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Foxconn Chairman Terry Gou, right, and U.S. President Donald Trump took part in the groundbreaking ceremony for Foxconn's new factory complex in Mount Pleasant, Wisconsin, on June 28.   © Reuters
CEO in the news

In Wisconsin, Foxconn's Terry Gou seeks a future beyond Apple

Taiwanese mogul wants to lead industrial AI to survive US-China tensions

LAULY LI and CHENG TING-FANG, Nikkei staff writers | Taiwan

MOUNT PLEASANT, Wisconsin/TAIPEI -- As trade tensions between Washington and Beijing escalate, the chairman of Foxconn Technology Group, Terry Gou, has managed to make the assembler of iPhones seem immune from the bitter tariff war -- and he even has become a notable job creator in the U.S. despite the fact that his hardware empire faces mounting challenges at a critical stage.

The groundbreaking ceremony on June 28 for the company's $10 billion liquid crystal display factory complex in Mount Pleasant, Wisconsin -- a 30-minute drive from Milwaukee and one of the biggest foreign investments in the U.S. -- was designed to highlight the move to bring manufacturing jobs back to the country.

Perhaps not surprisingly, President Donald Trump, who attended the event, spoke for nearly 40 minutes -- much longer than the planned 20-minute speech -- and praised Gou as "a friend of mine, one of the most successful businessmen in the world." Trump, whose Republican Party faces some challenges in this fall's midterm elections, boasted of luring major foreign investment to the U.S.

Taiwan-based Foxconn, formally known as Hon Hai Precision Industry, says the project will create 13,000 jobs with an average salary of $54,000 a year. With characteristic flourish, Trump described the project as "the eighth wonder of the world."

Gou, for his part, spent his eight-minute-long address that day to express appreciation. In front of nearly 2,000 guests from around the world, Gou said he received his first order for television manufacturing from Chicago in 1974. "I came back to the Midwest to make a major investment in Wisconsin, to repay the kindness of the people who gave me the chance to realize my own dream," the 67-year-old Gou said.

His move to use the U.S. as a tech production site -- 30 years after tapping China as a manufacturing base -- underscores his bold decision-making as well as his business acumen. "I would like to thank President Trump for being with us today," Gou said. "I've said this before, and I will say this again, it is well-known that if not for you, I will not be here today."

Masayoshi Son, the founder of SoftBank Group of Japan --- one of the first foreign business titans to advocate Trump's call for "Made in U.S.A." and a close friend of Gou, unexpectedly showed up at the ceremony. As Trump spoke, he called out Son's name and invited him to the stage. "Masa, are you back there?" the president asked.

It was a rare image: Two of Asia's most prominent business leaders in the heart of the American Midwest with the U.S. president. The three men, all wearing red neckties, greeted each other with amiable pats on the shoulders and displayed some moments of levity. Son said he was proud of Gou. "Terry is my best friend and we are the brothers." Trump interrupted: "What about me, no?" Son replied, "Of course!" drawing laughter from the crowd.

From left, President Donald Trump, Terry Gou, and SoftBank CEO Masayoshi Son meet at Foxconn's groundbreaking ceremony in Mount Pleasant, Wisconsin, on June 28.   © Reuters

Gou, a self-made billionaire who founded Foxconn in 1974, was also among the first foreign executives to express interest in investing in the U.S. soon after Trump was elected in November 2016. The Wisconsin plant is an apparent win for Gou in marketing his manufacturing company, which earns more than 50% of its revenue from assembling iPhones and MacBooks for Apple at its facilities in mainland China, and as an employer that could bring high-quality tech jobs to the world's largest economy.

Analysts say that, compared with other electronics manufacturing services providers, Foxconn thinks ahead and moves fast when political winds shift. "Terry Gou knows exactly what the politicians want while addressing his company's own needs," said Gordon Sun, director of the Economic Forecasting Center at the Taiwan Institute of Economic Research.

