In Trade War of Words, Huawei Goes on Offensive

“Huawei won’t move manufacturing to America.”

The headline sounds, well, weird, almost like “Tiffany’s not robbed.”

But the crux of it is a tale of global politics and business tactics growing ever-more-fascinating by the day.

In short, at the Consumer Electronics Show this week, the head of Huawei’s consumer business group issued a statement saying the smartphone maker doesn’t think much of the incoming Trump administration’s habit of calling out companies that build and import product to the US.

While Trump has thus far had mostly automakers in his sights (GM, Toyota, Ford), Apple has been the poster child for the war of words over trade. By speaking out at CES, the world’s largest technology trade show, Huawei is among the first companies, and likely the biggest, to go on the offensive.

“If [companies] move all manufacturing to the U.S., some manufacturing is not good for US companies, because costs will likely increase,” said Richard Yu, who was also a keynote at the show. “If you move all that [low-cost] manufacturing to the US, you’ll damage the US.”

Huawei has an uneasy history with the US. Its head is a former Chinese military officer Ren Zhengfei, and the company was banned from supplying telecom equipment to US government buyers after a Congressional committee accused the firm of spying on behalf of China. It is also the third-largest smartphone OEM in the world, and given the easy nature of using those devices as tools for capturing user habits and data, that is hardly less troubling.

More complex, Huawei, like Apple, depends heavily on Foxconn as a contract manufacturer. Although based in Taiwan, Foxconn founder and chairman Terry Gou is a strong supporter of China. He also is reportedly considering a run for president in his native Taiwan, a move that if successful would likely strengthen the ties between the island and mainland — and potentially further complicate already precarious relations between China and the US.

Until the new administration is officially installed in two weeks, the machinations are mostly bluster. But the chatter shows no signs of abating, and the campaigns for — and now, against — Made in America are just starting to heat up.

Patents, Home and Abroad

The annual review of the world’s patent filings always tells an interesting story.

Some 2.9 million applications were filed in 2015, up 7.8% year-over-year. China led with 1.01 million filings, followed by the US (526,000) and Japan (454,000), reports the World Intellectual Property Organization.

But … (when it comes to China there’s always a big but) … only 4% of China’s applications were outside their own borders, while 45% of US applications were filed abroad.

Computer technology (7.9% of the total) saw the highest percentage of published patent applications worldwide, followed by electrical machinery (7.3%) and digital communication (4.9%), WIPO reports.

WIPO doesn’t indicate why Chinese inventors are by and large choosing only to protect their claims in-country. Here are some possible reasons:

1. The US requires that inventors obtain a “foreign filing license” before filing foreign patent applications on inventions that occur in the US.  “This allows the government to assess, for example, whether the technology could threaten US national security,” says Dennis Crouch, a professor at the University of Missouri School of Law and co-director of the Center for Intellectual Property and Entrepreneurship.

2. China, on the other hand, requires inventors to first file domestically, where it will then determine whether the invention needs to remain secret for security or other purposes. Only then is the inventor allowed to submit an application abroad.

In summary, domestic firewalls in the world’s two largest markets could well be hampering outsiders.

Foxconn Labor Strategy Emblematic of China’s Growing Influence

A pair of University of Padua researchers have written a really interesting comparison of Foxconn’s management practices in Turkey and the Czech Republic versus those in China.

Among the findings:

  • Foxconn relies heavily on a temporary work staff in the CR, where 40% of its 9,000 workers are temporary, but all its 350 staff in Turkey are direct.
  • In both countries, Foxconn’s strategy is to drive down labor costs.
  • Foxconn leans heavily on the respective countries for financial support in the way of tax rebates, worker hiring rebates, tax holidays and other incentives.
  • Foxconn actively seeks to minimize the influence of worker unions.

The researchers say the emergence of China is having a direct impact on labor practices elsewhere, and global production is inseparable from “social reproduction.” It’s worth a read.

Does Rising Nationalism Pose Threat to Electronics Supply Chain?

The amount of geopolitical discord around the world at present is stunning: Thailand, Vietnam, Korea and other major electronics manufacturing hubs are seeing a rise in nationalism and severe internal tension over how to address foreign pressure.

Thailand in May endured yet another military coup — its 19th since declaring independence from its monarchy in 1932. Some observers feel the military wants a permanent seat in the national parliament, a move that could hinder its democratic movement.

