Focus: Apple supplier Luxshare unnerves Foxconn as U.S.-China feud speeds supply chain shift

Foxconn Interconnect Technology

26/10/2020 03:01

* Foxconn set up task force to 'defeat' Luxshare - sources
    * Analysts see rise of Chinese tech supply chain amid U.S.
feud
    * Luxshare fits into Beijing's quest to move up tech value
chain
    * Luxshare to take 30% of iPhone production in 5 years -
analyst

    By Yimou Lee and Josh Horwitz
    TAIPEI/SHANGHAI, Oct 26 (Reuters) - Apple's  AAPL.O  top
iPhone assembler, Taiwan-based Foxconn, has set up a task force
to fend off the growing clout of Chinese electronics
manufacturer Luxshare, which it believes poses a serious threat
to its dominance, three sources with knowledge of the matter
said. 
    The project was initiated by Foxconn's founder Terry Gou,
according to one of the sources, to target Dongguan-based
Luxshare  002475.SZ , which is little-known internationally but
is poised to become the first mainland China-headquartered firm
to assemble iPhones - a turf until now dominated by Taiwanese
manufacturers. 
    The task force, which the sources say was created last year,
has been looking into Luxshare's technology, expansion plan,
hiring strategy and whether the company - which currently makes
only 5% of Foxconn's revenue - is supported by any Chinese
government entity.
    While the U.S.-China trade war and the coronavirus crisis
have intensified pressure on global supply chains, an
increasingly acrimonious tech feud between the economic giants 
has also prompted Beijing to strengthen efforts on creating
world-leading local tech firms - and Luxshare's growth
trajectory fits into that mould.  urn:newsml:reuters.com:*:nL4N2FL2YK
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    "Luxshare is set to rise ... it's just a matter of how fast
it could be," one of the sources said. 
    "It makes sense for China to build up its own supply chain
and Luxshare is in line with that state policy."
    
    RED SUPPLY CHAIN
    That state policy, analysts say, is gaining traction with 
the rise of China's "red supply chain", where Chinese firms with
apparent government support increasingly take on the work of
manufacturing products for Apple and other global firms.
    "Facing the rise of the red supply chain, the threat of
Taiwan manufacturers being replaced continues to increase,"    
Market Intelligence & Consulting Institute, a think tank backed
by Taiwan government, wrote in a September report.   
    Luxshare, whose chairwoman was once a worker at Taiwanese
Apple supplier Foxlink  2392.TW , acquired two smaller factories
belonging to Taiwanese iPhone assembler Wistron in China in
July. Previously, Luxshare was best known for making Apple's
AirPods. 
    One of the sources called it a "formidable opponent", and
said Foxconn has been conducting extensive research on Luxshare,
aiming to "defeat it completely."
    The sources, who have direct knowledge of the matter and are
familiar with Foxconn's thinking, declined to be named citing
the sensitivity of the issue.
    Public records reveal that while Luxshare is majority-owned
by Grace Wang and her brother Wang Laisheng, its minority
shareholders include state-owned Chinese investment company
Central Huijin Investment Ltd, which has a 1.38% stake. 
    Luxshare has also received over 1 billion yuan ($148.80
million) in government subsidies since 2016 to the first half of
this year, a Reuters calculation of its financial reports shows.
Roughly half of that sum came in 2019 alone.
    Foxconn told Reuters in a statement the task force described
in this story is "not grounded in facts" and there were "no
meetings or any other contact." 
    "There have also been no other extraordinary actions taken
by the management team." It did not elaborate.
    Luxshare declined to comment. Apple did not respond to a
Reuters request for comment.

    'BLOOD IN THE WATER' 
    Luxshare was founded in 2004 by Grace Wang, who told
Taiwan's Business Today in July that she was once a worker at
Foxlink, owned by Gou's brother, T.C. Gou. 
    Its journey up Apple's value chain has been driven in part
by acquiring smaller components makers, starting with the
manufacturing of connector cables for the iPhone and Macbook
through a 2011 acquisition of its Dongguan neighbour Lanto
Electronics, then by making acoustic components for the iPhone,
and eventually by manufacturing airpods.
    The company's revenue has risen in tandem with its advance
up Apple's value chain - sales in 2019 hit 62.5 billion yuan, up
75% year-on-year.
    That's roughly 5% of Foxconn's revenue, formally called Hon
Hai Precision Industry, although investor bets on the company's
prospects have lifted its market value to roughly $20 billion
above the Taiwan firm's $39 billion market capitalisation.
    Luxshare now gets 58% of its revenue from Apple, according
to Morningstar Research 
    The company's July acquisition of Wistron's iPhone plants in
Kunshan marks its most significant deal yet, which Fubon
Research said could help Luxshare capture up to 30% of iPhone
production within the next five years. 
    Two of the sources familiar with Foxconn said Luxshare had
also been actively poaching from Foxconn. In one case, one of
the sources said, Luxshare offered 500,000 yuan ($75,009) cash
upfront as a relocation subsidy for a senior Foxconn employee to
move family from Taiwan to China.
    David Collins, a manufacturing consultant based in Taipei
and Kunshan, says that Chinese firms see both Foxconn's legacy
status, coupled with its move away from China, as prime
opportunity to usurp it.
    "Foxconn's share price is down roughly 50% from two years
ago. They see blood in the water."
 ($1 = 6.6658 Chinese yuan renminbi)

 (Reporting by Josh Horwitz in Shanghai and Yimou Lee in Taipei;
Editing by Brenda Goh & Shri Navaratnam)
 ((Josh.Horwitz@thomsonreuters.com; +86 21 20830007;))