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posted on 26 January 2017

More Jobs, Lower Profits

by Ben Shepherd, Investing Daily

Investing Daily Article of the Week

The United States is the second-largest market for televisions in the world, with 34 million sold in 2013, but we don’t make any of them. While we had a thriving TV business decades ago, but by the 1970’s our manufacturers were moving production overseas. You’ll still find some red, white and blue boxes at big retails like Walmart, but the fine print tells you the sets inside are just assembled here from imported parts.

That may soon change though, with Taiwan-based Foxconn Technologies (TPE: 2354) reportedly considering investing $7 billion to build a factory in the United States. You’ve probably heard of Foxconn, it’s the world’s largest electronics contract manufacturer and a major supplier to Apple.

According to Foxconn Chairman Terry Gou, the factory could create between 30,000 to 50,000 American jobs. While Gou said the factory would likely be in Pennsylvania, the company is still negotiating over land prices and power rates. It also said it will only make the move if opening the plant would be cheaper than shipping the components from Asia, which is a high hurdle. Gou has reportedly been considering building a U.S. plant since at least 2014, but until now hasn’t been able to get favorable enough terms.

A Foxconn factory in the U.S. would earn President Trump a gold star, helping to fulfill his campaign promise of creating American manufacturing jobs. Consumer electronics are also big business here in the states, but not only do we not make televisions, we don’t make many smartphones, computers or any of the other electronic gadgets that we use daily. Being able to slap “Made in America" stickers on those products would not only create a lot of jobs, it would help eliminate some headaches for companies like Apple (NSDQ: AAPL) that have been under fire for relying on foreign manufacturers.

But a product made here likely won’t be cheaper.

Consider: While Foxconn may initially be focusing on television sets, Apple is its single largest customer and generates about half of Foxconn’s revenue. That means it’s safe to assume that some Apple components may be made here soon.

The component parts of a basic iPhone 7 cost about $225 and thephone sells for about $650. On top of that, it costs about $10 to assemble each phone in China, but doing that work in the U.S. would add $30 to $40. Gou himself told the Asian Nikkei Review that in the future we may be paying $500 for U.S. phones, “but those don’t necessarily work better then a $300 phone."

Those higher costs wouldn’t be good news for Apple, which has already been faced with slower iPhone sales. Sales of Android phones have been cut to the point that some analysts are predicting that Apple will cut iPhone production by about 10% in the first quarter of this year. That could eventually hurt sales and earnings.

So Foxconn opening a display factory here in the U.S. would be good news for Americans workers, but it won’t help profits for its big tech clients like Apple.

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