Foxconn’s Savvy Investment: Hedging against an Emerging Trade War

“Designed by Apple in California; Assembled in China” are the words engraved on the back of Apple’s ubiquitous iPods, iPads, and iPhones.  Might that soon change? 

Foxconn, the Taiwan-headquartered company that does Apple’s assembling in China, announced last week that it will invest up to $10 billion in production facilities in Wisconsin. That sounds like something to cheer. After all, investment is essential to economic growth and foreign direct investment tends to nourish the domestic commercial eco-system by bringing in companies with new ideas and better ways of doing things.

But Foxconn is in the business of contract manufacturing—producing, but mostly assembling, electronics products branded and owned by other companies. It’s not a high value-added operation requiring high-skilled workers. It’s the kind of supply chain operation better suited to economies with an abundance of low-skilled workers willing to work for much lower wages than Wisconsin’s work force expects to earn. Then again, economic considerations aren’t the only determinants of investment decisions.

Back in 2011 at a dinner in Silicon Valley, President Barack Obama asked Apple’s founder and CEO Steve Jobs why all of the production and assembly of the company’s products couldn’t be done in the United States. Jobs was a bit dismissive, responding that those kinds of jobs weren’t coming back. 

But the message wasn’t lost on other business executives, including GE’s Jeff Immelt, who was quick to announce repatriation of some operations that had recently been outsourced to China. The president was in a political jam and his reelection efforts might benefit if he were to show that U.S. companies were reshoring and bringing those manufacturing jobs back stateside.

Foxconn’s investment in Wisconsin is the commitment Obama was seeking from Steve Jobs, who knew that assembling iPhones in the United States would be, if not cost prohibitive, irrational from a commercial perspective. But sometimes investment location decisions are driven more by political considerations than economics. Fear of political retribution and ingratiation to key policymakers are just as relevant as the regulatory environment, taxes, infrastructure, and skills of the workforce when deciding upon where to locate production. The rapid and virtually uninterrupted growth of Washington, DC over the past decade, while the rest of the country stagnated and limped along, attests to those unfortunate facts. The dividends from political investment are often greater, and more reliable, than growing a business the old-fashioned way.

With plans to build a facility in the United States that it estimates will employ thousands of workers, Foxconn has succeeded in winning Trump’s affections. That the plant will be built smack dab in the middle of the House Speaker’s district makes the deal all the more laudable from a politically strategic perspective. But, most importantly, Foxconn’s investment in the United States is savvy because it will provide some insulation for Apple products – and many other U.S. and western branded electronics – from the worst effects of an increasingly likely U.S.-China trade war.

The heat is being turned up on a low-grade, high-tech trade war that has been simmering and sometimes churning over the past decade, with the U.S. Trade Representative’s Office announcing it will initiate an investigation into China’s forced technology transfer policies, which could lead to the imposition of trade restrictions. 

Compelling China to change course with respect to these kinds of market access barriers is long overdue, but U.S. missteps (such as imposing restrictions unilaterally through channels not sanctioned by the World Trade Organization) could initiate a much larger and more deleterious sequence of protectionist measures. The prospect of that happening is what Foxconn is hedging against with its investment inside the U.S. tariff wall.

Depending on how things turn out, you may soon find engraved on the back of your smart phones the words: “Designed by Xiaomi in Shenzhen; Assembled in Wisconsin.”