China tax probe into Foxconn stuns Taiwan

Mark O'Neill November 06, 2023 09:10

China’s announcement of a tax and land investigation into two subsidiaries of Foxconn late last month has stunned Taiwan, especially its business community who wonder what is their future in the mainland.

Foxconn was founded in 1974 by Terry Gou Tai-ming, one of Taiwan’s richest men and one of four candidates for the presidential election in January 2024. In September, Guo stepped down from the company board but retains a 12.5 per cent stake in the company.

What has shocked Taiwan people most is that Foxconn is the largest foreign company in China, by cumulative investment, workers and exports. It employs more than 800,000 people, including 400,000 in Zhengzhou, capital of Henan, a poor province which depends heavily on it for tax revenue and job creation. Because of its enormous contribution, it has long enjoyed tax breaks and favourable levies on land use.

It is the world’s largest electronics manufacturer and has over the past 30 years played a critical role in making China the “workshop of the world”. For most of that time, Foxconn has enjoyed a privileged status in China, with Gou treated as a VIP wherever he went.

Such an investigation would have been unthinkable during the eras of Deng Xiaoping, Jiang Zemin or Hu Jintao.
So the question everyone in Taiwan is asking: why is Beijing going after Gou now?

One answer is that Beijing wants him to withdraw from the presidential race. Latest polls give him 6.3 per cent of the votes. Beijing believes he is taking votes away from candidates opposing Vice-President Lai Ching-te of the Democratic Progressive Party (DPP), currently in the lead with almost 32 per cent.

Also, on the day he announced his candidature in August, Lai was asked if his business interests in China would make him beholden to them. “If the Chinese Communist Party regime were to say ‘if you do not listen to me, I’ll confiscate your assets from Foxconn’, I would say: ‘yes, please do it! I cannot follow their orders, I won’t be threatened.”

Such provocative language was not welcomed by the government.

The second answer is that Beijing is sending a warning to Taiwan companies not to move factories out of China to India and countries in Southeast Asia.

Over the last two years, many Taiwan and other foreign firms have moved part or all of their production out of China. They want to diversify their risk and are under pressure from their clients, especially American ones, not to manufacture in China.

The Sino-U.S. economic war makes the risk of sanctions, tariffs or other obstacles to trade more likely. For many Taiwan firms, U.S. companies are their biggest clients.
Foxconn has been increasing production in India. By 2024, it plans to produce 18-23 per cent of its iPhones in India, up from 10 per cent this year and five-ten per cent in 2022. The proportion made in China will fall to 78-83 per cent in 2024, from 90 per cent this year and 90-95 per cent in 2022.

The third answer is that city and provincial governments are seriously short of money. During the three years of the COVID pandemic, many could not pay the salaries of their teachers and civil servants. The recovery since the end of COVID in December 2022 has been disappointing. A September Reuters poll of 76 analysts, in and outside the mainland, predicted that China’s economy would grow five per cent this year, with forecasts ranging between 4.5 per cent and 5.5 per cent.

Increasing taxes and land fees from major investors like Foxconn is a quick way to raise revenue.

The fourth answer is that the status of Taiwan investment in the mainland has fallen sharply. In the three decades up to 2010, Taiwan firms played a key role in bringing to China capital, products, management, technology and access to foreign markets. With Hong Kong, Japanese, European and American firms, they were the biggest foreign investors.

But today China has accumulated deep reserves of capital, technology and management skills. Taiwan firms no longer enjoy any privilege and their competitive advantage is diminishing.

Gou has until November 24 to decide whether to run. That is the final date on which candidates have to register formally to be put on the ballot paper for the presidential vote. He may regret having thrown his hat into the ring. If he had not, perhaps his companies would not be facing this investigation.

The other two opposition candidates are Ko Wen-je of the Taiwan People’s Party, who receives 23 per cent of the votes in the polls, and Hou Yu-ih of the Kuomintang, who receives 20 per cent.

The two have agreed to co-operate in fielding candidates for the Legislative Yuan, whose vote will be on the same day as the presidential one. But they cannot agree on a joint ticket -- who will be the presidential candidate and who the vice-presidential one? In Taiwan, the president holds a great deal of power and his deputy little.

For Beijing, the ideal scenario is that Gou drops out and that Ko and Hou agree on a joint ticket. All the polls show such a candidate would comfortably defeat Lai of the DPP.

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Mark O'Neill

A Hong Kong-based writer, teacher and speaker.