Foxconn Leaving Brazil?

 

In February 2011, Apple-Foxconn announced that it would set up a plant to produce “Made in Brazil” Apple smartphones and tablets.  This announcement was taken as a major triumph for the former Brazilian President, Dilma Russeff’s government.  It took Foxconn about a year to set up the manufacturing site in Jundaí.  This plant initially hired around 1,000 workers and had the capacity to assemble around 5,000 units per day.

It was speculated that local assembling could reduce iPad or iPhone prices by as much as 30%, as Brazil imposes >60% tax on imported smartphones.  However, the cost savings of 30% was never realized.  In fact, the prices rose where local devices, such as the iPhone 6, cost 97% higher than the US release pricing.

The outcome of local assembly should have equated to a faster time-to-market.  This also was never realized.  iPhones launched after 2011, or the iPhone 4S launch, were delayed at least two months compared to global launch timings.  From an end users’ perspective, costs were higher and time-to-market was not improved.

 

Apple Smartphone Brazil release Date and Price

In 2012, Foxconn further announced to the Brazilian government that it planned to invest $12b USD to set up five additional plants that would create more than one hundred thousand jobs. However, impacted by multiple issues, including several economic and social issues, Apple’s local manufacturing process never took off in Brazil.  The following are a few of the key complications Foxconn has faced:

  1. The cost of technology transfer is too high. The overall process from producing sub-assemblies in China to final assembly in Brazil remains too expensive.
  2. Overvalued Brazilian currency. From 2010 to 2015, the Real, was very strong compared to USD.  So, it increased the local production labor cost.
  3. Political environment has been highly unstable in Brazil for the last few years. And, this is most likely to continue until the next elections in 2018.
  4. Unions complicated local manufacturing and assembly. Manufacturing/assembly productivity is low and the workforce highly unionized in Brazil.  As a matter of fact, the former president Lula da Silva used to be the head of this union.  Chinese manufacturers are not accustomed to negotiating with unions.  Furthermore, this union has accused Foxconn of unhealthy working conditions in its Jundaí plant.  The negative publicity has hurt Apple & Foxconn.
  5. Apple products have a small addressable market in Brazil. Although the Brazilian population ranks fifth globally, iPhone sales are ranked only 12th globally. The high-end segment (+USD 400) has never been above 13% of the Brazilian market.

 

Percentage of iPhone Imported From China vs Local Assembly

The chart above illustrates the percentage of local assembling is slowly decreasing.  Starting in 2017, Foxconn Brazil has begun to slowly shut down iPad assembly lines and will only assemble iPhones locally.  Furthermore, starting 2H 2016, more specifically with the launching of iPhone 7, Apple gradually started to increase the imports of devices while decreasing its local production of smartphones.

Another reason why local production has fallen is iPad demand has fallen.  The market for tablet devices like the iPad has been shrinking globally, and the current economic crisis in Brazil has accelerated the drop of the premium tablet segment.  Therefore, it is likely no longer economically feasible to maintain an iPad assembly line in Jundaí.

Foxconn may use that excess capacity for something else, as it has many other lines of business.  Foxconn manufactures computer and smartphones parts and it recently created a joint venture with HMD—branded under the Nokia name.  This joint venture will design, manufacture and market Nokia branded devices. HMD could also be a good candidate to use Foxconn’s excess capacity left by the iPad.

Foxconn’s initial promises have not been met.  Because of this, the Brazilian media has blamed Foxconn for not keeping its promises of further investment and speculating that it will leave the country. Foxconn leaving the country is likely an overstatement.  Foxconn has apparently stopped producing iPad, but there is not enough evidence that it will be leaving Brazil — at least not in the next couple of years.