China's Investigation of Foxconn is a Warning to the U.S.

Chinese authorities have launched tax and land-use investigations into Foxconn, the world’s largest contract electronics maker, in what some experts say may be a warning to U.S. companies and the Biden administration.

Why it matters: Foxconn factories assemble about 70% of Apple iPhones. COVID lockdowns and a huge protest at a major Foxconn factory in November last year resulted in significant delays in iPhone deliveries.

“This is a shot across the bow — a message to Foxconn but also to Foxconn’s customers, alerting them that if relations between China and the U.S. get worse, these companies could incur costs,” said Chris Miller, associate professor of international history at Tufts University and author of “Chip War.”
“The hope in Beijing would be that these companies would then lean on their governments to improve relations.”
The move comes just as the U.S. announced further restrictions on technology exports to China and a month before President Biden and Chinese President Xi Jinping are expected to meet in San Francisco for APEC.

What’s happening: Chinese state-backed media outlet Global Times reported on Sunday that Chinese tax and land-use authorities were scrutinizing Foxconn operations across several provinces.

The Global Times characterized the probes as “normal market supervision activities, which are reasonable and legal.”
What they’re saying: Foxconn “will actively cooperate with the relevant units on the related work and operations,” the company wrote in a statement.

Between the lines: Reuters cited two sources close to Foxconn as saying that the disclosure of the investigation by the Global Times was politically motivated.

“Any investigation of a major foreign investor or foreign company in China would at least have to have political approval to move forward,” Miller said. “And we’ve seen a trend over the past few months of investigations that are linked to political disputes.”
Since numerous foreign firms beyond Apple rely on devices assembled in Foxconn factories, “this investigation could well be a signal to those companies that their operating model is at stake,” he added.

The intrigue: Foxconn founder Terry Gou is currently running for president in Taiwan. He resigned from the company’s board when he announced his candidacy last month.

The investigation of Foxconn could be intended to put pressure on Gou, or on Taiwan’s broader political system, as the Chinese government claims sovereignty over Taiwan and opposes democratic elections there.
Gou has cast himself as friendlier to Beijing than the ruling Democratic Progressive Party, but he’s also said he can’t be coerced. “If the Chinese Communist party regime were to say, ‘If you don’t listen to me, I’ll confiscate your assets from Foxconn,’ I would say, ‘Yes, please, do it!'” Gou said last month.

What to watch: Apple has already begun diversifying its iPhone manufacturing beyond China, including at a Foxconn factory in India, though it is still heavily dependent on Chinese factories for assembly.