China Rattles Foreign Firms Again With Arrests, Foxconn Probe

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

(Bloomberg) — Chinese authorities are again shaking the confidence of foreign companies in the country with a series of arrests and an investigation into Foxconn Technology Group, Apple Inc.’s most important partner and one of the largest employers in China.

Over the weekend, state media said that regulators are conducting tax audits and reviewing land use by Foxconn, the Taiwanese company that makes the vast majority of iPhones at factories in China. Hon Hai Precision Industry Co., Foxconn’s public arm, said it will collaborate with authorities.

Meanwhile, an executive and two former employees of WPP Plc, one of the world’s biggest advertising companies, have been arrested in China, people familiar with the matter said. The government detained a local employee of a Japanese metals trading company in March, the Nikkei newspaper reported Sunday. And this month, a court formally charged an Astellas Pharma Inc. executive on suspicion of espionage.

Hon Hai, Foxconn’s main listed arm, fell the most in more than three months Monday. Foxconn Industrial Internet Co., a major Shanghai-listed subsidiary, plunged its 10% daily limit — its biggest loss on record. Luxshare Precision Industry Co., a Foxconn rival based in China, gained as much as 4.9%.

China often does not explain the actions taken by its regulators publicly, leaving companies with operations in the country guessing at the ultimate goals of the government. Given the Communist Party’s immense power, that opaque approach to oversight of the economy has unsettled foreign executives. The Japanese trading company worker was detained in March and there is still no public acknowledgment of or clarity about the specific charges.

“My sense is that the core of the leadership really worries about foreign influence as dissent, among elites, is growing,” said Alicia Garcia Herrero, chief Asia Pacific economist at Natixis SA. “It is not a signal for foreigners. It is a signal for the elites: don’t follow that path.”

With China struggling through a housing crisis, Xi Jinping and his administration have been trying to signal support for the private sector, seeking help in stabilizing the world’s second-largest economy. Perceptions of the party’s economic stewardship suffered during years of Covid lockdowns and a brutal crackdown on the technology industry, including Alibaba Group Holding Ltd. and co-founder Jack Ma.

Foxconn is a similarly surprising — and enormous — target. The company has been at the foundation of China’s growth as a high-tech manufacturing base and, with the Apple halo, a symbol of the opportunities for other companies in the country. Tesla Inc., for example, has now made China a key base for its electric-vehicle production.

Apple Chief Executive Officer Tim Cook visited China last week, meeting with Commerce Minister Wang Wentao to declare their support for “win-win” collaborations. The Apple chief’s rare visit follows a move by Beijing to ban some staff at government agencies and state-owned companies from using Apple’s marquee iPhone for security reasons. The latest iPhone 15 is also off to a disappointing start in China after Huawei Technologies Co. stunned the market with the 5G-capable Mate 60 phones.

“The part of the leadership dealing with the economy and attracting foreign capital is not in the driving seat,” said Garcia Herrero. “So they can only watch and hope to minimize the damage by announcing opening of certain sectors.”

In the current investigation, tax authorities are conducting checks on Foxconn subsidiaries in Guangdong and Jiangsu provinces, the state-run Global Times said Sunday, citing unidentified people with knowledge of the matter. The report also said natural resources officials are looking into the company’s use of land in Henan and Hubei provinces.

No further details of the investigations and tax checks were provided in Global Times’ report. Hon Hai didn’t give specifics either in a filing with Taiwan’s stock exchange. Foxconn’s Zhengzhou plant, known as iPhone City, is located in Henan.

Foxconn billionaire founder Terry Gou resigned from the company’s board last month as he campaigns to become president of Taiwan. The campaign referred questions to Foxconn. He previously dismissed claims he would be susceptible to Chinese pressure, were he to win January’s election. 

“I will not bow to China’s threats,” Gou said at the August briefing announcing his presidential bid. Name-checking key customers including Apple, Tesla and Inc., he said any halt to production due to political pressure would disrupt supply chains — something China would need to explain to the world.

Xiaomeng Lu, director of Geo-Technology at Eurasia Group, said the probe may be China’s way of seeking influence in the Taiwanese election, where the island’s relationship with the mainland will be a central issue.

“I think Beijing definitely has an incentive to weigh in and have a chat with Terry Gou about this presidential race,” she said on Bloomberg Television.

Lai Ching-te, Taiwan’s vice president and presidential election frontrunner, voiced support for Hon Hai at a campaign event Sunday. 

“China shouldn’t force Taiwanese companies to declare their position whenever an election is taking place,” he said. “China should acknowledge Taiwanese companies contribute to its economy greatly.”

On Monday, Taiwanese Premier Chen Chien-jen told reporters in Taipei that the government has kept in touch with Hon Hai and will offer assistance depending on the situation.

Beijing has been intensifying its scrutiny of Western businesses amid growing geopolitical tensions. In March, authorities raided New York-based due diligence firm Mintz Group’s office in Beijing and detained five of its Chinese employees. In April, Bain & Co. confirmed that Chinese authorities had questioned staff at its Shanghai office. 

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

At a forum last week in Beijing, Takehiko Nakao, chairman of Mizuho Research & Technologies, said that arrests with no public clarity over the reasons have added to a sense of unease among international companies. Seventeen Japanese have been detained in China since May 2015, the country’s foreign ministry said in a September email.

“Japanese companies want to expand but are also somewhat cautious,” said Nakao, who previously ran the Asian Development Bank, adding that the caution was partly due to China’s detention of an executive without public explanation. “If there’s even one person like that, people become very worried.”

–With assistance from Thomas Seal, Mark Bergen, Gao Yuan, Cindy Wang and Jasmine Ng.

(Updates with share trading and comments from fourth paragraph)

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