May 1, 2014 7:00 pm JST

Chairman Gou plots Foxconn's life beyond contract manufacturing

Terry Gou (Photo by Yasushi Kato)

TOKYO -- Where Apple goes, so follows Foxconn, according to conventional wisdom. And Apple appears to have lost its knack for innovation.

     Taiwan-based Foxconn Technology, which trades as Hon Hai Precision Industry, last year logged its second-smallest growth in group sales since 2001, up 1% year-on-year at 3.95 trillion new Taiwan dollars ($130 billion). Only 2009, at the height of the financial crisis, was worse.

     But the world's largest electronics contract manufacturer is still dominant in the industry. Its sales are four times that of its nearest competitor, Pegatron, also of Taiwan.

     In a recent execlusive interview with Nikkei Electronics, Foxconn Chairman and CEO Terry Gou talked about his business outlook in an era of growing competition. Corporate Executive VP J.W. Tai and Brand Cheng, senior vice president of the Communication & Network Solution Business Group, were also present at the interview.

 

Q: In July 2012, you acquired a 37.61% stake in Sakai Display Products of Japan for 66 billion yen ($646 million).  How are business conditions at Sakai Display?

Terry Gou: I attended Sakai Display's shareholders meeting (on March 26). Let me show you part of the company's financial report for fiscal 2013 (ended last December). It underscores that Sharp of Japan (Sakai's founder and major shareholder) and Foxconn are working together closely.

     2012 was a tough year. The TV market struggled to grow and the unit prices of TVs fell even though the yen weakened. Furthermore, Sakai Display faced a quality problem. Nevertheless, the company booked 15.1 billion yen in operating profit.

     The good results are thanks to cost cutting by Sakai Display's staff and other efforts, in the hopes that these endeavors will pay off.

     I promised Sakai Display three things. The first is I will not cut payroll. The second is that existing employees will be utilized. And the third is that profits will be shared as much as possible with employees. Sakai Display employees will receive special bonuses totaling about 400 million yen, the amount of dividend that is supposed to be paid to me as a shareholder. If the company also secures a net profit in 2014, I will again share my dividend with employees.

 

Q: Is there no change to the plan to take Sakai Display public before very long?

Gou: No. Sharp and I have set a goal of having Sakai Display make an initial public offering in 2016, on condition that the company generates profit for the three consecutive years through 2015.

 

Q: What about Sakai Display's production capacity? You mentioned in 2012 that your intention was to increase monthly capacity to 120,000 glass sheets and then build another plant with the same capacity next to the existing plant.

Gou: The company's current capacity is 80,000 glass sheets a month. With an average capacity utilization rate of 85%, it produced the profit mentioned before. In years to come, Sakai Display will install facilities in currently unused space at the existing plant.

J.W. Tai: Sakai Display is now considering building a plant outside Japan. The Chinese government plans to raise import tariffs on large liquid crystal display panels from 5% to 8% to help nurture the domestic LCD industry. China may raise the tariff even more in the future. Another thing is huge transportation costs. Although Sakai Display is ahead of BOE Technology Group of China and other rivals in terms of the generation of manufacturing technology, it seems better for the company to have plants in big consumption markets such as the U.S. and China.

 

Q: Last May, Foxconn set up a research center in Osaka, Foxconn Japan RD, to develop displays and chemical materials. Don't you feel a perception gap over time and cost between Japanese engineers?

Gou: What's most important is the relationship of trust. We want to implement large-scale investment in Japan as we have done in Sakai Display and to bring back the fruit to Japanese society. Japan has many industries and technologies, such as organic electroluminescence panels as well as materials, that we should learn about.

 

Q: Taiwan's administrative authorities hope for reorganizing companies. Mr. Gou is the largest individual shareholder in Innolux. If the LCD manufacturer combines operation with AU Optronics, it would spur technological development and help Taiwanese companies compete against rising Chinese panel manufactures, would it not?

Gou: I'm in a position to weigh the advantages of the merger from the broad perspective of a shareholder. In the high-risk business of display panels, it appears that management by founder's family can turn a profit more easily.

     At the South Korean companies Samsung Electronics and LG Display, the founding families are deeply involved in management. For Sharp, Saeki family used to control operations.

Q: The Foxconn plan to buy a stake in Sharp remains up in the air. The initial aim of the attempt was to improve your company's ability to design electronic devices. Is the need to invest in the electronics brand company fading?