Eric Chiou, an analyst at Taipei-based research firm WitsView, noted that Foxconn rode the wave to address Trump's "Made in U.S.A." pledge and that it was very symbolic for Foxconn to "kick off" its LCD project amid the U.S.-China trade war. As the U.S. still relies mostly on China for mass production of consumer electronics, Foxconn's move is significant for the U.S and for Trump to cut heavy reliance on China for the electronics manufacturing sector. "Such a move, if successful, might really attract more companies to bring manufacturing work to the U.S.," Chiou said.

Despite the big splash in the U.S., Gou has not forgotten to please Beijing and continually show his commitment to continue investing in China, where most of the company's manufacturing sites are based. Such nimble moves make Foxconn, China's largest exporter and manufacturer, less vulnerable to becoming a potential target of attack amid trade tensions.

Just weeks before heading to Wisconsin, Foxconn held a three-day celebration to promote its 30th anniversary of investment in China. On June 8, Foxconn Industrial Internet -- a unit that makes smartphone components, cloud service equipment and industrial robots -- made its debut on the Shanghai Stock Exchange. The listing of Foxconn Industrial Internet met the Chinese government's goal of luring large tech companies and unicorns to list on the domestic market. Analysts also viewed the event as supportive of Beijing's "Made in China 2025" campaign to advance the tech industry.

There have been other recent investments, too. Sakai Display Products, a joint venture between Foxconn and Sharp, in December 2016 signed a 61 billion yuan ($9.1 billion) deal with the city of Guangzhou in southern China to build a 10.5-generation LCD plant. It is scheduled to begin production in 2019.

A week after Foxconn's landmark groundbreaking ceremony in Wisconsin, Gou received an enthusiastic welcome in Silicon Valley when he delivered a talk at Stanford University on artificial intelligence, an important area of development in both the U.S. and China.

Dozens of people -- scientists, AI engineers, software programmers, startup entrepreneurs and students -- had to stand in the aisles, while many others could not even enter the room when the talk began.

Attendees showered Gou with praise. "I went out at 6:00 a.m. this morning just to get here and listen to Terry Gou's insights about AI," said Dankai Liu, a project system engineer at the Jet Propulsion Laboratory of the California Institute of Technology.

Waylen Lin, a startup entrepreneur based in Silicon Valley, said he was at Gou's speech to learn more about Foxconn's take on edge computing. "Foxconn's aggressiveness in pursuing the latest technologies reflect its leader's strong leadership."

Foxconn Chairman Terry Gou addresses participants during an AI event at Stanford University in the U.S. state of California on Friday. (Photo by Lauly Li)

Many in the audience view Foxconn as an industrial AI company, and questions on iPhones or other Apple products that Foxconn assembles were not raised. The Stanford speech underscored Gou's continuing efforts to transform his company from a low-end contract manufacturer into an AI and data-centric company -- and to slash its reliance on Apple. While Gou has managed to find a balance for Foxconn amid the U.S.-China trade dispute, the company is charging ahead with transforming itself.

For 2016, Foxconn saw its revenue fall for the first time since it went public in 1991, to 4.35 trillion New Taiwan dollars ($142 billion) from NT$4.48 trillion in 2015. In 2017, with its operating income dropping more than 35% from a year earlier, the company's net profit also fell year-over-year for the first time since 2008, to NT$138.7 billion from NT$148.66 billion. As of July 19, shares of Hon Hai, the flagship listed company, are down 10.5% this year.

"Gou is actually in a very difficult position," said Vincent Chen, head of regional research at Yuanta Securities Investment Consulting. "You can say he manages well between China and U.S. or you can also say he has no choice as he is caught in between the both sides," he said. "Gou needs to lead his manufacturing empire beyond Apple amid the slowing demand for the iconic iPhones, while he has to show China his commitment to continue investing in the country."

Gou is very much aware of the mounting challenges. He has said he does not take off weekends or take annual leaves, and he spends only a third of the year in Taiwan. Foxconn executives travel to wherever Gou is, and they often have to walk alongside him while he is on his daily 10,000-step exercise routine. "The next three to five years are crucial to the company," Gou said at the company's annual general meeting in June. "I won't be retiring at least in the next five years."

Gou has made efforts toward educating the public about labeling the company as a low-end contract manufacturer or linking Foxconn's performance so closely to Apple. "Foxconn is no longer just a contract electronics manufacturer," he said earlier in January at a shareholders' meeting. He said Foxconn is a manufacturer that generates massive production data on a daily basis and an industrial internet company.

