From Foxconn, the development of low-end manufacturing industry is "super-expected"

Along with the inflection point of China's demographic dividend, the prices of various factors have risen, and the profitability of low-end manufacturing industries characterized by labor intensiveness has been weakened. However, Foxconn's development path shows that there are new opportunities for “secondary” development in these industries, or there are more than expected factors.

Two major misunderstandings for low-end manufacturing

After 2010, China entered the period of population dividend turning, the working-age population declined, the total labor supply gradually reached its peak, and the labor factor price rose significantly. In this context, labor-intensive industries represented by textiles are considered to be in the “mature period” or even “recession period” of the life cycle, and the growth space is limited. In fact, there are two "mistakes" in this judgment.

One of the misunderstandings: The decline in export growth means that the competitiveness of low-end manufacturing is weak. In fact, the decline in export growth is partly due to the fact that domestic companies are actively shifting to Southeast Asian industries and accelerating localized production. Therefore, from a macro perspective, China's low-end manufacturing exports characterized by labor intensiveness are shrinking; Southeast Asian textile and garment, electronic foundry and other industries are growing rapidly. However, at the micro level, some Chinese companies that have set up factories in Southeast Asia have been boosted by their internationalization and peripheralization strategies, and their profitability has been further enhanced.

Misunderstanding 2: The low-end manufacturing industry is a sunset industry, and the growth space is limited? Taking history as a mirror, you can know how to replace it. Starting from Foxconn's successful case, try to find an effective path for the future development of China's low-end manufacturing industry. The first is to reduce the cost of labor, land and other factors through industrial transfer, and increase the gross profit margin. Then, in exchange for the scale effect and market share in terms of gross profit margin, it will work closely with the “Time Brand”. By shifting to Southeast Asian industries, low-end manufacturing companies will re-establish and consolidate their competitive advantage. The best among these companies will be the next Foxconn.

The process of correcting and clarifying the above two "misunderstandings" is the marginal improvement of the leading competitive advantage of the low-end manufacturing industry, which stands out in the market.

Foxconn: The road to growth from small Taiwanese companies to international giants

Through industry transfer, pressure on factor costs and increase gross profit margin. In the 1970s and 1980s, Foxconn was an unknown electronic foundry in Taiwan. In 1989, Foxconn ranked 294th among the 1,000 largest manufacturers in Taiwan. In the early 1990s, Foxconn began to invest and build factories in the mainland. With the characteristics of low cost of labor, land and other factors in the mainland, it quickly expanded its scale and established several manufacturing bases in Shenzhen and Kunshan.

Through industrial transfer, Foxconn gradually established a competitive advantage. For example, in 1990-1996, Foxconn's gross profit margin exceeded 20%; at the time, its main competitor, Compal Computer, only set up a factory in Taiwan, with a gross margin of only about 10%. In 1995, Foxconn released its production capacity in the mainland, and the gap with Compal's gross profit margin even widened to 20%.

In exchange for orders for gross profit, the international giant of electronic foundry. In the mid-to-late 1990s, Foxconn basically completed the transfer of production capacity to the mainland, and Taiwan's main competitors also gradually moved their production bases to the mainland. Foxconn keeps pace with the times and adopts the strategy of “Maori for orders”, which has rapidly increased its international market share from 3% to 18%, and the gross profit margin dropped from 26.8% to 6.7%. From the rank of 100 companies, Foxconn jumped to Taiwan's largest private manufacturing leader.

After 2000, Foxconn continued to achieve scale growth through gross profit. In 2003, the global market share increased to the fifth place, and after jumping to the top in 2007, it has remained so far. After becoming the world's largest foundry manufacturing company, Foxconn's bargaining power in the industry chain was gradually restored, the operating capital accounted from negative to positive, and the net profit subsequently increased rapidly.

Cooperation with international brands has become the key to scale growth. Foxconn continues to consolidate and expand its cooperation with brand partners by taking advantage of cost advantages and strict quality control measures. This strategy ensures the company's continuous capacity expansion from the demand side. For example, in the 1990s, Foxconn was part of Compaq, Dell, IBM, Apple iMac, HP OEM personal PCs and notebooks.

At the beginning of the 21st century, Foxconn's brand partners expanded to Intel, Nokia, Motorola, Sony Ericsson and Nintendo. After 2006, Foxconn officially entered the Apple mobile phone industry chain. From chassis and precision parts to notebooks and mobile phones, Foxconn's cooperation with international brands has been continuously upgraded with the development of the industry.

