Technology Corporations Have a Path Out of China!
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- Hardware manufacturers have struggled to minimize their dependency on the world’s industrial hub. The key may be electric automobile parts.
Global electronics manufacturers, aiming to expand their manufacturing footprint beyond China, are taking advantage of the rising demand for complex parts used in electric cars to move production closer to their customers in other countries. It’s a wise move that might assuage concerns that the supply chain is overly reliant on a single area in the face of shortages and geopolitical conflicts.
Electric cars have become a spur for corporations to increase capacity throughout the world, thanks to new corporate clients, a desire to customize vehicles for local markets, and a willingness among certain governments to subsidize the costs of setting up factories.
Foxconn Technology Group, Pegatron Corp., Compal Electronics Inc., and Wistron Corp. are world leaders in the assembly of electronics for companies such as Apple Inc., Sony Corp., and Dell Technologies Inc. They also offer electric car manufacturers like Tesla Inc. and Volkswagen AG with systems. Currently, they mostly do so in China.
The COVID-19 epidemic, on the other hand, demonstrated the fragility of global supply networks and the considerable risks that come with concentrating production capacity in a single location. A COVID epidemic caused Foxconn to shut down manufacturing in the southern city of Shenzhen last week. Over the last two years, most of Foxconn’s competitors have experienced similar challenges as authorities have tried to contain COVID’s spread. Geopolitical tensions, particularly between Washington and Beijing, but increasingly spanning much of the globe, are heightening the feeling that more production diversification is required.
This is where electric vehicles (EVs) come in.
Governments, manufacturers, and worldwide customers are all pushing for electric vehicle production, including high-tech parts, to get closer to consumer markets. Cars are physically larger, and hence more expensive to freight, so localization makes sense. Consumers may see domestically made automobiles as a source of national pride.
Some electronics manufacturers, such as Foxconn, are prepared to take on final assembly work or split it up with automobile manufacturers. Others, like Pegatron and Wistron, concentrate on systems and parts. Meanwhile, governments view EV production as a way to boost new sectors and create more jobs in their own countries. Many companies are giving incentives to have automobiles built in the United States.
Still, it takes time to move high-tech production out of China. Because of the availability of people and favorable local legislation, the country has become the world’s industrial heartland during the last three decades. As labor-intensive industries sprang up, so did a slew of multinational suppliers that supply everything from raw materials to finished goods. Because desktop computers, laptops, and cellphones can be readily delivered throughout the world, mega-factories have become more important than having a manufacturing capacity scattered globally.
When asked about the high cost of establishing new facilities to create chips, vehicles, and vehicle batteries during a recent earnings call, Foxconn Chairman Liu Young-Wei encouraged investors not to be concerned: Local partners or governments will bear a large portion of the cost. That comment has a whiff of arrogance about it, but he isn’t wrong. Foxconn intends to recreate what it calls a “build, operate, and localize” model by enlisting the help of local governments and companies, including footing the price.
India, Indonesia, Thailand, Saudi Arabia, and the United States are all interested in collaborating with Foxconn to produce electric vehicles and parts. Another iPhone assembler, Pegatron, made a $164 million investment in the United States last year to work on vehicle electronics and control systems (Tesla is already a client). Wistron has stated that it expects to benefit from electric vehicles in the near future, and last year it formed a partnership with India’s Optiemus Electronics Ltd. to jointly develop and manufacture electronics for phones and automobiles.
Manufacturers of electronic parts are specialists in arranging incentive packages. Elon Musk, the CEO of Tesla, has notoriously stated that he dislikes subsidies, despite the fact that the business has received them. If governments in growing markets like Indonesia and Thailand erect competitive hurdles, EV companies and their supply-chain partners may not even require handouts. Instead of offering tax breaks, free land, or cash, they can simply impose quotas to ensure that an electric vehicle accounts for a certain percentage of all vehicles sold in the country. That alone would give EV businesses a leg up on their combustion-engine competitors. And the more conventional players who provide electrified versions, the better for contract electronics manufacturers.
Importantly, the economics of automobiles are considerably different from those of consumer electronics, thus decreasing the requirement for a highly concentrated supply chain in a single location. While batteries are now the most expensive part of an electric car, electronics account for 40% of the cost and are expected to climb to 50% by 2030, meaning a $40,000 vehicle may have $20,000 in processors, sensors, and connections.
Manufacturing relationships don’t always work out, which is a risk with these movements. Rivian Automotive Inc., an electric vehicle manufacturer, inked a cooperative development agreement with Ford Motor Co. in 2019. The agreement was discontinued less than three years later for unknown reasons. Last year, Foxconn’s ambitions to collaborate with China’s Byton were put on hold due to Byton’s apparent financial difficulties. Many more collaborations between manufacturers, municipal governments, and car customers will undoubtedly fail. If they’re lucky, the deals will fall through before the new factories are built, and not too much money will be lost. In the worst-case scenario, they’ll be saddled with large-scale, embarrassing, and costly failures like Foxconn’s entry into Wisconsin.
Regardless of whether a particular initiative succeeds, there is a clear tendency to guarantee that the electric vehicle supply chain does not face the same concentration danger as consumer electronics. Future CEOs and politicians will be able to sleep a bit easier as a result of this.
