June 5, 2017 12:00 am JST

Apple, Amazon to back Foxconn on Toshiba chip bid, Gou says

U.S. tech titans depend on Japanese firm's memory chip output

DEBBY WU, Nikkei staff writer

Foxconn keeps its headquarters in suburban Taipei though it makes most gadgets in China.

OSAKA -- Chairman Terry Gou of key iPhone assembler Hon Hai Precision Industry, or Foxconn Technology Group, told the Nikkei Asian Review in an exclusive interview Sunday that his company has financial support from Apple and Amazon in its bid for the memory chip unit of embattled Japanese conglomerate Toshiba.

According to sources, Hon Hai is the highest bidder among five interested buyers, supposedly offering more than 2 trillion yen ($18.2 billion).

"Of course Apple and Amazon are offering money together, but I cannot comment on how much funds each company is putting on the table," Gou said at a hotel in Osaka.

The Taiwanese mogul, who heads the world's largest contract electronics maker, was in the western Japanese city for meetings with his staff at Sharp Corporation, which Foxconn acquired last year.

Hours earlier on Saturday night, Gou told the Nikkei Asian Review in a separate interview that he has secured support from Apple and Amazon on the Toshiba deal.

While there had been speculation that Apple and Amazon may be interested in Toshiba's semiconductor business, Gou's comments Sunday were the first official confirmation that the two companies were participating in a bid.

Apple declined to comment. Amazon did not immediately respond to an email seeking comment.

Both U.S. tech titans are key customers of Foxconn.

More than half of Foxconn's revenue comes from supplying components and assembling gadgets for Apple, while the company manufactures Kindle e-readers and Echo speakers for Amazon.

Toshiba's NAND flash memory chip is a component for storing data used in a wide range of electronics, including smartphones, servers and PCs.

The Japanese firm is a major supplier for Apple's iPhones. Meanwhile, Amazon needs NAND flash memory chips in the servers it uses in its data centers to provide cloud computing services for itself and external customers.

Data centers are essential infrastructure for major tech companies such as Amazon, Facebook and Google to gather and analyze massive amounts of data and create next-generation technologies, such as artificial intelligence and driverless vehicles.

Apple and Amazon's interest in memory chips could significantly alter a sector currently dominated by Samsung Electronics, a major rival to Apple in the global smartphone market.

In the first quarter of 2017, Samsung generated $4.21 billion from its NAND flash business and enjoyed a 35.4% global market share, according to Taipei-based research firm TrendForce. Western Digital (17.9%) and Toshiba (16.5%) trailed the South Korean firm, while Micron and SK Hynix followed behind with respective market shares of 11.9% and 11%.

Toshiba is seeking to complete the sale of its memory chip business, the only profitable unit of the Japanese conglomerate, before the current fiscal year ending in March. It intends to use the proceeds to bolster its finances to compensate for massive losses at Westinghouse, its U.S. nuclear subsidiary.

Four other bidders are vying to win Toshiba's memory unit alongside Foxconn. American chipmaker Broadcom, U.S. private equity firm Kohlberg Kravis Roberts, Toshiba's technological partner Western Digital, and South Korea's SK Hynix together with U.S. private equity firm Bain Capital have all made offers.

Confident of success

Gou appealed to both Toshiba and its banks by saying he can help ensure the firm's debts will be honored and stating his commitment to retaining the Toshiba memory unit permanently if Foxconn wins the bid.

"We will definitely not undermine nor interfere with [Toshiba's existing management]. We will treat them like the way we have been treating Sharp," Gou said, adding that he was confident that Foxconn stood a good chance of winning the bid.

"We let Japanese [managers] run Sharp ... we are also hoping that Toshiba's memory unit will survive into the next 50 to 100 years at least, like Sharp."
 
Under Foxconn's control, Sharp is forecasting a net profit of 59 billion yen in fiscal 2017 after it posted a net loss of 24.8 billion yen the year before, the first time it made money in four years.

"We can help banks secure their Toshiba debts. We are not like private equity funds -- if they buy a business, they will resell them for a profit afterwards. But we hope to manage Toshiba for life," Gou said.

Gou also tried to dispel concerns from some sectors in Japan that Toshiba's advanced memory technology may be leaked to China if sold to Foxconn, which makes electronics for other clients on its sprawling Chinese tech campuses.

"Since Foxconn was first founded all these years ago, I have been building the business with my own money and accumulating my own funds, and then I have been investing with my own profits. I have never taken a dime [from others]," he said.

He urged all parties involved in the Toshiba deal to abide by the bidding rules, although he would not go into details.

Gou said that Foxconn stood out among the bidders as it could offer recommendations on how to build the right memory components for future gadgets, drawing from its solid experience in smartphone and server manufacturing.

"We really hope to help Toshiba design better products in the future," he said.

With global smartphone demand softening in recent years, Gou has been aggressively exploring new business opportunities to make up for razor-thin margins on existing contracts.

The tycoon appears intent on building his manufacturing empire into another Samsung following his acquisition of Sharp, an iPhone panel supplier, and his ongoing efforts to snatch Toshiba.

Panels and memory chips are two of Samsung's most profitable businesses. Sharp still lacks the advanced organic light-emitting diode panel technology rolled out by the South Korean firm.

Apple will use OLED panels, solely supplied by Samsung, in its upcoming premium iPhone handset to be released later this year.

Gou has also been keen on building Foxconn's own brand names, an effort that may lead to competition with Foxconn's own customers.

Besides Sharp, Foxconn controls InFocus, a little-known electronics brand.

Last year, Foxconn agreed to acquire Nokia's feature phone business from Microsoft. Foxconn is also making Nokia brand smartphones for Finland-based HMD Global, which has licensed the Nokia brand for 10 years.

On Saturday, Gou confirmed to the Nikkei Asian Review that his company was also financially backing and manufacturing the Essential Phone, designed by Android creator Andy Rubin.

But the tycoon declined to comment on the progress of plans to build panel plants in the U.S. on the weekend.

Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 65,731.19M
Shares: 17,328.73M
Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 297,948.22M
Shares: 148.18M
Asia300

SK hynix, Inc.

South Korea

Market(Ticker): KRX(000660)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 42,957.16M
Shares: 728.00M

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 11,544.90M
Shares: 4,237.60M

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