Foxconn Under Investigation: China Disturbs Foreign Companies Again with Arrests

Chinese authorities are once again shaking the confidence of foreign companies in the country with a series of arrests across various industries and an investigation into Foxconn, Apple’s most important partner and one of the largest employers in China.

Over the weekend, state media reported that regulators are conducting tax audits and reviewing Foxconn’s land use, the Taiwanese company that produces the vast majority of iPhones in factories in China. Hon Hai Precision Industry, Foxconn’s public branch, stated that it will cooperate with the authorities.

Meanwhile, the CEO and two former employees of WPP, one of the world’s largest advertising companies, have been arrested in China, Bloomberg reported. The government detained a local employee of a Japanese metal trading company in March, Nikkei reported on Sunday, and this month, a court officially charged the director of Astellas Pharma on suspicion of espionage.

Hon Hai, Foxconn’s main publicly traded company, experienced its largest drop in over three months on Monday. Foxconn Industrial Internet, the main subsidiary listed on the Shanghai Stock Exchange, fell below its daily limit of ten percent, marking the largest loss in its history. Luxshare Precision Industry, Foxconn’s rival based in China, rose by as much as 4.9 percent.

China often does not publicly explain the actions taken by its regulators, leaving companies operating in the country to speculate about the government’s ultimate goals. Given the immense power of the Communist Party, this lack of transparency in economic oversight has unsettled foreign executives. A worker from a Japanese trading company was detained in March, and there is still no public acknowledgment or clarification of the specific charges.

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– My sense is that the core leadership is really concerned about foreign influence as dissent among the elites grows. This is not a signal for foreigners. This is a signal for the elites: do not follow that path – said Alicia Garcia Herrero, Chief Economist for Asia and the Pacific at Natixis.

As China grapples with a housing crisis, Xi Jinping and his administration are trying to signal support for the private sector, seeking help in stabilizing the world’s second-largest economy. The perception of party economic governance has suffered damage from the pandemic and the brutal crackdown on the tech industry, including Alibaba Group Holding and its co-founder Jack Ma.

Foxconn is an equally surprising target. The company has been at the very foundation of China’s growth as a high-tech manufacturing base and a symbol of opportunity for other companies in the country with the help of collaboration with Apple. Similarly, Tesla has turned China into a key base for the production of its electric vehicles.

Apple CEO Tim Cook visited China last week, meeting with Commerce Minister Wang Wentao to express their support for a win-win collaboration. The rare visit by an Apple leader followed Beijing’s move to ban some employees in government agencies and state-owned companies from using Apple iPhones for security reasons. The latest iPhone 15 has also had a disappointing launch in China after Huawei Technologies stunned the market with its Mate 60 phones that support 5G.

– The part of the leadership that deals with the economy and attracting foreign capital is not at the forefront. So I can only watch and hope they will mitigate the damage by announcing the opening of certain sectors – said Garcia Herrero.

In the current investigation, tax authorities are conducting checks on Foxconn’s subsidiaries in Guangdong and Jiangsu provinces, the state-run Global Times reported on Sunday, citing unidentified sources familiar with the matter. The report also states that natural resource officials are investigating the company’s land use in Henan and Hubei provinces.

The Global Times report did not provide further details on the investigations and tax checks. Hon Hai also did not provide details in its filing to the Taiwanese stock exchange. Foxconn’s Zhengzhou factory, known as iPhone City, is located in Henan.

Foxconn founder Terry Gou resigned from the board last month in his campaign for the presidency of Taiwan. He previously dismissed claims that he would be subject to Chinese pressure if he won the elections in January.

– I will not bow to China’s threats – Gou said at a briefing in August announcing his presidential candidacy. He added that any halt in production for key customers like Apple, Tesla, or Amazon would disrupt supply chains, and that is something China would have to explain to the world if it is political pressure.

Xiaomeng Lu, Director of Geotechnology at Eurasia Group, said the investigation could be China’s way of seeking influence in Taiwan’s elections, where the relationship between the island and the mainland will be a central issue.

– I think Beijing definitely has incentives to weigh and talk to Terry Gou about this presidential race – she told Bloomberg TV.

‘Japanese Companies Want to Expand, but Are Also Somewhat Cautious’

Lai Ching-te, Vice President of Taiwan and a favorite in the presidential elections, expressed support for Hon Hai in the campaign on Sunday.

– China should not force Taiwanese companies to declare their stance whenever elections are held. China should recognize that Taiwanese companies significantly contribute to its economy – she said.

On Monday, Taiwanese Prime Minister Chen Chien-jen told reporters in Taipei that the government has remained in contact with Hon Hai and will offer assistance depending on the situation.

Foxconn’s investigation has likely contributed to the weakness of the Taiwanese stock market and put pressure on the local currency, according to Khoon Goh, Head of Asia Research at Australia & New Zealand Banking Corporation. The Taiwanese dollar has fallen to its lowest level in seven years, Bloomberg reported.

At the same time, Beijing is intensifying its scrutiny of Western companies amid rising geopolitical tensions. In March, authorities raided the office of New York-based due diligence firm Mintz Group in Beijing and arrested five Chinese employees. In April, Bain & Co. confirmed that Chinese authorities had questioned staff in their Shanghai office.

The following month, Chinese state security officials visited the Capvision branch, a consulting firm based in New York and Shanghai.

At last week’s forum in Beijing, Takehiko Nakao, President of Mizuho Research & Technologies, said that arrests without public clarification of the reasons have contributed to a sense of unease among international companies. Seventeen Japanese nationals have been arrested in China since May 2015, the country’s foreign ministry stated in an email in September.

– Japanese companies want to expand, but are also somewhat cautious. If there is just one such person, people become very worried – Nakao, who previously led the Asian Development Bank, added that caution is partly due to the Chinese detention of an executive without public explanation.