Gou again brought up the issue at the June meeting, saying that Foxconn's revenue increase of more than 8% to NT$1.71 trillion in the first five months of this year was not only because of a "major client." "We are not just depending on the major client -- our cloud computing and internet of things business also supported the increase." It is generally understood that the client he referred to is Apple.

Gou has been guiding his company to diversify its business portfolio for years, extending its reach from upstream supply chains to electronics brands to meet consumer demand. A Foxconn subsidiary acquired Microsoft's feature, or entry-level, phone business and the right to use the Nokia brand in 2016. It also purchased a stake in Sharp of Japan that same year. In March this year, a Foxconn subsidiary announced plans to buy Belkin of the U.S., which owns Linksys and Wemo. In June, Foxconn and its flat panel unit Innolux said they would purchase stakes in U.S. television brand Vizio.

Gou confirmed two months ago that Foxconn would make its own semiconductors even though the company's chip business is still small. "We've established a semiconductor team with up to 100 talents to do chip design and manufacturing," Gou said in a speech in Beijing in May.

Foxconn's moves to make more key components -- including advanced displays, semiconductors, electric car parts and 5G connectivity gears -- are all efforts to cut its reliance on Apple. However, those ventures have not yet yielded substantial fruit. An unsuccessful bid for Toshiba's NAND flash memory chip business in 2017 was also Foxconn's attempt to move deeper in the semiconductor industry.

In addition, it is clear that Foxconn will see increasing competition from rivals from mainland China with strong government support. For example, with Foxconn's display business, China already has a local leader in BOE Technology Group. For its connector and touch module businesses, respectively, Chinese competitors Luxshare-ICT and O-film Tech grabbed international attention when Apple Chief Executive Tim Cook visited them last year and endorsed both companies as key suppliers, elevating the two Chinese companies' global status.

At the same time, how the trade war between China and the U.S. proceeds remains a question for Foxconn, and analysts point out that the political atmosphere in the U.S. is also unclear. "We need to monitor closely whether President Donald Trump could continue to be in power after 2020 and whether there are any changes in the political environment in the near term," said Chiou of WitsView. "Any political dynamics changes could have a significant impact on the progress of the Wisconsin project."

The Wisconsin facility alone also has its own difficulties. LCD-flat panel makers, which are centered in East Asia, constantly face fierce pricing competition, especially when Chinese flat-panel plants are built with subsidies from the government.

The project will receive nearly $4 billion in incentives, which includes $3 billion in tax credits and breaks from the state of Wisconsin and roughly $764 million from Mount Pleasant and Racine County, where the plant is being built. The state will not receive a return on its $3 billion investment in the project until about 2042, based on estimates from the nonpartisan Legislative Fiscal Bureau.

"Economically, it is quite controversial over how much subsidy they have to give [Foxconn]," said Willy C. Shih, at professor at Harvard Business School. "But if you don't have subsidies for the capital costs, then you are not going to be competitive at all."

The LCD flat panel industry is a capital extensive industry and has faced excessive supplies from time to time over the past two decades, mainly due to rush capacity expansions. Considering that Chinese flat panel makers are building new capacity, Shih said Foxconn is a little late in starting construction now, adding that when the plant goes in operation it might face oversupply and pricing pressures.

Shih said another problem is in the supply chains. In the U.S., Foxconn can only source LCD glass from Corning, which has a factory in Kentucky, while the rest of the supplies, such as color filters and polarizing films, have to be imported or companies will have to set up production in the U.S.

"So, can you do it?" he said. "Absolutely you can do it. It's just the question of how much money and time you are willing to spend along the way."

Setting up an LCD plant in Wisconsin is just the beginning of Foxconn's plan in the U.S. After the groundbreaking ceremony, Foxconn established an AI company in Cupertino, California, in an effort to lure talent from Silicon Valley, part of Gou's strategy to accelerate the company's transformation.

"Foxconn is becoming an AI-infused industrial internet company," Gou said in the speech at Stanford. "I am excited to work with you all to create the new future of the industrial internet."

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