In Vietnam, citizens are outraged at what it feels is Chinese strong-arm tactics. Its Northern neighbor has provoked many Southeastern nations over the past few years, often by occupying seaborne territory that others had staked claims to in the past. (The Philippines have a similar complaint dating to 2012, when China evicted Philippine fishermen from their long-held fishing grounds.) Lately, Chinese oil rigs took up in Vietnamese waters, leading to riots at Fittec, Foxconn and elsewhere, where domestic workers took aim at their Chinese* employers.

Korea is losing business to Vietnam, aided in part by its own OEMs: Korea is now the largest investor there, pumping in nearly 23% of all outside investments in the first quarter this year. As Samsung relocates its cellphone manufacturing there, Vietnam is on track to produce 250 million handsets this year, versus 200 million in China and just 30 million in South Korea. As the linked article indicates, as of March 2014, Samsung Electronics subcontractors had invested an aggregate $2 billion in Vietnam. Meanwhile, while Samsung buys a reported 53% of its parts from Japan, South Koreans now view Japan as their second-leading military threat, next to North Korea, and resentment from World War II is rising once again.

Indonesia is suffering through a contested presidential election, one that involves an ex-general and the possibility of an overturned ballot result.

Japan, my friend Dr. Hayao Nakahara tells me, has essentially stopped investing in new manufacturing sites in China, with the only new developments minor capacity add-ons to existing plants. The two nations have been at odds over everything from possession of uninhabited islands in the East China Sea to a rehashing of wartime atrocities.

Southeast Asia is home to the bulk of the world’s electronics production, and holds the majority share of products built for the consumer, industrial/instrumentation, telecommunications, PC and peripherals end-markets (not to mention the vast majority of the raw materials and components supply). We’ve absorbed several of nature’s bullets of late — flooding in Thailand, the typhoon in Malaysia and of course the 2011 earthquake and subsequent tsunami in Japan. I am told that the media reports have exaggerated what’s happening on the ground in Southeast Asia, and that on a day-to-day basis little dissent is noticeable. That may be true, and to be sure, the self-inflicted disruptions have thus far been held to a minimum. Given the number of countries involved — unprecedented in recent times — and the enormity of what’s at stake, we can’t help but feel it will take some luck if the next supply-chain breakdown is only as bad than the last.

*Fittec is based in Hong Kong, Foxconn in Taiwan, but most employees and manufacturing for both companies are in China.

Taiwan’s New Gravity

How bad is the labor problem in China? We are aware, of course, of the steady hikes in wages, which have annually risen by at least double-digits for over a decade.

But now it’s being reported that Taiwan-based component makers have had enough, to the point where some are considering repatriating their production from China, or packing it up for Brazil, Mexico and elsewhere in Southeast Asia.

Now, I’m not going to put too much stock in an unsourced report. That said, the notion that Taiwan could steal back jobs from China has been floating around for months. The average salary in Taiwan has risen just 0.9% in the past decade, despite a working population of just 11 million. (China, by contrast, has an estimated 920 million working aged citizens.) Monthly wages in Taiwan’s manufacturing sector were NT 41,087 (US$1,358) as of October,  and have trended considerably more slowly than China for some time.

All in all, it’s a stunning development, given that just a few years ago China’s promise appeared mostly still in the “potential” stage. Is it possible that promise will ultimately go unfulfilled?

System Failure

Apple is front and center today saying the death of a 15-year-old worker at one of its subcontractors was not the result of conditions at the Pegatron factory in Shanghai.

The teenager died of pneumonia, according to news reports. He was employed after using someone else’s ID to get the job.

It’s very sad that this happened. But the truly uncomfortable fact is that the worker was 15.

Apple’s response, as usual, was stiff and unconvincing: “Apple has a long-standing commitment to providing a safe and healthy workplace for every worker in our supply chain, and we have a team working with Pegatron at their facility to ensure that conditions meet our high standards.”

Underage workers continue to gain employment in Chinese factories. Why does this continue to happen there? Is it a failure of management? Is it cultural? And how many others will die before the system is fixed?

 

 

Why a Tight Supply Chain Is Actually Less Restrictive

This is a great first-hand account of why a tech OEM found manufacturing in Mexcio to be far superior to China. The shorter supply chain, lower inventory, access to plentiful skilled engineering and machine talent (and accountants versed in manufacturing operations) — all of these have played roles in the decision-making and success of 3D Robotics.

Is A New Vision Needed?

