Foxconn steps up Vietnam capacity footprint in shift away from China: S&P Global

In line with the ongoing tech supply chain shift out of China, Foxconn is accelerating its capacity footprint across India, Vietnam and Mexico, S&P Global Ratings says in a recent report.

Global tech hardware firms have largely completed phase one of their shift out of China, but phase two will be much more disruptive and costly, the report notes.

The current focus on adding "midstream" tech production outside of China presents more credit risks than the prior stage – the expansion of downstream output outside the country.

The first wave of tech hardware firms expanding capacity outside of China largely involved downstream electronic manufacturing services (EMS) firms building in countries such as Vietnam and India.

This was less risky and less costly to execute. The production facilities are not too capital intensive; they can be rebuilt in a new country for moderate cost. Entities have easily found low-cost labor in the new markets, S&P Global clarified.

The reallocation of midstream capacity from China will involve even more spending, higher ongoing operational costs, and the possibility of botched executions, S&P Global stressed. More significantly, this phase will be hard to reverse as it involves heavy investment in plants and equipment that will be difficult to move.

Midstream tech firms will find it harder to reduce reliance on China, the report said.

Midstream entities need to achieve high volumes that justify their steep fixed costs. For this reason, they will want centralized production with suppliers and customers close at hand, in addition to a specialized work force.

It was likely that midstream suppliers were shifting midstream production from China only because their customers werer requesting it. For example, Foxconn Industrial Internet Co. Ltd., China's largest manufacturer of high-precision components, will significantly increase capital expenditure, most of which is likely to be outside of China, at the request of its largest customers.

Regarding Foxconn, a key supplier to Apple, S&P Global emphasized most of Foxconn's production remains in China, however, the company is accelerating its capacity footprint across India, Mexico, and Vietnam.

Foxconn’s annual capital expenditure can top RMB13 billion ($1.83 billion) in the next two years, higher than RMB6-9 billion in the past three years. Much of this spending will be used to build production capacity outside of China, S&P Global highlighted.

Foxconn has substantial financial resources to cover its heavy global investment. The higher costs related to its overseas expansion will likely be offset by improving margins related to its fast-growing cloud segment, bolstered by rising sales of AI servers. S&P Global said.

In June, Brand Cheng, CEO at Foxconn Industrial Internet, informed Vietnamese Prime Minister Pham Minh Chinh that the Taiwan-headquartered firm had invested around $4 billion in five Vietnamese provinces, employing 80,000 people.

The company recorded a total operating income of $6.7 billion from its Vietnamese affiliates in 2023.

One of the most recent investments Foxconn has made is an additional $551 million in Vietnam’s northern coastal province of Quang Ninh. A part of this investment is a $263.7 million project to manufacture Nintendo Switch gaming consoles .