How Zhengzhou transformed itself into ‘iPhone City’

January 05, 2017 11:07
Apple chief executive Tim Cook visits the iPhone production line at the Foxconn Technology Group facility in Zhengzhou. Photo: Bloomberg

The New York Times has published a long investigative story about how Zhengzhou's local government lured Foxconn to set up the world’s largest iPhone factory in the capital of Henan province with billions of dollars of perks, tax breaks and subsidies.

Soon after Apple launched its first iPhone in 2007, sales quickly skyrocketed.

With its Shenzhen factory running out of capacity, Apple’s biggest contract manufacturer Foxconn had to build a new factory.

Realizing the new factory would create huge numbers of jobs and contribute tremendously to the local GDP. various Chinese provinces and cities sent representatives to Shenzhen to court Foxconn with various incentive packages.

So how did the then obscure Zhengzhou, which was far from outstanding in terms of labor cost, R&D capability, supply chain support, infrastructure and geographical location, beat the rest of the suitors?

The answer lies in the generous terms it offered.

The Zhengzhou government reportedly doled out US$1.5 billion in direct subsidy to Foxconn, in addition to indirect benefits worth billions of dollars.

The Foxconn unit was able to enjoy total tax exemption (including corporate tax and value-added tax) in the first five years, and preferential tax treatment for another five years, not to mention discounts on power bills and logistics costs.

Zhengzhou even built a bonded zone around the factory and the nearby airport, which Zhengzhou expanded and upgrade at the cost of 20 billion yuan (US$2.89 billion), to help Apple save on export levies and speedily ship out its products to overseas markets.

“We needed something that could really develop this part of the country,” a Zhengzhou official told the New York Times.

“There’s an old saying in China: ‘If you build the nest, the birds will come.’ And now they’re coming.”

All these efforts paid off, handsomely.

The Zhengzhou factory started operation in 2010, and now has more than 300,000 employees. Every one out of two iPhones sold anywhere in the world is made here.

The city’s per capita GDP was only US$2,300 in 2007. In 2015, the number jumped to US$13,000.

It has now become one of the nation’s fastest-growing cities. Home prices in Zhengzhou approximate those in top-tier cities like Tianjin or Guangzhou.

Zhengzhou has also become a hub of China’s high-speed railway network.

While US President-elect Donald Trump wants to get more US companies to take their production back home and create more jobs, Apple may not heed the call given the privileges it now enjoys overseas.

It’s clear that both China and the United States are vying for the world’s top manufacturers.

Perhaps a key to win the race is how a business-friendly environment can be made accessible not only to giant corporations but also to average manufacturers.

This article appeared in the Hong Kong Economic Journal on Jan. 4.

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal columnist