Foxconn Furies: A Warning Shot for Engaging with China – Center for European Policy Analysis Feedzy

It’s a familiar script for autocrats. Weaken a powerful company, then buy it on the cheap. Vladimir Putin did it with the oil giant Yukos. China’s Xi Jinping did it with the UK chip designer ARM. And now will China do it with Taiwan’s tech Foxconn?

Beijing has announced a tax investigation into Foxconn. The crackdown comes as tensions soar between China and the West. While the West aims to reduce its economic dependence on Beijing and slow China’s tech advances that feed its military, an increasingly autocratic China aims to reassert control.

Taiwan’s Foxconn finds itself caught in the middle. It is the largest single foreign investor in China and arguably has done more than any single company to turn the country into the world’s high-tech manufacturing hub. Foxconn founder Terry Gou is running in the island’s presidential election and Taiwan sees the tax probe as a “slap in the face.”

Another motive could be retaliation against recently reinforced US semiconductor sanctions. As the largest contract manufacturer of the iPhone, the Foxconn crackdown represents a blow against one of the most successful US tech companies, Apple.

History suggests the outcome will be painful. China’s Communist Party has a long-term strategy of taking control of intellectual property and routes-to-market from democratic countries, by fair means or foul. Its motivations can be either political or commercial, or a combination of both — and the methods range from tough but fair to outright extortion.

Start with the tough but fair. These tactics target Western start-ups with valuable patents but have run out of cash. A good example is the Cambridge (UK) Internet of Things chip developer Neul, which designs lightweight, low-power communications chips that allow machines to “talk” to each other. Chinese telco vendor Huawei scooped it up for a mere $25 million.

Another fair strategy is to take over failing manufacturing facilities for their IP and brand portfolio. The UK’s famed MG Rover Cars suffered this fate. So did Sweden’s Volvo cars. In these cases, Chinese investment can be positive, turning Volvo, which had insufficient scale to succeed on its own, into an electric car leader.

Rational and ruthless commercial logic moves much manufacturing to China. Consider Netherlands-based Philips, born in 1891 producing light bulbs. After World War II, it boomed, becoming the world’s consumer electronics leader, inventing the first compact cassette audio player, the Laser Vision optical disc, and the audio CD. In many ways, Philips was the Apple of its time. But the Dutch company could not keep out-innovating the competition. A decade ago, China’s TPV Technology bought its flagship TV operations. (Irony of irony: TPV started out, like Foxconn as a Taiwanese company that grew massively thanks to facilities in mainland China, only to be bought out and back to the mainland).

Although such Chinese tactics are fair, they often can sour into unfairness. With China’s Wintech having bought another Philips firm, chipmaker Nexperia, massive government subsidies will enable it to dump legacy chips, the lifeblood of the electronics industry, wiping out remaining Western production and increasing dependency on China.

Other Chinese tactics are coercive. To do business in China, the Chinese government insists that a “joint venture” must be set up with assets transferred into it — with little or no compensation for Western shareholders. A good example is the “heist” of ARM China. The Japanese-owned, UK-based chip designer sold a 51% stake to a joint venture for $775 million — a trivial sum, given its revenue of $890 million in 2022 alone. The Chinese venture received the exclusive right to distribute Arm’s IP within China. Within two years, the joint venture had declared its independence and rebranded its “borrowed” IP.

Outright theft is another part of the Chinese recipe. Earlier this year, South Korean prosecutors arrested a former Samsung official on suspicion of stealing technology for a copycat chip factory in China. ASML has reported data theft in a Beijing-backed spy operation. When data is difficult to steal outright, China’s client companies use state resources to reverse-engineer the tech, in brazen violation of signed agreements.

These examples point to the potential playbook for Foxconn, and it isn’t pretty. Taiwanese companies with production facilities in China for top Western tech brands will be targeted. IP will be transferred to the mainland and Chinese companies will be able to take over.

Politics will play a role. Xi Jinping brooks no political interference from businessmen, even the most powerful and successful. When Alibaba founder Jack Ma, criticized Chinese financial rules, regulators blocked the planned IPO of his fintech company Ant Group and Ma retreated from his businesses.

Foxconn’s Terry Gou may suffer a similar fate. When he announced his bid to become Taiwan’s next president, he dared the Chinese government to stop him, even suggesting that expropriation would not get him off the ballot. Taiwan’s elections are scheduled for January 2024. Time will tell if Foxcomm and Gou are willing — and able — to stand up to Beijing’s pressure.

Christopher Cytera CEng MIET is a Non-resident senior fellow with the Digital Innovation Initiative at the Center for European Policy Analysis and a technology business executive with over 30 years of experience in semiconductors, electronics, communications, video, and imaging.

Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.