After a Covid-19 outbreak at a Foxconn factory in Zhengzhou, China, some workers chose to go home. Pictured here are shuttles on October 30, 2022.
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BEIJING – The decision to maintain Covid-19 control is prompting companies to look to factories outside the country, according to The Economist Intelligence Unit.
“What we’re hearing from companies [is] Nick Marro, global trade leader at The Economist Intelligence Unit, said.
“If it’s a developing economy, if things can’t get done, then that affects decision-making,” he said. “We don’t expect companies to leave China. We just expect them to diversify their footprint, China plus one.”
Beijing’s strict Covid control measures have helped the country get back to work while the rest of the world still grapples with the pandemic in 2020. While other countries have relaxed most of the time. restrictions and choosing to “live with Covid”, Beijing has stepped up its virus testing and extensive control requirements since Shanghai was locked down for the first two months of this year.
Authorities have tried to keep key factories operating under so-called closed systems, in which employees live and work in the same location, or at most just commute between facilities. manor and house.
A Covid outbreak at Apple supplier Foxconn’s factories over the past few weeks highlight the ongoing challenges factories face in trying to stay afloat while preventing infections from spreading.
“I don’t think we can really extrapolate from just one case,” said Marro, “but this is remarkable because it shows a kind of breakdown in that closed-loop system.
Over the weekend, some Foxconn workers are said to have been forced to escape the control of Covid at the factory. The city government then announced the plan support workers who want to leave the factory to return to their hometown.
Foxconn did not respond to CNBC’s request for comment.
“Clearly if they don’t change the Covid zero policy, we’ll see cases like this happening again and again,” said Patrick Chen, CLSA’s research lead in Taiwan. He said he expects little change in policy unless vaccination rates increase.
“I don’t see many added costs associated with managing or manufacturing this closed cycle, but there will certainly be some negative impact on employee morale or overall quality,” he said. in production productivity”. monetary incentives to keep employees at the factory.
Typically, Chen said workers at factories like Foxconn’s receive a monthly salary of about $1,000.
Weak demand reduces impact
While Foxconn’s Zhengzhou factory handles important iPhone production, Chen said weak demand for smartphones means production disruptions have less of an impact.
The global smartphone market shrank 12% in the third quarter from a year ago, although Apple retained slight growth. Opposite study.
Almost twice as many US companies cut investments in China this year compared to last year, American Chamber of Commerce in Shanghai found in a survey this summer.
At the end of the day, uncertainty is the biggest problem for investors.
Nick Marro
Economist Intelligence Unit
The survey found that just under a third of respondents said they were increasing investment in the country. But that number is down from 38% last year.
CLSA’s Chen said the rising costs of running a sizable operation in China have prompted tech companies to shift production of less complex products overseas.
However, he noted that it is difficult for Apple to find another 200,000 to 300,000 workers – like at the Foxconn Zhengzhou factory – to make iPhones outside of China, except in India.
The American smartphone giant announced in September that it is manufactured its latest phone model, iPhone 14, for the first time in India. JPMorgan analysts predict that only 5% of Apple’s global iPhone 14 production will go to India this year.
In recent weeks, China has announced measures to encourage more foreign investment in manufacturing and specific industries such as animation and brewing. The extent of implementation remains unclear, especially as controlling the Covid outbreak remains a top priority for now.
“Foreign businesses that want to be in China, and companies that are still in this market, I think we can take them at face value when they commit to the Chinese market,” said EIU’s Marro. . “They are waiting for signals that the operating environment and macroeconomic environment will improve.”
“The biggest problem is that those signals don’t come in,” he said. “At the end of the day, it is uncertainty that is the biggest problem for investors.”
– Arjun Kharpal of CNBC contributed to this report.
