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Thursday, August 20, 2020
Foreign Manufacturers' Withdrawal and China's Supply Chain in Reshuffling
ANBOUND

Lens Technology and Catcher Technology have both announced on August 18 that they had signed the "Equity Sale and Purchase Agreement". Catcher Technology will sell 100% of its stake in subsidiaries Topo Technology (Taizhou) and Meeca Technology (Taizhou) to Lens Technology for USD 1.427 billion (about RMB 9.9 billion) in an all-cash transaction. Before this, the news that Catcher would sell its business in China had already spread in the market, but there were no clear buyers. At that time, the list of potential buyers estimated by the market included major Chinese manufacturers such as Lens Technology and Luxshare.

According to public information, Catcher Technology is a Taiwanese alloy die-casting manufacturer. It mainly engages in the production, sales, and development of alloy and provides metal casings for Apple's iPhone, MacBook, and other consumer electronics products. Its market share of supply for MacBook case in 2019 reached 40%-45%. Catcher's assets in the Mainland include Suzhou plant, Taizhou plant, and Suqian plant. The two companies to be sold (Topo Technology and Meeca Technology) accounted for about 40% of Catcher's 2019 annual revenue. Lens Technology, headquartered in Changsha, Hunan province, specializes in mobile phone glass covers. Its glass case and metal frame businesses have received orders from Huawei, Xiaomi, OPPO, and other first-tier domestic mobile phone brands, and its market share is firmly in the leading position in the industry. In addition, Lens Technology has seen steady growth in shipments to its core customers in the automotive electronics market and is participating in the Tesla supply chain. Financial results show that Lens Technology has a good performance in 2020, with the net profit attributable to parent company increased by 1322.42% in the first half of the year and 1831.3% in the second quarter.

Lens Technology's acquisition of Catcher Technology's businesses is seen as another move by domestic Chinese manufacturers to undertake businesses leftover by foreign investment. In the context of drastic changes in the global economic and trade environment and the restructuring of supply chains, the transaction involving domestic and foreign investment in Mainland China's production capacity is a typical reflection of the restructuring and reshuffling of industrial chains and supply chains that are taking place in the "the world's factory". Similar acquisitions have already taken place in China. Luxshare announced on July 17 that it would acquire 100% equity of the iPhone manufacturer Wistron Corporation's assembly businesses Wistron Corporation (Jiangsu) and Wistron Corporation (Kunshan) at a price of about RMB 3.3 billion. When the deal is completed, Luxshare is expected to be the first Mainland China's contract manufacturer of Apple's iPhone. Wistron Corporation has the smallest share of the three iPhone contract manufacturers (Foxconn, Pegatron, and Wistron), with a share of about 6%, far below Foxconn's 70%.

To better understand this changing industrial and market environment, the research team at ANBOUND believes that there is a need to clarify some of the situations objectively:

First, the withdrawal of foreign-funded manufacturing industries, including those funded by Taiwan, is accelerating. Over the years, the total amount of foreign investment in China has been increasing, but the structure of manufacturing and services has been changing dramatically. The service sector accounted for only 24.7% of China's foreign direct investment (FDI) in 2005, and it increased to 68.1% in 2018. The January-July 2020 figures show that the FDI in China's service sector totaled RMB 414.59 billion, up 11.6% year-on-year, accounting for 77.4% of China's FDI. Behind the changes in the FDI structure is the relative decrease of foreign capital in the manufacturing industry. Under a variety of factors, the trend of foreign-funded manufacturing industry leaving Mainland China has been confirmed by many individual cases. China used to be the world's factory. If foreign investment in manufacturing falls sharply, it will certainly cause problems for the Chinese economy.

