China Set To Lose Foxconn to Indonesia

January 29, 2014 Posted by China Briefing Reading Time: 4 minutes

SHANGHAI – Reuters has reported that Taiwan’s Foxconn Technology Group, the major supplier of Apple’s iPhones and iPads, is set to relocate their high-end manufacturing to the United States and low-end manufacturing to Indonesia. As manufacturing prices in China rises, and labor unrest increases, Foxconn is looking to diversify its supply chain.

During the technology group’s annual party last Sunday, Chairman Terry Gou told employees that “the U.S. is a must-go market.”

Gou further stated that customers and partners have previously asked when Foxconn would open shop in the U.S. to access its advanced manufacturing potential. Meanwhile, continuing its diversification away from China, Indonesia will become a priority this year due to its low costs, yet modest manufacturing skills. We have also written about the potential for India to take on some of Foxconn’s production in a piece titled “Could India Manufacture the iPad?“

Chris Devonshire-Ellis of Dezan Shira & Associates comments that “it brings home the reality that China is no longer a manufacturing or sourcing hub for global MNCs, and especially so for the IT sector. This trend will continue to grow and will affect other industries such as textiles and light manufacturing. We have already been seeing this in Vietnam and now this is spreading to other ASEAN nations. Indonesia is attractive for Foxconn due to its large labor market.”

Reuter’s further suggests that once situated in the U.S., Foxconn could take advantage of geographical proximity to develop new deals with partners such as Apple as they create new technology.

Foxconn’s interest in Indonesia is clear. Indonesia is one of the world’s most populous nations with some 260 million inhabitants. It is a member of ASEAN and as such has tax treaties and free trade agreements with China – meaning certain products can be made at comparatively cheaper wage levels and then exported to China duty free. Details of ASEAN’s FTA with China can be found on our ASEAN Briefing website here.

According to Indonesian government officials, Foxconn intends to invest US$10 billion over five years in conjunction with their Indonesian partner Erajaya Swasembada. The Indonesian government has reacted positively and will offer Foxconn a lucrative tax package with the goal to kick-start the plan (Foxconn has yet to confirm these details).

“We have seen over the past five years a shift in production away from China to ASEAN and India – which is why Dezan Shira & Associates has expanded out of China and now has offices in these regions,” Chris further stated. “We have been in India for six years now and in ASEAN for the same amount of time. As infrastructure in countries such as Indonesia, Vietnam and India improves, the manufacturing credibility gap between these countries and China’s productivity and previously low labor costs is now being eroded. If companies are able to bring production levels up to 70 percent of what can be achieved in China, lower wages in ASEAN and India dictate that it makes better economic and financial sense to relocate. This is exactly what Foxconn are doing.”

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or download the company brochure.

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