Today, the Supply Chain Matters blog will provide supply network updates on some important industry sectors in the ongoing backdrop of the COVID-19 coronavirus pandemic that continues to impact multi-industry supply chains.

This particular commentary focuses on the high tech and consumer electronics sector. Consumer Electronics manufacturing

Foxconn Makes A Significant Strategic Move

The South China Morning Post recently reported the global contract manufacturing services (CMS) provider Foxconn, also referred to as Hon Hai Precision Inc., is accelerating plans for this CMS to develop a semiconductor component supply chain internally within China.

According to the report, the company signed a co-financing agreement with the government of Qingdao, a major city in eastern Shandong province, to erect and operate a semiconductor packaging and testing facility. Reportedly, construction is expected to begin this year, with the initial production capability directed at application-specific integrated circuits used in 5G communications and artificial intelligence computing needs. This report further indicates  previously announced plans to develop semiconductor design services as well as equipment and chip design operations in southern Guangdong province.

The company’s chairman was quoted as indicating to local media the move will open up upstream and downstream semiconductor supply and accelerate (domestic) industry development.

Among the ongoing trade tensions involving the United States and China, is the latter’s efforts in defining strategic industries that will be further developed. A flash point has indeed been key semiconductor components.

Currently, after semiconductor chips are designed by predominantly U.S. manufacturers, packaging and testing is generally sourced in either the Philippines, Malaysia or other countries.

At the height of tensions last year, the Trump Administration banned termed strategic suppliers, including those developing semiconductor capabilities to support 5G telecommunications networks from doing business with China’s Huawei Technologies. The fallout cascaded across high-tech supply networks with an awareness that this would be an area where China would accelerate its internal design and manufacturing capabilities to become less reliant on international suppliers.

China’s goal is to develop an industry-leading domestic supply network capability in the current decade.

In a May 2019 blog that was titled the weaponization of high tech and supply networks, we cited a Bloomberg published report reporting on the increased high-tech development tensions, that quoted Alex Capri, a senior fellow at the Business School of National University of Singapore as bluntly indicating:

Long-held relationships between supplier networks and global ecosystems will fall apart. Markets will fragment, and there will be a decoupling of China and the U.S. into two distinct tech supply chains.”

From our lens. these announcements from Foxconn have strategic connotations to the noted observation of the initial signs of such de-coupling.

As many of our readers well know, Foxconn serves a primary CMS to Apple for production of iPhones and other consumer electronics devices. Whether any of Foxconn’s future domestic produced and tested semiconductor components make their presence in Apple’s assorted devices is of course, open to much speculation.

However the move is likely to provide yet another political flash point in the ongoing trade tensions involving both countries, and Apple will once again have to practice the company’s adroit  political skills. Then again, the supply network risks brought forward from the 2020 COVID-19 pandemic that first impacted China’s manufacturing sectors may cause Apple to accelerate plans to transfer some production of devices to countries such as India and Vietnam in order to reduce production and other geopolitical risks.

 

Apple Is Raising 2020 iPhone Manufacturing Requirements

While on the topic of Apple, Nikkei Asia Business reported this week that the consumer electronics provider has notified several of its suppliers of a plan to have 213 million phones produced in the 12 months through March 2021. That number reportedly represents a 4 percent increase from the came period a year ago. The mix of product includes the newly announced low-end iPhone SE model, and between 3 to 4 new 5G phones due to be announced this year.

The report indicates that suppliers are questioning the volume increase in the light of the COVID-19 severe economic impacts across multiple countries and goes on to speculate that Apple’s motivation is likely to prioritize likely limited inventory and production capacity among key suppliers. As this blog has observed in many prior consumer electronics supply network commentaries, Apple is not shy in leveraging its buying and supplier influences to gain market leverage.

The report noted that last year, Apple’s initial forecast called for 220 million phones, with actual production levels likely to near 200 million devices.

A significant number of global-based suppliers have suspended production operations because of local mandates and overall worker concerns. These suppliers are reportedly making hard assessments as to likely smartphone demand and production levels if various country-specific economies slip into severe recession, invoking high unemployment. The short or longer-term implications of COVID-19 on global economies and individual consumers is far more uncertain, thus suppliers are likely very concerned themselves in  needs to preserve working capital and cash. Likely, the negotiations will be dynamic.

Apple itself may be attempting to hedge its margins if demand turns out to be more weighted toward the lower-cost SE model vs. more expensive 5G models. In either case, suppliers and contract manufacturers will likely be weighing risks and scenarios of their own in ascertaining what the real market demand and inventory risks may turn out to be.

 

Bob Ferrari

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