July 9, 2017 12:00 pm JST
Company in focus

Foxconn seeks to raise its own profile after working for others

The Taiwanese company embarks on an acquisition strategy to boost profits

DEBBY WU and CHENG TING-FANG, Nikkei staff writers

Foxconn Chairman Terry Gou speaks at a press conference after the annual general shareholders' meeting in New Taipei City, Taiwan on June 22 (Photo by Nozomu Ogawa)

TAIPEI -- When a Nikkei Asian Review reporter approached Founder and Chairman Terry Gou of Hon Hai Precision Industry, more commonly known as Foxconn Technology Group, outside of the hotel in Osaka where he was staying in early June, he appeared caught by surprise and not ready to talk.

But after several seconds, he decided to grab the opportunity to elaborate on his interest in acquiring the memory chip unit of embattled Japanese conglomerate Toshiba.

"Apple and Amazon will be injecting funds into the deal," he told the NAR reporter as they took a stroll for 30 minutes.

The episode reflected what has made Foxconn what it is today: Gou's ability to think fast on his feet and make snap decisions in response to an ever-changing business environment. It also reflected his deep ties with Apple, which treats him almost on an equal footing despite Foxconn's role as a contract assembler for the American electronics giant.

Every iPhone has this label on its back: "Designed by Apple in California. Assembled in China."

What the label does not say is that Foxconn is responsible for making most of the iPhones.

Apple's iconic handset was first introduced on June 29, 2007. Since then, Foxconn has become a household name for iPhone fans and tech industry watchers. But Foxconn is no longer content with just assembling products for others. It now wants to manufacture its own high-margin components to compensate for slim profits in its core assembly business.

That new direction led Foxconn last year to acquire Japanese electronics manufacturer Sharp, which makes screen panels for iPads and iPhones. It is now bidding for the lucrative memory chip business of embattled Japanese conglomerate Toshiba.

"We can tell Toshiba how to design superior memory chips" since Foxconn makes smartphones and servers, Gou told the NAR in early June. He argued that Foxconn was a better fit for the chip unit than the other semiconductor companies, government funds and private equity companies bidding for it.

Gou is also seeking to expand his empire by developing brand name products through acquisitions and internal projects. Sharp is helping Foxconn to achieve that ambitious goal with its wide range of home appliances and large-size TVs. Nokia, which once dominated the global mobile phone market, now has an indirect licensing deal with Foxconn via a third party.

Andy Rubin, who created the Android operating system, has publicized the financial and production support he is receiving from Foxconn for his upcoming Essential Phone. The Taiwanese company has also created a new brand for large TV sets and smartphones known as InFocus, although it has gained little recognition outside of its home market.

The company is seeking to offer a wide range of branded electronics and operate in several industries. Foxconn said in a statement it has identified several key areas for growth, including mobile devices, the Internet of Things, Big Data, cloud computing, smart lives, Industry 4.0 automation, robotics engineering, and advanced TV display technologies.

iPhone City

Foxconn, the world's largest contract electronics maker by revenue, now employs about 700,000 people in China, down from a peak of one million workers due to the growing use of automated production in response to rising wages.

Foxconn makes most of the iPhones at Zhengzhou in Henan province, which has been dubbed an "iPhone City." The Zhengzhou plant, with its 90 production lines and up to 350,000 workers, can churn out 500,000 iPhones a day, according to Macquarie, an investment bank.

Foxconn is responsible for assembling about 70% of the 210 million iPhones sold each year, according to Yuanta Investment Consulting in Taipei. Foxconn's smaller Taiwanese rivals, Pegatron and Wistron, are responsible for assembling the rest.

Foxconn is estimated to account for 70% of Henan province's total international trade of 471.47 billion yuan ($69.3 billion) in 2016, according to the official China News Service. Henan is now one of China's top ten provinces in terms of international trade.

Foxconn gradually moved its iPhone production from southeastern China to Zhengzhou following a string of worker suicides at its Shenzhen facility in 2010.

Labor rights groups accused Foxconn of managing its production lines in a harsh, military-style manner and forcing employees to work for unreasonable long hours. Since then, the company has offered improved compensation and counseling services. Apple has also imposed a ceiling on the number of hours Foxconn employees on the assembly line can work each week.

