Electronics Assembly: Made in China, Made by Taiwan
While you may buy that laptop or cell phone from the brand name that adorns it, other brands have touched the product as well. Not exactly household names, these electronics manufacturing services (EMS) providers put together almost all of the world's consumer electronics – from
As reported in the May 2005 issue of Site Selection, Foxconn, a mobile handset branch of Taiwan-based electronics firm Hon Hai Precision Industry Co. Ltd., is building a $30-million, 60,000-sq.-ft. (5,574-sq.-m.) complex on this 43-acre (17.4-hectare) site in Juarez, Mexico. The company hopes to make Juarez its operations center for North America. Hon Hai is building a $20-million phone handset plant in Northern China.
your teenager's iPod to the cool flat screen television monitor in the family room. So where are they expanding?
Many EMS firms are based in Asia. While Japanese and Korean firms dominate as the brand name electronics that everyone recognizes, these firms – Fujitsu, Samsung, Toshiba, LG – might not actually put together the finished products. Instead it's companies like Quanta Computer, or Hon Hai Precision Industry. Never heard of Hon Hai, or FoxConn, the company's other corporate name?
In fact, Hon Hai ranks second in providing electronics manufacturing services worldwide. Hon Hai, among other Taiwan firms, is expanding aggressively in China. The company recently announced a decision to set up a $20-million telephone handset component factory in northern China.
A complicated relationship underpins the dynamic between Taiwanese firms and the contract companies they set up on the mainland. Yet, this symbiotic connection drives the value chain in electronics assembly, with location trends playing out the same oceans and time zones away in the U.S.
"Basically, high-end production requiring highly skilled workers stays in Taiwan – or in other home base Asian nations like Japan," explains U.S.-Taiwan Business Council President Rupert Hammond-Chambers. "We won't see cutting edge technology moving over to China," he says. "That said, there has been a fairly robust movement of Taiwan electronics manufacturing moving to China, mostly low end stuff like motherboards, the mouse, the PC."
The reason is pretty simple: the lower cost of production. "To stay competitive for their customers, our companies have to lower their costs, and it costs less to pay Chinese workers than it does to pay workers in Taiwan," he says.
New Law Brings New Challenge
Aside from the lack of highly skilled workers, Hammond-Chambers
Rupert Hammond- Chambers
notes that the Taiwan government has made it difficult for Taiwan firms to export their leading edge technology for production elsewhere. Thus, 300-mm. chip production and high-end LCD panels – the current pockets of global growth – won't be going to China any time soon. Meantime, the Chinese government may be cracking down on hiring flexibility with a new law requiring a 5,000-yuan (US$624) upfront deposit against future pay for every temporary worker hired, and shifting the burden of workmen's compensation for temporary hires to the company. According to Taiwan press reports, some manufacturers employ as many as 20,000 temporary workers at their plants, allowing them to ramp up rapidly as needed and to streamline production costs during down cycles.
"If this law passes, it will surely increase cost. This is what we don't want to see," notes Dior Chen, manager of the Taiwan Semiconductor Industry Association.
"There is a cluster of unique issues in the Taiwan-China relationship that play out in electronics manufacturing," Hammond-Chambers says. "The on-going risk of war undermines a more robust relationship. The Taiwan stock exchange is tremendously profitable because our companies are in China. But because Taiwan and China don't get along politically, the government of Taiwan has imposed some restrictive policies," he adds.
The island's unsettled political status also limits location options elsewhere around the globe. Because Taiwan does not have tax treaties with many nations, the ensuing tax burden for firms precludes locating in other logical global hotspots – by themselves, that is.
Joint ventures are another story. Most major players in the consumer electronics industry partner up at some point, like Micron and Intel, because of synergies, and because of capital and resource advantages. But Taiwan electronics firms have turned the joint venture into a veritable art form, in part because this allows them to circumvent the treaty issue.
"Taiwan companies like the concept of shared risk, and joint ventures allow them to do this," Hammond-Chambers says, "whether it's shared risk on investment capital or on tariff or non-tariff barriers. There are some issues related to Taiwan's lack of diplomatic recognition around the world, like the lack of tax treaties, and these joint ventures can help with that."
Other Asian Routes
China isn't the only place that Taiwan firms are going. Like their counterparts in the U.S., firms are following the market, and, in some cases following the path to lower cost production. Increasingly, they are looking at India, while activity in Vietnam and Thailand has grown as well.
"Taiwan companies feel that India can be a significant location for them," Hammond-Chambers says. "It's a good match between India's software capabilities and Taiwan's hardware capabilities." In February, for instance, Hon Hai announced plans for a cell phone factory in India.
India's market for consumer electronics is expanding, too, and the lure of lower cost of production, combined with proximity to a large and growing consumer market is powerful. According to a report published in early June by manufacturing consultancy Plan B Manufacturing Ltd., India's small batch manufacturers are helping the country make its case in electronics manufacturing. Their capabilities are backed by forecast numbers from Frost & Sullivan that peg the Indian electronics market at $363 billion by 2015, from $28.2 billion in 2005.