Your browser doesn’t assist the <audio> component.
Foxconn, a Taiwanese electronics producer, is finest identified for making iPhones in China. But in October it introduced plans to construct a megafactory in Mexico that may churn out servers made with artificial-intelligence (AI) chips from Nvidia, a semiconductor big. To fulfill the roaring demand for AI, the plant’s capability will likely be, as Younger Liu, Foxconn’s chairman put it, “very, very huge”.
That phrase may effectively describe the ambitions of the contract-manufacturing trade as a complete. The corporations, which make devices for different firms, are on a tear. On January fifth Foxconn, also referred to as Hon Hai, introduced document fourth-quarter gross sales of $65bn, up by 15%, 12 months on 12 months. Its smaller rivals, akin to Quanta Pc and Jabil, have additionally reported strong outcomes just lately. Up to now two years the mixed market worth of the eight largest contract producers has roughly doubled (see chart). Buoyed by their spectacular efficiency, the businesses are busy increasing into new merchandise and locations.
A lot of their current success is right down to AI. Whereas demand for smartphones and PCs has stagnated, for information centres it has ballooned. On January third Microsoft mentioned that it could splurge $80bn on ai infrastructure this 12 months. For Foxconn, an enormous provider to the software program big, AI servers will make up a couple of quarter of whole gross sales in 2025. For Quanta that share might be half, in accordance with Mizuho, a Japanese financial institution. Different contract producers, akin to Luxshare, a Chinese language provider to Apple, and Compal, a Taiwanese one, are hoping that AI will revive gross sales.
Contract producers have additionally been increasing into new industries. In October Foxconn unveiled two new electric-vehicle designs, so as to add to the six different fashions which it’ll construct for firms. Opponents akin to Pegatron at the moment are making gear for personal 5G networks. Quanta is increasing into wearable medical gadgets and smart-home gadgetry. Foxconn has blasted two prototype satellites into area.
The corporations are attempting to manage extra of the worth chain as effectively. Foxconn desires to offer elements, akin to liquid-cooling applied sciences, for the server racks it assembles. Luxshare, which started life as a maker of elements for smartphones, is doing extra meeting. On December thirty first it introduced it could purchase the meeting division of Wingtech, one other Chinese language provider to Apple.
On the identical time, a geographic shift is below approach, precipitated by Donald Trump’s first spherical of tariffs in 2018. In keeping with Counterpoint, a analysis agency, the manufacturing of smartphones and PCs principally stays in China, although there was some relocation to locations like India and Vietnam. However the manufacturing of different merchandise has moved nearer to clients. About two-fifths of Taiwanese contract producers’ server manufacturing now takes place in Mexico, reckons JPMorgan Chase, a financial institution. That cuts the price of delivery to the American cloud-computing giants, that are their largest clients.
For all of the growth, contract producers face a lot of dangers. One is competitors. The corporations are always invading every others’ turf. Luxshare was based by two former manufacturing unit employees at Foxconn, with which it now vigorously competes. Tata, an Indian conglomerate, purchased the native iPhone operations of Wistron, a Taiwanese producer, in 2023, and is buying a majority stake within the Indian operations of Pegatron.
One other danger is buyer focus. Round 70% of Luxshare’s enterprise comes from Apple. Foxconn will get about 60% of its income from the iPhone-maker. Booming gross sales associated to AI imply some contract producers now rely closely on Nvidia for his or her progress.
A remaining danger is commerce. Mr Trump has mentioned he’ll slap tariffs on Canada, China and Mexico. Their dependence on a number of clients means that contract producers might wrestle to go on larger prices. That would imply thinner margins as gadget-makers soak up the levies or crops are moved to tariff-free international locations. Throughout Mr Trump’s first time period Apple and Samsung efficiently lobbied for exemptions for his or her provide chains. Contract producers will likely be hoping for a repeat, maybe with assist from the cloud giants. Regardless of their finest efforts at diversification, Foxconn and mates are nonetheless on the mercy of huge tech. ■
To remain on prime of the largest tales in enterprise and know-how, signal as much as the Bottom Line, our weekly subscriber-only e-newsletter.
