Sunday, December 4, 2022

Foxconn to keep expanding in China despite Covid disruption

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Foxconn, the world’s largest contract electronics manufacturer, has said the bulk of its spending on production facilities will continue to be in China, despite the major disruption at its plants caused by Beijing’s zero-Covid policy.

Foxconn chair Liu Young-way told investors on an earnings call on Thursday that the recent upheaval at its 200,000-strong factory town in Zhengzhou, which led to some workers scaling fences and walking home, was a crisis created by the pandemic.

The hit to production of iPhones forced a rare warning from Apple this week of lower iPhone 14 Pro and iPhone 14 Pro Max shipments than anticipated, and customers experiencing longer wait times to receive their products.

The higher transmissibility of the virus and “the country’s dynamic zero- Covid policy”, were to blame, Liu said. “How to meet those requirements is a challenge for us. Not just Zhengzhou, but other plants and our competitors face the same challenge.” He said he hoped Beijing could change its policy as the virus became less deadly.

The remarks were unusual coming from the Taiwanese company, which is China’s largest private-sector employer and exporter and normally steers clear of any comments that could be interpreted as political.

Liu downplayed the risk that the Zhengzhou disruption could allow rivals to snatch Apple orders from Foxconn. Although he conceded that the company needed to adjust its pandemic management model, he said the largest portion of capital investment for next year would still flow to China, alongside investments in factories in Vietnam, India and Mexico.

Liu said the need for reallocating capacity in response to the pandemic would not drive diversification of the company’s manufacturing footprint beyond China. “There are other drivers behind that, like geopolitics. Capacity reallocations for those reasons are more likely,” he said.

His comments came as the cost of managing production under Beijing’s draconian Covid-19 control measures, along with soaring inflation, ate into Foxconn’s profitability. The group’s gross margin, which Liu aims to gradually increase to 10 per cent, dropped to 6.16 per cent in the third quarter from 6.4 per cent in the three preceding months.

Foxconn’s net profit for the September quarter was NT$38.8bn ($1.2bn), a 5 per cent increase compared with the same period last year but below analysts’ expectations of NT$41.3bn.

The company said it expected revenue to be flat in the current quarter and next year. While its consumer electronics business was likely to be weaker in 2023 than this year, cloud products, personal computers and electronic components would continue to drive growth, it said.

Liu said the company would do whatever it could to adjust capacity to fulfil demand from its customers for the upcoming Christmas and Lunar New Year season.

The disruption was rare for Foxconn, as the company’s large network of factories across China enabled it in earlier phases of the pandemic to avoid disruptions that hit rivals such as Pegatron, another Taiwanese-owned iPhone maker. Production was “gradually returning to normal” in Zhengzhou, Liu said.

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