Second, COVID-19 and geopolitical factors have exacerbated the withdrawal of foreign investment from the manufacturing sector. Regarding the sale of the Mainland China's factory, Catcher Technology admitted that the international political and economic environment has changed significantly in the past two years, which forced Catcher Technology to undergo a transformation, and its business will inevitably suffer in the transformation process. Under the influence of factors such as the changes in an international trade situation, the evolution of customer strategies, as well as the supply chain moving towards price competition, Catcher Technology will further reshuffle its assets and accelerate vertical integration of its supply chain. Catcher Technology's idea in its transformation is not unique among foreign capital, especially with the deterioration of the geopolitical environment, manufacturing enterprises consciously participate in and promote the supply chain restructuring and adjustment. As the relationship between China and the United States deteriorates, global supply chains will split due to geopolitical reasons, forming "Chinese supply chain" and "non-Chinese supply chain" systems.

Third, Chinese manufacturing companies are trying to undertake assets and capacity that have been left over by withdrawn foreign investment, and enhance their value in the global supply chains. According to the observation of ANBOUND's researchers, the increase in the number of withdrawals of foreign-funded manufacturing companies in the past two years "exposes" the true status of the Chinese manufacturing industry in the global supply chain and value chain. In terms of the nature of capital and the origin of enterprises, a considerable number of "Made in China" products are actually produced in China by foreign-funded companies. Take the production of Apple's iPhone as an example, before the acquisition of Taiwan-funded Wistron Corporation by the Mainland Chinese company Luxshare, Mainland manufacturers did not participate in the assembly of the iPhone. In other words, in the global field of contract manufacturing, foreign-funded manufacturing enterprises in Mainland China have upgraded the level of "Made in China". The acquisition of Taiwan-funded assets by Lens Technology, Luxshare and other Mainland Chinese enterprises is believed to have the main purpose of both capacity expansion and industrial upgrading, so as to realize their value chain upgrading. Some analysts pointed out that after the completion of the acquisition, the combination of Lens Technology's glass business and Catcher's Taizhou plant's metal frame business will increase Lens Technology's shipments to major overseas customers by more than 10%.

However, there are some uncertainties and even risks in the implementation of such ideas. Lens Technology, for example, after paying RMB 9.9 billion for Catcher's plant acquisition, will it be able to get future orders from Apple? It has also been reported that Apple planned to withdraw its production out of China a year ago amid tensions between the U.S. and China. At the time, the Wall Street Journal quoted sources as saying Apple planned to move 15% to 30% of its hardware assembly out of China, a process that could take a dozen months or even years. We estimate that the withdrawal of Wistron Corporation and Catcher Technology from mainland China may strengthen Apple's determination to withdraw from mainland China and restructure its production chain externally. Given Apple's strategy of shifting its manufacturing capacity overseas, Lens Technology could run the risk of not getting enough orders from Apple in the future if it persists with acquiring Catcher Technology's plants.

We have noticed that political factors and cost factors have led to the emergence of global supply chain adjustments. Apple Inc., for example, has made preparations for its new layout of the industrial chain: On the one hand, it supports Mainland Chinese enterprises to change the past industrial ecology dominated by Taiwan-funded plants, so as to build an industrial chain focusing on serving the huge consumer market of Mainland China. In addition, by increasing its economic influence in Mainland China, it reduces the risk of being suppressed in the trade war. On the other hand, Apple Inc. is also accelerating the transfer of its production capacity in mainland China to Vietnam and other places, thereby to hedge against the risk of global market supply chain under friction between China and the United States. In this context, China, the "world's factory", is facing great adjustments and challenges. Earlier, Foxconn chairman Liu Yang-wei was quoted as saying that the era of China as the "world's factory" was over. Although Foxconn immediately came forward to clarify that Liu's intentions had been misinterpreted, but objectively speaking, the decline of China's status as the "world's factory" is a sign of things to come.

Final analysis conclusion:

Factors such as anti-globalization, coronavirus outbreak, and geopolitical influence are changing the global supply chain pattern and industrial layout. Under this circumstance, the withdrawal of foreign-funded manufacturing companies from China may be more intense than the foreign investment data suggest. Some local manufacturing companies in Mainland China are striving to absorb the market space and manufacturing assets left by the withdrawal of foreign investment, hoping to improve their position in the global supply chain and value chain. But in the context of the adjustment of global market space, there is still great uncertainty about whether Chinese companies can achieve the ascent from the low end to the middle and high end.

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