iPhone maker Foxconn’s cautious pivot to India shows limits of ‘China plus one’

When Foxconn chair Young Liu was in Tamil Nadu two weeks ago to discuss more investment by the iPhone manufacturer in the southern Indian state, two ministers from neighbouring Karnataka sought him out for their own meeting — and later produced documents claiming Foxconn also intended to build two factories in their state.

While Foxconn insisted it had not committed to any project, the Karnataka government’s lobbying was a sign of the intense competition brewing in India to attract more investment from the world’s biggest contract electronics manufacturer, as Apple and other tech companies diversify away from their reliance on China.

Multinationals’ desire for a “China plus one” strategy, following supply chain disruptions and geopolitical tensions between Washington and Beijing, is driving Foxconn into a renewed push into India, where it first invested 15 years ago but where it still only employs some 50,000 of its 1mn global workforce.

In recent months the group has broken ground for a factory near Hyderabad that government officials said would make smart headphones, and it has acquired land near the airport in the Karnataka capital Bengaluru for an iPhone plant. Another site near Hyderabad and two more in Karnataka are in the planning stage, according to an internal Foxconn presentation reviewed by the Financial Times.

“Ever since 2018 there has been this move to try to have a more geographically diversified tech supply chain,” said Gokul Hariharan, head of Asian technology research at JPMorgan. “During the pandemic, we saw some of these things delayed. But since last year, when things started to normalise a bit, diversification has picked up.”

India now accounts for $10bn of Foxconn’s annual revenue, according to the presentation. That is 4.6 per cent of the company’s $216bn 2022 revenue, more than double the 2 per cent registered in 2021. Liu, who has visited India at least twice in the past year, is expected to update investors on his plans there when he presents second-quarter results on Monday.

Still, the push into India is also revealing limits to Foxconn’s willingness and ability to diversify. Foxconn executives and other observers dismiss the expectation that India could come even close to matching China’s role as a global technology manufacturing hub.

“China can still supply the US and a lot of other foreign markets,” said a Foxconn executive. “In India, building a supply chain to satisfy the growing domestic market, that is reasonable — and then that can become a production base for a limited region, the markets in the vicinity of India.”

Liu has said China accounts for 75 per cent of Foxconn’s global operations, up from 70 per cent before the pandemic. He has not given a target for a more distributed footprint, reflecting a decidedly cautious attitude towards India.

According to Foxconn’s internal presentation, it currently has nine campuses in India with 36 factories. Its operations are mainly concentrated in Tamil Nadu and Andhra Pradesh, producing smartphones, feature phones — mobile phones with fewer functions than smartphones — television sets and set-top boxes for customers including Sony, Xiaomi and Apple.

In a domestic market dominated by Chinese-made feature phones and Androids, Indians are starting to buy upscale iPhones in greater numbers. Apple this year opened its first two stores in the country in Mumbai and New Delhi.

For Narendra Modi’s government, electronics is a key part of its “Make in India” programme meant to boost investment in the country’s chronically underperforming manufacturing sector. Seeking to secure more of the factory jobs that have for decades gone to China and south-east Asia’s export-led economies, India is offering investors billions of dollars’ worth of production-linked incentives (PLI). 

But a person close to Foxconn said India’s subsidies were hard to get. “Money under PLI is disbursed only based on previous-year shipments, and even under new policies that allow subsidies to be disbursed upfront, like for semiconductor ventures, many have not qualified,” the person said.

One example is the agreement struck last year between Foxconn and Indian resources group Vedanta. The companies said they intended to set up a semiconductor and display production complex in Modi’s native state of Gujarat.

However, Foxconn severed its partnership with the heavily indebted Indian company last month after the pair failed to secure government approval for a chipmaking subsidy. Both companies have said they intend to reapply separately under a modified call for projects by the government. 

Executives said in private that subsidies were the decisive factor for any new project. If the level of budget support was right, Foxsemicon, the group’s chip-tool subsidiary, could consider setting up a plant in Bengaluru, people familiar with the company’s decision making said.

Foxconn is also exploring opportunities in India for electric vehicles. But while the company’s hopes for future growth and higher margins rest on this segment, executives believe it will be years until the market is mature enough to justify a major move.

That leaves the group’s traditional main business of smartphone manufacturing.

“Currently we are only doing assembly, but everyone hopes that we can make components and modules, such as casings and screens,” said one executive.

People familiar with the company’s plans said these steps would be largely limited to Foxconn group companies for the time being because a large portion of the China-based supply chain consists of Chinese producers, which are having difficulty getting allowed into India.

Another big question is how far Foxconn can make its India operation more cost-effective, which is key in a business with razor-thin profit margins. Neither India — nor any other of the newer production bases such as Vietnam — can accommodate single campuses with 100,000 workers such as the ones Foxconn runs in China, according to industry executives, who argue that most Indian workers refuse to leave their homes for a faraway job and live in a dormitory.

With Apple pushing for a faster increase in production, Foxconn is testing the limits of those assumptions, expanding its 24 existing dormitories and building new ones. A person familiar with its India operations said that while it was “highly unlikely” that any single India campus would house 100,000 employees or more, there was significant room for scaling up operations with a network of bases not far from one another where at least part of the staff lived on site.

Still, analysts believe this would incur steep costs — and even then have limits.

“China will still be the primary location for the high-volume consumer products,” said JPMorgan’s Hariharan. “They will probably add one or two locations for different products, but we will not get one big hub again — that may just not be feasible.”