Foxconn's presence in Shenzhen has boosted the local economy and young Chinese do not appear to be deterred from joining Foxconn judging from the long lines recently seen at a Foxconn recruiting center.

Humble origins

Gou, the son of a policeman who fled to Taiwan with the Nationalist forces in 1949, started his first business in 1974 making plastic components, such as TV control knobs, with 300,000 New Taiwan dollars ($9,804). He once joked that he set up his headquarters in a gritty Taipei suburb close to a prison because he feared he might go to jail if his checks bounced.

Gou got his first break in the late 1970s when he received an order to make connectors for Atari gaming consoles. Connectors remain an important part of Foxconn's business as reflected in the last part of the company's name, while Gou chose "Fox" for the first part of the name because the animal connotated agility and speed.

Gou spent a lot of time living and traveling in the U.S. in the late 1980s to win bigger orders and then in 1988, he set up the company's first production facility in China in the Longhua district of Shenzhen.

Gou got his first contract with Apple in 1994, making semi-transparent casing for iMac and then becoming a key assembler for the iPod in the early 2000s. In addition to iPhones, Foxconn now makes iPads, Kindle e-readers for Amazon.com, game consoles for Sony and Nintendo, the humanoid robot Pepper for SoftBank Group, and servers for HP.

Since the beginning of 2017, Hon Hai shares have risen more than 36% to close at NT$114.50 on July 7, with a market value of about NT$2 trillion, which is bigger than that for Sony and Nintendo.

The surge in the share price is in response to market anticipation about the upcoming premium iPhone handset, which will sport an organic light-emitting diode display. Hon Hai will virtually dominate assembly orders for the OLED iPhones.

Acquisition drive

But while Foxconn has become Apple's main partner, it is grappling with razor-thin margins. To boost its bottom line, Foxconn is trying to acquire technologies for key components.

One of the reasons that Foxconn acquired Sharp last year was that the Japanese company has been supplying liquid crystal displays for the iPhone. Foxconn believed that Sharp has the capability to produce OLED panels for smartphones, although it is unclear when the Japanese company will be able to do that.

Core processor chips and panels are the two most expensive components in a smartphone, while memory chips are another source of profits.

This is why Gou now wants to gain control of Toshiba's memory chip business, although Japanese officials are trying to block his bid because of fears that the sensitive technology could be leaked to China.

Gou realizes that remaining in the assembly business will keep Foxconn's profit margins slim as global smartphone sales are slowing. That is why Foxconn wants to develop its own brand name products.

Gou has vowed to revitalize the Sharp brand. "We are hoping that Sharp will become a paragon" for other Japanese companies, Gou said at the annual shareholders' meeting in June. As part of that effort, Foxconn decorated its inconspicuous, utilitarian headquarters in the Taipei suburb of Tucheng with Sharp banners and its latest home appliances products during the shareholders' meeting. It has also been aggressively promoting Sharp TVs in China and Taiwan.

Among the several brands it now controls, Sharp is probably the most important to Foxconn, said Vincent Chen, president of Yuanta. But he added that if Foxconn tries to grow Sharp, it could represent "a conflict of interest for Foxconn since it also makes gadgets for others," Chen said. "Currently, Sharp is limited to selling TVs and home appliances, two markets where most Foxconn customers do not operate."

In addition, the TV business is a tough one. "It's a bit challenging for Foxconn to make profits from selling televisions only, especially when its current strategy is to offer discounts to boost shipments," said Eric Chiou, an analyst at WitsView, although TV sales could increase Foxconn revenues. Sharp is planning to ship some 8.5 million television units this year from 4.7 million units in 2016, mainly due to demand in China, he added.

Trump friendly

While relatively low labor costs in China made the iPhone affordable for middle-class consumers worldwide and contributed to its immense success, Gou is looking at establishing two panel production facilities in the U.S. The NAR first reported last year that Apple had asked Foxconn to consider making iPhones in the U.S., but it is unclear whether the current plans are related to the assembly of complete iPhones.