Gou: We are continuing negotiations with Sharp over cooperation in making smaller LCD panels. After attending Sakai Display's shareholders meeting, I met with Sharp President Kozo Takahashi for about an hour. The successful cooperation at Sakai Display has made it easier for Foxconn and Sharp to work together.

     Meanwhile, Foxconn's ability to design consumer electronics has already reached a level comparable to that of brand companies. That is evidenced by an announcement in February in Spain by John Chen, CEO of BlackBerry, about the company's bold new plan. BlackBerry will concentrate on the development of software and servers to enhance information security; the development of automotive devices and M2M (machine to machine) communications; the development of real-time operating system QNX geared for IoT (Internet of Things); and the planning and sales of smartphones, while entirely entrusting the development of other smartphones to Foxconn.

     Brand companies used to build consumer trust through technological development, customer support and long-term commitments to these matters. But should they continue to engage in all technological developments in the future as an extension of the past?

 

Q: Vizio, a U.S. TV brand and a core Sakai Display customer, maintains the second largest share of the U.S. market by exploring low-margin distribution channels, including Costco Wholesale. Vizio effectively outsources its entire technological development to Foxconn and other suppliers.

Gou: Our company grew from being a mere EMS (electronics manufacturing service) provider, or assembler, quite a while ago. Today we do upstream processes for our customers. For instance, we provide BlackBerry with IIDM (innovative integrated design manufacture) services, in which we take over from the product planning. We also work with the Canadian company in sales in Asia as well as customer support. We make our own smartphones under the InFocus brand by engaging in all stages, from planning to sales, and this helps to bolster our IIDM service.

Q: Foxconn had achieved remarkable growth, but it failed to fulfill the target of a 15% gain in group sales in 2013.

Gou: That's right. But let me add something. Innolux, Sakai display and so on which I as an individual, have stakes in, are not consolidated subsidiaries of Foxconn. If these companies' sales had been added, Foxconn's group sales would have grown 10% year-on-year to about NT$4.5 trillion last year.

     We aim for growth without relying on mergers. Therefore, we now believe that 10% is an appropriate sales growth target when economic conditions are stable.

     That growth target is still high. But we will attain that by transferring power to the general manager of each business group. This year, we have reorganized our business units into 12 to speed up decision-making and facilitate teamwork by downsizing groups. If a business group or its affiliates go public, its employees can enjoy financial and emotional rewards.

 

Q: In the smartphone business, Chinese contract manufacturers such as Shanghai Huaqin Telecom Technology, Longcheer Holdings and Wingtech Group are growing fast.

Gou: I believe our competence is still far higher than that of Chinese companies.

 

Q: You said Foxconn does not aim to become a brand company. What sort of company do you wish Foxconn to become?

Gou: Foxconn aspires to become a high-tech service company for the information age. We do not have to be a brand name. The business results of brand companies justify that. Except for a handful of them, these companies haven't generated sizable profits.

     In the information age, a long-established brand can't necessarily retain consumer trust and adoration. Tesla Motors of the U.S. is a case in point. Its history is far shorter than that of Toyota Motor, or Germany's Daimler and Porsche. Nevertheless, Tesla cars are gaining popularity against those brand automakers at bay area. I myself own two Teslas. The vehicles offer a totally new driving experience.

Brand Cheng: The information age is an era of eight displays -- smartphones, tablets, laptops, all-in-one (AIO) desktops, portable TVs, smart TVs, displays for business, medical and educational uses, and video walls (connected to one another through a single cloud or network system). Foxconn manufactures all eight products. And we make network equipment and servers that connect these displays.

     We are of course going to handle so-called wearable devices. Our $200 million investment in Woodman Labs, the U.S. company that owns the GoPro brand of action cameras, has been partly intended to foster the wearable business.

     Our business domain is not confined to devices. We will launch a 4G (fourth generation) telecommunications service in Taiwan in the very near future. One of the aims is to accumulate experience through a commercial service. We also decided this March to build a low power data center in Guizhou Province, China, for 220 million yuan ($35.1 million).

Gou: Entering the information age, people have come to make full use of their eyes. Unless a user watches a screen, he cannot do anything through Line or Facebook. That is why we have promoted since 2012 the so-called eyeball project, which calls for expanding our display and touch panel operations. We intend to strengthen businesses related to not just displaying information but creating and sending information.

 

Interviewed by Nikkei Electronics correspondent Tomohiro Otsuki and Editor in Chief Takuji Imai