Apple supplier Foxconn is ahead of its peers in diversifying out of China, analyst says

Apple supplier Foxconn is ahead of its competitors in diversifying its supply network in order to avoid getting caught up in the U.S.-China dispute, one analyst told CNBC.

Taiwan’s Foxconn, formally known as Hon Hai Precision Industry, is one of the largest electronics contract manufacturer in the world and this week posted better-than-expected results for the second quarter. It is also the top assembler of Apple’s iPhones.

“It was a very good result,” Kirk Yang, chairman and CEO of Kirkland Capital, told CNBC’s “Squawk Box Asia”   on Thursday. 

The company reported a 34% on-year increase in net profit of about 22.9 billion New Taiwan dollars ($778.54 million), driven by its server and computing businesses, according to Reuters. It exceeded analysts’ prediction of 17.95 billion New Taiwan dollars, the report said.

Foxconn said revenue from key consumer products, mainly smartphones, declined more than 15% from a year ago, as demand for global electronics was hurt by the coronavirus pandemic, the news wire said. 

U.S.-China tension

Tensions between the U.S. and China escalated in recent weeks after President Donald Trump issued executive orders banning American transactions with Chinese tech firms Tencent, which owns the popular messaging app WeChat, and ByteDance, which owns the widely popular short video-sharing app, TikTok. The ban is set to go into effect in mid-September though its scope remains unclear. 

Headquartered in Taipei, Foxconn counts Apple as one of its major customers and assembles the bulk of iPhones for the U.S. tech giant.

Chinese workers assemble electronic components at the Taiwanese technology giant Foxconn’s factory in Shenzhen, China.

AFP | AFP | Getty Images

One analyst reportedly said that if Apple is forced to remove the WeChat app from its App Store worldwide, it could dent iPhone shipments. iPhone users in China may lose access to WeChat, which is the most popular messaging app inside the mainland and has multiple services integrated into a single app. As such, they may opt to buy other handsets and could potentially hurt the revenue Foxconn generates from Apple. 

Yang explained that while the risk is there, if people in China do not buy iPhones, they are likely to buy smartphones from Huawei, Xiaomi or Oppo — all of which are Foxconn customers. 

“So, Foxconn might lose iPhone (revenue) a little bit, but they can gain from other non-iPhone customers,” he said, adding that iPhone fans may still buy the device without WeChat and find alternate ways of accessing the app, such as carrying a second device. 

For its part, Tencent said that WeChat and Weixin, the version of the app that is used in China, are two separate applications. The company said that based on its initial reading of the executive order, the move will likely be focused on WeChat in the U.S.

Local production

Foxconn manufactures and assembles about 30% of its products outside China. Chairman Liu Young-way told an investor conference that ratio could increase in the future, Reuters reported. 

“I think they are doing the right thing because previously, Hon Hai or Foxconn’s business model was always to serve customers locally,” Yang said, pointing to the company’s local operations in Texas, that used to previously serve computer-maker Compaq, and had a presence in Indiana and California. Foxconn’s first U.S. manufacturing facility was in Wisconsin and has attracted some controversies

Foxconn also has factories in countries like Brazil, Czech Republic and Malaysia, among others. The company also assembles some iPhone models in India and last month, Reuters reported that Foxconn will invest $1 billion to expand the factory.  

“They are much ahead of other competitors,” Yang added, referring to Foxconn’s non-China manufacturing.  

Being closer to customers is not the only consideration.

Yang explained that while China has relatively lower labor costs, the ongoing trade dispute between Beijing and Washington factors into Foxconn’s efforts to diversify its supply chain. iPhones assembled in China and shipped to the United States would be slapped with tariffs. 

That said, China will remain the main source for a lot of product development and many of the final assemblies are likely to be done outside, Yang added. 

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