The plans appear related, however, to U.S. President Donald Trump's call for major exporters to the U.S. to set up factories in America to create jobs and avoid possible protectionist measures. In late April, Gou met Trump and his son-in-law and advisor Jared Kushner in the White House to discuss investment plans, possibly in Republican strongholds and swing states.

"We will provide tens of thousands of jobs," Gou told reporters in June. "It is possible [Foxconn and Sharp together] will invest more than $10 billion, not all at once, but probably over a five-year span."

The 66-year-old Gou, who is referred to within the company as "BB" for Big Boss, is still working hard to lead Foxconn's key initiatives, particularly its U.S. expansion.

He rarely stays in the same place for more than three days, travels constantly for business, conducts hours-long meetings and never shows any sign of fatigue. He is also known for a sharp memory and eye for detail.

And that's the problem -- Gou rules Foxconn like a strongman, while no one within the company is as visionary as he is. Few can operate at his level of energy and speed.

Cloudy future

His 40-year-old son, Jeffrey, works at the group, but is overshadowed by the father's extraordinary achievements. His daughter, Shirley, does not appear to be interested in family business. Gou has another three children by his second wife, but the oldest is only eight. There is simply no heir apparent and Gou has never spoken about a succession plan.

Equally unclear is Foxconn's ownership structure. Gou and his longtime aide, Huang Chiu-lian, who is his first wife's aunt and Foxconn's de facto chief financial officer, have created numerous holding companies for investment and ownership purposes, like many other Asian companies.

For instance, Gou controls the Hon Hai board even though the latest annual report shows he only owns a 12.25% stake in the company. It is unclear whether Gou may have more shares via personal investment vehicles.

The business model that Gou has created may not be easy to be managed by his successor. Foxconn's gross profit margin is only 7%, while major electronics players like Sony and Nintendo have margins of around 40%. On the other hand. Foxconn has produced a net profit of close to $5 billion last year, which is about five to seven times bigger than Sony or Nintendo.

Moreover, Gou's future strategy to rely less on low-margin contract manufacturing and develop a more lucrative own brand businesses faces challenges.

The company's dependence on Apple for revenue has steadily increased since 2013. Last year, Apple accounted for 54% of Hon Hai's revenue of NT$4.35 trillion, which was down 2% from 2015 due to lukewarm sales of the iPhone 7, according Foxconn's annual report.

"Foxconn still cannot do without Apple in the future. Apple orders have become too big to lose for Foxconn," Chen said.

Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 66,090.20M
Shares: 17,328.73M
Asia300

Pegatron Corp.

Taiwan

Market(Ticker): TAI(4938)
Sector:
Industry:
Electronic Technology
Computer Processing Hardware
Market cap(USD): 8,363.75M
Shares: 2,574.73M

Sharp Corp.

Japan

Market(Ticker): TKS(6753)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 17,438.71M
Shares: 4,994.52M

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 10,776.57M
Shares: 4,237.60M

Sony Corp.

Japan

Market(Ticker): TKS(6758)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 51,029.67M
Shares: 1,264.36M

Nintendo Co., Ltd.

Japan

Market(Ticker): TKS(7974)
Sector:
Industry:
Consumer Durables
Recreational Products
Market cap(USD): 46,200.98M
Shares: 141.66M

SoftBank Group Corp.

Japan

Market(Ticker): TKS(9984)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 91,677.95M
Shares: 1,100.66M

Get Insights on Asia In Your Inbox

To read the full story, Subscribe or Log in

Get your first month for $0.99

Redeemable only through the Subscribe button below

Once subscribed, you can…

  • Read all stories with unlimited access (5 articles per month without subscription)
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

We could not renew your subscription.
You need to update your payment information.

To read the full story, Subscribe or Log in

Once subscribed, you can…

  • Read all stories with unlimited access (5 articles per month without subscription)
  • Use our smartphone and tablet apps

To read the full story, Subscribe or Log in

3 months for $9
SUBSCRIBE TODAY

Take advantage of this limited offer.
Subscribe now to get unlimited access to all articles.

To read the full story, Update your account

We could not renew your subscription.
You need to update your payment information.