China’s industry minister has put forth an aggressive goal of building five to eight giants in the electronics industry with $16-plus billion in sales in the next two years through consolidation and overseas acquisitions and alliances. The Ministry of Information and Technology’s blueprint wants to move the country away from low-cost electronics manufacturing toward higher-yield, higher technical segments such as Lenovo and Huawei Technologies.

We believe that China will reduce the mining of rare earth metals to increase margins and offset recent price declines while using these materials as leverage in foreign dealings. The country is still far behind the rest of the world in chip design and manufacture, so we can expect major moves in that arena. The China Development Bank will put $20 billion behind ZTE to help it reach the $16 billion goal. The Haier Group, one of China’s bigger electronics companies, spent $700 million to buy a New Zealand company to increase access to Australia and Europe while increasing its technology base.

One has to wonder how the rest of the world will compete with this massive government supported approach. (China has a stated similar goal for automotive calling for 10 companies to have 90% of its industry concentration by 2015.) One has to speculate who will join forces with China’s electronic industry forays. How greatly does it threaten open markets and free competition elsewhere? How serious a role does industrial espionage play in this new game with newly stated ambitious goals? How big a role will defense issues and security have? Does America need a new vision for the future?

China Chemical Registration

As of March 1, 2013, the following must obtain an appropriate Registration Certificate for Environmental Management Registration for Hazardous Chemicals in China:

  • newly established companies that produce hazardous chemicals
  • companies using hazardous chemicals for production purposes
  • companies importing or exporting hazardous chemical.

Registration Certificates will be issued by China’s Environmental Protection divisions and will be valid for three years. Existing companies that produce or use hazardous chemicals for production purposes have a three-year transition period to complete registration— this registration is separate from the registration required by the State Administration of Work Safety and it is said to aim at better tracking of the environmental impact caused by hazardous chemicals, rather than the health and safety impact.

Perhaps the biggest concern with the new Chinese chemical policies overall is how they add to the larger international weave of chemical restrictions, standards and regulations. The way to handle China’s hazcom rules— all of them, new and future— is to make sure that the way your company handles REACH, RoHS, Prop 65, GHS and TSCA also handles any Asian restrictions as well, from South Korea to Japan to India and China.

Newbies, look out. Newly established manufacturers must register their hazardous chemicals before completion and final acceptance of their project, while importers must register before they import a hazardous chemical for the first time. And the Registration must be complete before the final acceptance of any new construction projects or expansion projects of hazardous chemical manufacturers and users.

Legacy. Entities in China that manufacture or import hazardous chemicals must register their hazardous chemicals with China’s State Administration of Work Safety and China’s Ministry of Environmental Protection (MEP), while entities that use hazardous chemicals must register with China’s Ministry of Environmental Protection (MEP). Hazardous chemical manufacturers and users must also engage in material disclosure, that is, public disclosure of information regarding their hazardous chemicals production and use.

Information to submit when registering includes:

  1. classification and labeling information
  2. physical and chemical properties
  3. primary use
  4. hazardous characteristics
  5. safety information for storage, use and shipment
  6. emergency response measures.

In addition, hazardous chemical manufacturers must maintain a 24-hour domestic telephone hotline to provide users with emergency consulting services and technical instructions and other assistance with respect to hazardous chemical accidents. Another option is to assign the hotline to the Chinese government.

Action. In light of these regulations, the legal firm Baker & McKenzie suggests that entities in China who are manufacturing, importing, or using hazardous chemicals should consider: Designating certain employees, or creating a specific department, to be in charge of hazardous chemical registration and ongoing compliance requirements Conduct due diligence on suppliers in China who may be subject to these requirements as part of

Supply Chain Management (SCM). Rather than setting up an entire department to manage these changing compliance requirements in Asia, we would suggest subscribing to a secure SaaS software that manages compliance for you. In the end, it’s the most cost-effective way to manage fluctuating global regulations and supplier relations around them.

Outsiders Taking Over

Is the bloom off the rose in Vietnam?

The Vietnam News Service is reporting that with many businesses shifting from production to imports, Vietnam’s electronics industry is “standing on the verge of extinction.” More than 90% of the nation’s electronics exports are performed by foreign-based countries, the Viet Nam Electronics Business Association maintains. Meanwhile, major OEMs are closing domestic plants and switching to an import model to serve Vietnamese customers.

For those who see Vietnam as an alternative to China, this is not the wakeup call they expected.