Throughout the history of Foxconn's development, the two strategies have laid the road to success for the international giants of electronic foundry: first, “landing” , through the transfer to the mainland industry, reducing costs, establishing competitive advantages, and forming a larger gross profit space. Followed by “Maori for orders” , strengthen cooperation with international brands, rapidly expand production scale and gain market share. Taking history as a mirror, 20 years later, under the trend of China's industrial transfer to Southeast Asia, China's low-end manufacturing leaders are also expected to replicate Foxconn's successful experience, re-establish and consolidate competitive advantages, and achieve secondary growth.

China's transfer to Southeast Asian industries: taking textiles and electronics as examples

China's textile industry is moving to Southeast Asia for industrial transfer. With its advantages of cheap labor costs and free trade , Southeast Asia has become the first choice for China's textile industry.

Similar to Foxconn, Chinese companies are taking advantage of Southeast Asia's cost and free trade advantages to further strengthen cooperation with international brands. The industrial transfer has enabled China's leading textile companies to reduce costs, broaden the market, regain and further consolidate their competitive advantages, and thus gain the necessary roundabout space for strengthening cooperation with international brands and striving for new orders. In the process of the textile industry shifting to Southeast Asian industries, the cooperation between leading enterprises and international brands has been strengthened, and the cost advantage has further catalyzed the scale effect.

With the transfer of China's industry, the global textile industry's production and market share have undergone major adjustments, showing the "China + Southeast Asia" two strong pattern. On the one hand, the growth rate of China's textile exports has declined since 2010 and is now at a negative growth. On the other hand, the ASEAN textile industry has achieved a blowout development, cotton yarn imports have increased rapidly, and cotton and garment exports have grown rapidly.

According to statistics, in 2012-2016, the market share of Chinese textile companies in the United States dropped from 40.31% to 37.91%, and the market share in the EU fell from 50.43% to 39.86%. At the same time, the market share of ASEAN and South Asian companies continues to climb.

However, the decline in China's export growth rate does not mean that the competitiveness of leading textile companies is weak. In fact, the decline in export growth was partly due to the fact that Chinese companies took the initiative to transfer to Southeast Asian industries and accelerated local production in the local area.

Therefore, from a macro perspective, China's textile industry's export growth rate and market share are shrinking; Southeast Asian textile and garment, electronic foundry and other industries are growing rapidly. However, at the micro level, the leading Chinese enterprises that have set up factories in Southeast Asia have benefited from the internationalization and peripheralization strategies, and their competitive advantages have been continuously improved, and their profitability has been further enhanced.

In the electronics industry, cost advantages and market demand are the main driving forces for the electronics industry to move to Southeast Asia. First, similar to the textile industry, low labor and land costs are one of the main considerations for the transfer of electronic companies to Southeast Asian industries. Second, demand is pulling. According to statistics, in the second quarter of 2017, smartphone sales in emerging markets in Asia increased by 13% year-on-year. Among them, Malaysia grew by 31% year-on-year.

The development of the electronics industry in Southeast Asia has provided favorable conditions for Chinese companies to accelerate industrial transfer. At present, in the global electronics industry chain, Southeast Asian companies are mainly responsible for OEM, and rely on the supply of parts and components of Chinese electronics companies. The terminal electronics giant (such as Samsung) will accelerate the industrial layout and will drive Chinese electronic component manufacturers in the middle reaches to migrate to Southeast Asia.

Looking for the next Foxconn from the industry transfer leader

With the promotion of the “Belt and Road Initiative” and supply-side reforms, China will accelerate the transfer of industries to Southeast Asia. On the one hand, the “One Belt, One Road” capacity cooperation accelerates the migration of low-end manufacturing enterprises characterized by labor intensiveness in China; on the other hand, the supply-side reform is committed to “three to one, one reduction and one subsidy”, eliminating backward production capacity and pressing Under the influence of internal and external forces, the company will speed up the adjustment of its business strategy and further optimize its institutional layout.

In the process of China's transfer to Southeast Asian industries, reference to Foxconn's development path, leading enterprises including textiles and electronics, will first reduce the cost of labor, land and other factors through industry transfer, and increase gross profit margin. Then, in exchange for the scale effect and market share, the company will closely cooperate with the “Time Brand” to further consolidate its competitive advantage. The best among these companies will be the next Foxconn.

With the production and production increase of fabrics and garment manufacturers such as Shenzhou International (02313) and Nanxun Group in Vietnam, the color spinning enterprises that have formed production capacity will have a more competitive advantage. (Editor: Hu Min)

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