In July 2010, I visited the city of Zhengzhou. Terry Gou (郭台銘) had just swept into town and announced with great fanfare Foxconn’s plan to invest there. It was clear everywhere I went that all the branches of the local Communist Party had been mobilized for Foxconn. Roads were being built to serve the plant. Local educational institutions were tasked with getting the best workers for the new Foxconn plant. It was almost like a Maoist campaign by the Communist Party, a war if you will, to serve Foxconn.

By August 2010, only two months after the agreement was signed, Foxconn Zhengzhou opened up and started to make the iPhone 6. The plant grew to eventually employ almost 300 thousand workers, and is still Foxconn’s largest plant in the world. Foxconn replicated this model throughout China to become the largest private employer in China.

This marriage with local Communist Party organizations throughout China underpinned Foxconn’s growth. Foxconn got access to millions of workers, and benefited from the protection and support of the Communist Party.

It also served the interests of Communist Party. Foxconn generated millions of jobs in China and, along with the supply chain that grew around Foxconn, drove growth in China. This growth is critical to the Communist Party’s legitimacy, which is the claim that it has been able to bring economic prosperity to the Chinese people.

It wasn’t just Foxconn of course. Millions of Chinese entrepreneurs, as well as tens of thousands of Taiwanese businesses, built their own ties with local governments throughout China. But Foxconn was very much the spearhead of the massive relocation of Taiwanese businesses to China. It was not only the largest private employer in China, but it also built deep ties with the Communist Party. I was reminded of these ties on a recent visit to Tsinghua University when I walked past the building of the “Tsinghua-Foxconn Nanotechnology Research Center’ on the Tsinghua University campus.

But the effectiveness of this partnership between private businesses and Chinese local governments has been slowly unraveling long before my recent visit to Tsinghua. There are three forces behind this.

First, after President Xi Jinping took over in 2012, there has been a crackdown on local communist party officials. Specifically, the growing influence of private business, particularly in view of the close ties between private businesses and local party officials, was viewed as an existential threat to the Party. This view fed into the larger lesson the Chinese leadership took from the collapse of the Soviet Union, which was that without strengthening Party control, the Party would eventually collapse.

The consequence is that local communist party officials today are no longer the entrepreneurial agents they once were, eagerly seeking private investment, and doing whatever it takes to support private businesses. Instead they spend their time on political study sessions on Xi Jingping's thoughts, and keep their heads down to avoid attracting the attention of the Central Discipline Committee.

Second, there has been a crackdown on private firms, especially on large and powerful ones such as Alibaba and Tencent. This crackdown should be viewed as part of the ongoing campaign to restore Party control. Companies and individuals that threaten or potentially threaten Party control have been brought to heel. These include wealthy individuals, movie stars and celebrities, public opinion leaders, after-school tutoring companies, internet companies, media companies, and data-intensive companies.

Third, there is a growing hostility of western countries to China. It is not only higher tariffs in the US, but also the threat of tariffs and other measures should a firm based in China increase their sales to western markets. For example, despite the fact that BYD cars are likely much better and cheaper than that of the competition, it is not likely that it would ever be able to sell in the US market.

The paralysis of local governments, combined with the increasing hostility of the Western world towards China, has prompted many Taiwanese firms to rethink their reliance on China. But at the same time, Taiwanese businesses were mostly immune to the crackdown that affected many Chinese owned private businesses. Not only that, but to the extent that they are able to, local governments in China continued to support most Taiwanese businesses. For example, when Foxconn’s workers quit en masse to escape the harsh COVID lockdowns in 2022, Chinese local governments took it upon themselves to recruit new workers for the company.

Why have most Taiwanese firms in China escaped the crackdowns? One reason is that they do not pose the same domestic political threat to the Chinese Communist Party as wealthy Chinese private entrepreneurs. Jack Ma was not only the wealthiest person in China, but also a celebrity. He posed a political threat in a way that Terry Gou, as a Taiwanese, never can.

This is why the recent crackdown on Foxconn, under the guise of investigation for regulatory violations, is so shocking. Why, after supporting Foxconn for so long, is the Communist Party cracking down on Foxconn? Is this an example of what will come next for all the other Taiwanese companies in China?

Many in Taiwan have speculated that the crackdown was to send a message to Gou to withdraw from the Presidential campaign. It is no secret that the Communist Party would much rather have the KMT in power than the DPP, and Gou’s campaign makes it more unlikely that the KMT will win.

Perhaps then, in the future, the Communist Party will use Taiwanese businesses as an instrument to affect Taiwan’s politics. If this is the case, Taiwanese businesses should remain politically neutral, remain focused on delivering profits for their shareholders, and avoid taking political stances. This position of neutrality would also help them push back when a political authority demands their political support.

But what if political neutrality does not work? What if a Taiwanese business feels that its survival in the Chinese market necessitates that it supports the Party’s position. This was perhaps the position that Gou found himself in when Chinese authorities announced a crackdown on Foxconn. Here Taiwan should make clear that its businesses can not be an advocate for foreign governments. It is not acceptable for politicians to get campaign contributions from Chinese interests; it should also be unacceptable for businesses to take political positions due to political pressure in China.

But it is also possible that the crackdown was idiosyncratic to Foxconn and does not signal a future crackdown on Taiwanese firms in China. It seems unlikely that Beijing really believed that public pressure would prompt Gou to suspend his campaign (it hadn’t). It seems more likely that the Chinese leaders were upset by Gou’s comments that implied that he was more important to China than the other way around, and that they wanted to teach him a lesson on who the “boss” was.

If this is the case, then the lesson for Taiwanese businesses is simple. Take your profits, make your contingency plans in case things blow up in China, and do not unnecessarily antagonize Chinese authorities. 

About the Author

Chang-Tai Hsieh is the Phyllis and Irwin Winkelried Professor of Economics and PCL Faculty Scholar, University of Chicago Booth School of Business

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