YU NAKAMURA, HIDEAKI RYUGEN and YUJI NITTA, Nikkei staff writers

As Sino-U. S. tensions mount, Foxconn and Quanta turn to countries like Vietnam

A shift away from China is picking up steam again among Taiwanese contract manufacturers for American companies like Apple that are eyeing cheaper and less geopolitically risky production bases, such as Vietnam and India.

Electronics maker Quanta Computer, the top contract manufacturer of Apple's MacBooks, inked an agreement this month to build its first Vietnamese plant in the northern province of Nam Dinh.

"We're strongly determined to see this project through," Quanta director C.T. Huang said at the signing ceremony last week. "We want to start up the new factory as quickly as possible."

Moves like this to diversify production away from China have been years in the making for manufacturers that have watched wages there rise. Further impetus comes from trade and technology tensions between Washington and Beijing, which mounted in 2018 on tariffs imposed by then-U.S. President Donald Trump's administration.

Approved foreign direct investment in Vietnam climbed steadily, driven mainly by countries like South Korea and Japan, to $38 billion in 2019 -- up about 80% from a decade earlier. This trend stalled for a few years as COVID-19 swept across the globe, but is now resuming.

Taiwanese contract manufacturers' plans to invest in Vietnam reflect their American customers' aversion to China risks.

Quanta had parlayed its concentrated Chinese production base into rapid growth, logging over $41 billion in sales in 2022. But this position worked against it a year ago when the Shanghai lockdown over a COVID-19 outbreak forced it to shut down a 40,000-worker factory. With supply chains cut off, Quanta was unable to make its mainstay MacBook Pro, delaying deliveries for more than two months and disrupting Apple's plans.

The expansion into Vietnam marks a real break from its longtime reliance on China. Over the three years through 2025, it is expected to raise production outside the country to about 30% of the total, according to estimates by Taipei-based TrendForce and other sources.

The number of Taiwanese FDI projects in Vietnam grew 87% on the year in the first quarter of 2023. "Northern Vietnam especially has become a new production base for Apple products," said Ryotaro Hagiwara, who conducts on-the-ground research at the Hanoi office of the Japan External Trade Organization.

Top iPhone assembler Hon Hai Precision Industry, also known as Foxconn, is investing heavily in the northern province of Bac Giang. Local media reported last summer on Foxconn's plans to spend another $300 million and hire 30,000 people, and in February it signed a contract to lease a 45-hectare site until 2057. About 30% of its production is expected to be done outside China by 2025, estimates show.

Pegatron, which ranks second in iPhone production, has made big investments in the coastal city of Haiphong, and No. 4 Wistron looks to start up a personal computer factory next year.

Besides Vietnam's position on the Chinese border, which is helpful for accessing parts, low labor costs are a big part of its appeal. Monthly base pay for manufacturing workers averages $277, less than half the Chinese average of $607, according to JETRO. The country's population is forecast to top 100 million this year, which Hagiwara says is fueling high hopes for local demand.

Vietnam has built a business model of buying parts and intermediate goods from China to assemble into finished products for the U.S. While it has in recent years attracted big investments from Intel and major Chinese companies, suppliers with their own extensive networks, like Foxconn, are expected to have more of a presence going forward.

The government is eager to make the most of this opportunity. Success for investors means success for Vietnam, Prime Minister Pham Minh Chinh told representatives from foreign companies on April 22.

He pressed other government officials at the meeting to listen to concerns raised by foreign companies. "Don't say no. Don't say it's difficult," he said.

Investment in India -- which is expected to have overtaken China as the world's most populous nation by the end of the month -- is growing as well.

Hon Hai Chairman Liu Young met Prime Minister Narendra Modi in India in late February. India's economy is sure to take off, and Taiwan needs to grasp this opportunity, Liu said at a Taiwanese industry event the following month.

Foxconn assembles iPhone 14s in the Indian city of Chennai. It has secured sites for new factories in the states of Karnataka and Telangana as it looks to expand its footprint in the country.

By 2028, 30% to 35% of all iPhones will be produced outside China, TrendForce predicts. Local production is essential to tapping into demand in India, given the high tariff it imposes on imported smartphones, said analyst Mia Huang.

Change is also happening in printed circuit boards, which are critical components in computers and home appliances. Production has started to move away from its current hub in Wuhan to Thailand, a Taiwanese electronics executive said, predicting that Thailand will eventually overtake China in printed circuit board output.

China has been responsible for around half the global output of the component. But in March and April alone, Apple suppliers Unimicron Technology and Compeq Manufacturing announced their entry into Thailand.

Over 90% of direct investment made by Taiwanese companies outside of Taiwan in the January-March quarter went to places other than mainland China. Investments to Southeast Asia and India increased nearly five times on the year, even as those to China fell around 10%.

Taiwanese companies started making inroads into China in the 1990s as the latter opened up, playing a key role in turning the mainland into the world's factory. Three decades on, Taiwan is now on the forefront of a shift in global supply chains away from China.