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Foxconn leverages Xi's hopes to raise $4.2bn

iPhone assembler's IPO coincided with US-China tech competition

Foxconn Chairman Terry Gou seeks to raise funds in China for investment in businesses other than contract manufacturing.   © Reuters

TAIPEI/SHANGHAI/OSAKA -- Taiwan's Hon Hai Precision Industry, or Foxconn, is cashing in on Sino-American tech competition, as it skillfully rides on President Xi Jinping's ambitions to turn China into a tech powerhouse.

Friday's initial public offering of Foxconn Industrial Internet, a core business that assembles iPhones for Apple in China, netted 27.1 billion yuan ($4.22 billion), with shares closing limit-up at 44% above the opening price. The unit's chairman, Chen Yongzheng, paid lip service to Xi's "Made in China 2025" industrial strategy and said the company would be devoted to actively pursuing great achievements.

Foxconn's goal of raising funds for big projects, such as the construction of two roughly $10 billion liquid crystal display panel factories -- one in the U.S. state of Wisconsin and one in Guangzhou, China -- dovetailed with the Chinese government's aim of bringing in more powerful tech companies from outside the mainland. The listing received a fast-tracked approval process.

Foxconn Industrial Internet's iPhone assembly makes up about half of Foxconn's net profit, but flagging smartphone demand and rising labor costs have eaten into earnings from those operations. The company plans to put some IPO funds toward addressing the cost issue by mechanizing production lines, including by applying artificial intelligence. Investors include Chinese e-commerce leader Alibaba Group Holding and Tencent Holdings, which operates the popular WeChat messaging app.

Foxconn hopes to continue forging ties with the Xi administration to win further support. Chairman Terry Gou aims to cultivate 20,000 employees well-versed in artificial intelligence, he said at a forum the company initiated Wednesday in Shenzhen, the tech-hub city in southern China. Though many companies associated with Foxconn are already listed in markets such as Taiwan, there are also plans for a Shenzhen listing of Zhen Ding Technology Holding, a Chinese unit that makes printed circuit boards.

Foxconn's Japan-based display unit Sharp has announced an effort to raise up to 200 billion yen ($1.82 billion) through a public offering to buy back its preferential shares held by financial institutions. During talks over purchasing Sharp in 2016, there were predictions that the Taiwanese company would foot part of the bill. But Foxconn appears set to dodge that burden and later raise funds separately through a bond float by the Japanese unit, whose finances it helped rebuild.

With a pure contract-manufacturing model becoming less sustainable, Foxconn has put forth a number of forward-looking investment plans to shake up its business structure. Besides the two planned LCD plants, Gou said in May that the company hopes to get into semiconductor manufacturing -- a move that would likely require several billion dollars.

U.S. President Donald Trump claimed last year that Foxconn's American investments might rise to $30 billion. Plans have also surfaced for plants in India and a variety of countries. At the end of 2017, Foxconn's cash on hand was estimated at around the equivalent of $21 billion. But "the investments it has planned would probably cost triple" that figure, an executive at an industry peer suggested.

Foxconn's net profit suffered its first year-on-year drop in nine years in the 12 months through December, while operating cash flow -- which reflects assets earned through core operations -- came in at minus 39.3 billion New Taiwan dollars ($1.31 billion). Changes in relevant business conditions may have created extraordinary pressure on top of the smartphone slowdown and growing inventory. The company does not have ample cash lying around.

Gou all but certainly intends to continue appealing to both the U.S. and China by hiring more and improving production in both countries, hoping the strategy will pay off by helping the company restructure and achieve lasting growth.

Still, the market has taken an unsparing view of Foxconn's growth prospects. Last month, the company announced an effort to trim its capitalization by annulling NT$34 billion worth of shares to return value to shareholders -- a move aimed at boosting share prices, surmised one Taiwanese brokerage. But after a brief boost, two sessions later Foxconn stock had settled back to where it was before the announcement.


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