Ministry of Commerce. By comparison, furniture, toys and textiles were less than 20 per cent of China’s exports to the US last year.

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One senior executive at a Chinese OEM said electronics would be the main battleground in a trade conflict, the first salvos of which were fired on Friday when the Trump administration announced it would impose a 25 per cent tariff on US$34 billion worth of Chinese goods, with further duties possible on another US$16 billion.

After Beijing immediately threatened to retaliate, Trump escalated the row, announcing a plan to target US$200 billion worth of Chinese imports with a 10 per cent punitive tariff.

The executive said Beijing could, in theory, hit back by limiting electronic goods exports to the US, which abandoned much of its manufacturing decades ago.

“China’s assembly and manufacturing system are irreplaceable in the US consumer electronics market,” he said.

“But Beijing would never use this as a bargaining chip. While it would mean more expensive TVs, mobile phones and smart devices for Americans, it would mean massive closures and lay-offs of factories for Chinese.”

The US is also considering 45 per cent tariffs on its imports of hi-tech electrical and machinery products from China, action that Chinese Academy of Sciences (CAS) projects would cut China’s exports to the US by 35 per cent, or US$134.2 billion, and put more than 3.6 million people out of a job.

Liu Kaiming, head of the Shenzhen-based Institute of Contemporary Observation, which monitors working conditions in hundreds of Chinese contract manufacturers, said the real toll could be much higher for the 80 million-plus people working in areas related to the export-oriented electronics manufacturing sector.

“I think the true situation would be much worse than what the [CAS] report evaluated and expected,” Liu said.

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One option for manufacturers to avoid to fallout from a trade conflict is to move offshore to countries such as Vietnam and Cambodia, something many China-based makers of shoes, textiles, garments and toys have already done.

“The industry chain of producing shoes and clothes and accessories has become more and more mature in Vietnam, with millions of skilled workers there already,” Liu said.

Xie Xusheng is among the Chinese businesspeople who have migrated some operations overseas, setting up a clothing factory in Ho Chi Minh City in Vietnam this year to supply big-name American brands with shoes, bags and accessories.

Xie said he made the decision after his biggest customer moved its production chain to Southeast Asia.

“A growing number of Chinese textile and garment suppliers have to set up factories in Vietnam and Cambodia because overseas customers are increasingly only offering orders for factories in these countries, instead of China,” he said.

“That’s why I had to follow and set up a plant there.

“The brands used to source from 25 Chinese suppliers in the mainland, but now are partnered with just two.”

Xie said it was only a matter of time before US and European consumer electronics brands went the same way.

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But it won’t happen tomorrow. Unlike labour-intensive factories with “short industry chain”, the process of making an iPhone involves an “long industry chain” and requires the support of a big system that can only be developed over time.

“The industry chain for electronic and mechanical products is long and involves many fields from downstream to upstream,” Liu said.

“For example, each famous overseas brand like Apple sources from between 300 and 500 suppliers in China. Products assembled in China make up 70 per cent of Apple’s total shipments. It would take years or decades to build another production base as mature as China’s.”

Liu said China would retain its manufacturing edge for at least another five years but the uncertainty in US-China relations had become the biggest worries for many suppliers.

However, Apple CEO Tim Cook told CNN that he did not expect the company’s flagship handset to get caught up in growing trade tensions with China.

“I don’t think that [the] iPhone will get a tariff on it,” Cook said on Monday. “Based on what I’ve been told and what I see, I just don’t see that.”

Nevertheless, a few manufacturing giants have already started to move some of their operations out of China, including Foxconn which will set up a factory in the United States.

“I had already invested a big factory in the US this year,” Foxconn chairman Terry Gou told the South China Morning Post earlier this month, when asked about the trade war.

“The US and the mainland are the world’s two biggest markets … No one can choose one and drop the other. It has to be balanced.”

Louis Woo, Gou’s assistant, said the company could establish two complementary operations – one in China and one in the US.

“If the future appears uncertain, we may need to operate two separate systems for the two markets … We buy components and parts … and invest in the US for the local market. Also, we do the same for the mainland market,” Woo said.

To that end, Foxconn will put US$8.8 billion into a television flat-panel factory in Guangzhou and another new US$10 billion LCD display panel factory in Wisconsin.

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Both plants will make LCD screens for televisions, mobile phones and other smart devices. They will also open around the same time and employ a similar number of workers to supply local markets.

Economics professor Chuang Yih-Chyi, from Taiwan’s National Chengchi University said other Taiwan-invested electronics manufacturers needed to think about investing overseas or in the US directly to spread risk.

“Taiwan-invested electronics manufacturers have been playing a key role in the global product supply chain. Their industry division and heavy investments in mainland China will be affected by US-China trade frictions,” Chuang said.

For China, the road ahead is clear, according to Luo Jun, from the International Robotics and Intelligent Equipment Industry Alliance. Chinese authorities should keep ploughing investment into hi-tech industrial innovation while it had time, he said.

“[Competitors in] Southeast Asia are still at a low level of industrialisation and can’t replace the mainland. They don’t have enough skilled workers and their industrial chains are not mature,” Luo said. “China is still the hub of the world’s factories. We should take this advantage ... to comprehensively upgrade Chinese industry.”