What the Foxconn Exodus in Zhengzhou Means for China’s Supply Chains

Last week, images and short videos flooded China’s social media of an exodus of hundreds of workers from the Foxconn complex in Zhengzhou, the factory that produces nearly close to half of Apple iPhones, making their bumpy journey home on foot. Speculation is that those who left the complex and a well-paying job were fearful of being infected with COVID-19, which had been detected within the walled-off campus, and worried about being locked in isolation between their dormitories and the assembly lines.

In a sense, Foxconn’s Zhengzhou manufacturing complex is like a city, except that its residents live in extremely high density and must obey strict rules in their daily routines. At rush hour, almost 350,000 people work and live on a 10-square-kilometre piece of land (the size of about 1,400 standard football fields).

Behind those workers are perhaps millions of relatives who seemed willing to prioritize the health and freedom of their loved ones over a secure income for the family. While the media raised concerns about the safety and well-being of workers, the exodus also raises a longer-term question: Is this the end of China’s dominance over supply chains in the global production network?

The capital markets showed their pessimism. At the news of the exodus, foxconn stock price fell 1.4 percent on the Taiwan Stock Exchange and Apple by 1 percent on the Nasdaq. If COVID-19 spreads more widely within the compound or in the interdependent supply chains for Foxconn’s production, Apple will have a hard time delivering its iPhones, iPads and other devices to customers around the world in time for Christmas.

From the “Factory of the World” to the “Workshop of the World”

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Foxconn, a manufacturing outsourcing contractor for many brands of electrical and electronic devices, operates the largest, most efficient and flexible factories in the world. It is one of the world’s earliest users of advanced robotics, precision automation equipment, artificial intelligence and other advanced digital technologies in manufacturing.

Behind those advanced technologies, however, Foxconn’s most valuable assets are its skilled workforce, who are more than just assembly-line workers following instructions and screwing together different components. Precision engineered mass production is a complex process. Every year after Apple releases its new iPhones, iPads, MacBooks and iWatches designs, Foxconn factories initiate an experiment-driven process, through which skilled engineers and experienced workers facilitate iterations between R&D teams. and design by Apple and component and module suppliers to achieve production of the new products with scale, speed, accuracy and cost-effectiveness.

In this process, experimentation in production and process innovation is key. This type of innovation involves skills based on tacit knowledge and large-scale skill. It takes years, even decades, to reach the level required to translate complex designs into mass production with engineering precision and at a competitive cost. In fact, Foxconn expresses the chinese transformation from being the “factory of the world” to the “workshop of the world”.

An efficient and resilient supply chain network works well, until it stops working

Behind Foxconn’s success in China is China’s mega supply chain network in the electrical and electronics sector. Over the past three decades, with the advancement of digital technologies in manufacturing, traditional vertically integrated production dominated by multinational companies has gradually given way to module-based production in which small manufacturers in China are included in the network of global production according to their specialties. throughout the different stages of the global value production chain. The division of labor in manufacturing is therefore by stages of production rather than by final products. This new production arrangement has changed world trade from final goods to intermediate goods.

the global value chain, based on competitive and comparative advantages between different countries, provides efficiency; however, it can be vulnerable under conditions of external stress, such as natural disasters, pandemics, wars, and economic downturns. The more complex a product is, the longer its supply chain and the more vulnerable it is to external shocks. In other words, there is an intrinsic paradox: a competitive production network, by its very efficiency, often carries endogenous vulnerability due to its interdependent, complex and widely distributed networks of global suppliers.

Over the past decade, China has built an extensive supply chain network, which is the strength of its manufacturing power. Based on the advantages of scale and scope, meaning that it has a large enough number of suppliers for each item and also covers a wide enough range of items, this supply chain network has, under normal circumstances, achieved both efficiency and resilience.

For example, Foxconn has a network of more than 300 electrical and electronic suppliers, grouped in Foxconn’s Zhengzhou Science Park, which has also attracted other smartphone manufacturers such as ZTE, Skyworth, Tianyu and OPPO. This manufacturing ecosystem is efficient and resilient, as it has advantages of both scope and scale. Zhengzhou has thus become the world’s largest production base for electrical and electronic devices, contributing a quarter of the GDP of Henan, China’s third most populous province.

In 2010, as Shenzhen, where Foxconn had operated for more than two decades, began to transform into a hub of innovation, Foxconn decided to move its manufacturing facilities inland to benefit from lower labor and land costs. An agreement was reached between Foxconn and the Zhengzhou government, the latter promising attractive fiscal, land and labor policies to support Foxconn’s move.

After 10 years, Foxconn in Zhengzhou became China’s largest exporter, contributing 80 percent of Zhengzhou’s total trade volumes and Henan’s 60 percent. It is also the largest employer in the province. Apple made 90 percent of its products in China and the largest proportion in Zhengzhou.

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Unfortunately, China’s advantages mean vulnerability for other countries, especially the United States. What if China’s supply chains suddenly stop? It is for this reason that diversifying supply chains away from China, an attempt to prioritize resilience over efficiency, has become a national priority for the United States.

Foxconn was part of that diversification effort. In 2018, Foxconn built an assembly line for Apple smartphones in India; after four years, production there accounts for about 5 percent of total iPhone production. In 2021, Apple established a factory in Vietnam to produce its laptops and tablets. However, its production still relies on supply chains from China.

It will take a lot of time and money for India and Vietnam to build their own supply chains. They won’t have the economic incentive to do so unless China’s supply chains stop working. According to the official supplier of Apple readyNearly half of Apple’s 190 suppliers are Chinese companies, and nearly 160 of them (China-based and foreign) produced their components in China.

How to contain COVID-19 while maintaining production?

Let’s go back to the recent exodus of Foxconn workers in Zhengzhou. While the government claimed to have contained the virus, there will inevitably be other outbreaks. The way a supply chain works is that one plus one will be greater than two; however, when one becomes zero, the sum will also be zero.

China now faces an internal dilemma: how to contain COVID-19 while stimulating economic growth.

A large unvaccinated vulnerable population and an inadequate public health system, especially in the less developed areas and the vast countryside, make China’s zero COVID policy necessary. However, the economic costs of this policy, especially the long-term ones, must be recalculated. Restoring manufacturing is not like turning on a faucet when more water is needed or driving down a highway where the driver can increase speed by accelerating. It’s more like the journey of an airplane: after a hard landing, takeoff requires the right runway (supply chains) and momentum (skilled labor), the construction of which takes time and money.

Foxconn and Zhengzhou have drawn much attention for their contribution to the economy; however, there are many more factories, restaurants, and venues, even Disney resorts, across the country that have had to abruptly go into amojing” – standing still in silence. People are losing faith in the future in a context where they don’t know if tomorrow they will have freedom. The domino effect can be catastrophic: Without a level of certainty about the future, people cut back on their consumption, which is the key to China’s economic growth.

Specifically in manufacturing, once the supply chain is broken, other countries, such as India and Vietnam, will have incentives to fill the gap. Once the workers and suppliers leave, they leave.

Solving the China conundrum of containing COVID-19 and sustaining economic growth requires political and economic wisdom. Time and tide wait for no one, nor for any country.

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