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Foxconn looks beyond 'Apple pie'

TAIPEI -- Foxconn Technology Group's role as key Apple assembler was not the first thing mentioned by the Taiwanese company's Chairman Terry Gou on June 25, when he spoke about the future at the annual shareholders meeting of group flagship Hon Hai Precision Industry.

Foxconn Technology Group founder Terry Gou plans to expand his company with less reliance on Apple.

     Instead, the chairman began with industrial automation, manufacturing in China, and expansion into India. He also touched upon telematics, supply chain management and cloud computing.

     "We aim to explore many new fields, especially in Industry 4.0 and the 'Made in China 2025' initiative," Gou told shareholders at the beginning of his opening remarks, referring to the efforts of both Foxconn and Beijing to upgrade manufacturing technologies.

     "We have also been involved in developing automation and robotics. We want to go into India this year too," Gou said.

     The chairman added that the company faces some uncertainties in the second half of this year in its transition, as some emerging products have yet to contribute significant revenue.

Apple ties

Gou did acknowledge the importance of Foxconn's partnership with the California-based tech company, snarling at rival Pegatron, which is competing for iPhone orders. Still, his ongoing efforts to diversify into non-Apple business show he is determined to find new growth drivers for his empire of more than 1 million foot soldiers in the face of slowing demand for smartphones.

     Apple and Foxconn remain important partners for each other in a codependent relationship that deepens with each new initiative.

     In April, Foxconn began to sell secondhand iPhones. Two months later, it was revealed the U.S. company is working together with the Taiwanese contractor on building an eco-friendly data center in the southwestern Chinese province of Guizhou.

     The popularity of the iPhone has also propelled both Apple and Foxconn to reach record earnings in recent years. Hon Hai made a record net profit of 130.53 billion New Taiwan dollars ($4.22 billion) on historic revenue of NT$4.21 trillion in 2014 thanks to the iPhone 6, Apple's best-selling smartphone, but the Taiwanese manufacturer has been struggling with tepid growth.

     Gou set a goal for Hon Hai's sales to grow 10% annually, but the company has not been able to meet it since 2013, growing 1.2% that year and 6.6% in 2014. While Apple has a net profit margin of over 20%, Hon Hai's remains around 3%. Apple is responsible for roughly half of Foxconn's annual revenue.

     The chairman denied during the shareholders meeting that a permanent slowdown in smartphone demand has arrived, priding himself and his group on being the world's No. 1 maker of tablets and smartphones by volume. Despite this ranking, the manufacturer still has good reasons to worry.

     According to research company IDC, global smartphone growth is slowing, with shipments increasing only 11.3% in 2015, down from 27.6% in 2014. IDC expects this downward trend to continue.

     Further, Gou dismissed Pegatron as merely an Apple backup, but the rival has outperformed Hon Hai on the stock market over the past year. Hon Hai shares gained less than 1% during the previous 12 months, while Pegatron's stock jumped 69%.

     Vincent Chen, an analyst at Yuanta Securities Investment Consulting, said Pegatron has close to 30% of the iPhone 6 orders, while Foxconn has 70% and dominates the iPhone 6 Plus.

     He said, however, Pegatron is not rushing to secure more Apple orders as it is trying to avoid becoming overreliant on the Californian company. For the upcoming iPhone 6S, the Taiwanese assembler will only get about 40% of orders in place of the previous estimate of 50%.

     "Foxconn's scheme to sell refurbished iPhones has convinced Apple that it can utilize its staffing levels and capacity better than Pegatron to cater to the U.S. giant's needs at a time when the issue of labor supply and costs in China is becoming more difficult to deal with," Chen said.

     Yet Gou also appears to share Pegatron's wariness about becoming overdependent on Apple.

     "While Terry does want to get a piece of the Apple pie, his attitude is that if Apple turns sour, he can eat something else," a Foxconn official said. "Terry does not like to be under the control of others."

Gou's way

Indeed, Gou has tapped into myriad new projects outside Apple in recent years, including servicing its rivals, to create a more balanced expansion path for Foxconn.

     The conglomerate has been churning out handsets for Chinese smartphone leader Xiaomi via its Hong Kong-listed unit FIH Mobile, which is surpassing Hon Hai's profitability as it is expecting profits to surge 141-171% in the first six months of 2015 from a year ago.

     Foxconn is also not content with being just a maker of mobile devices. Last year, it ventured into the telecommunications services field by acquiring a key stake in Taiwanese mobile carrier Asia Pacific Telecom.

     Besides manufacturing, Gou is also keen to turn Foxconn into an online and offline retailer. Last year the group kicked off, its e-commerce platform in China. In May, it unveiled Syntrend, an upscale electronics shopping mall in downtown Taipei overseen by Gou's son Shou-cheng.

     In addition to the mobile device and retail businesses, Gou identified cloud computing, the Internet of Things, big data, robotics and an ecosystem for smart life as key pillars for future Foxconn development.

     To branch out into new sectors and markets, Gou has chosen to work closely with other regional tech leaders. He has formed a close alliance with SoftBank CEO Masayoshi Son and Alibaba Group Executive Chairman Jack Ma Yun to solicit new businesses in China, Japan and India.

     In China, Foxconn has started to work with Chinese Internet company Tencent and China Harmony Auto to develop connected electric cars in the central mainland city of Zhengzhou this year. In collaboration with Alibaba, Foxconn is helping to build Internet infrastructure in both the southwestern municipality of Guiyang and the eastern coastal city of Hangzhou, home to the Chinese e-commerce giant's headquarters.

     While Gou has made personal investments in Japan, holding a key stake in Sakai Display Products, he continues to pursue the possibility of acquiring shares in display technology leader Sharp. The Foxconn chairman is also investing in robotics together with Son and Ma in the hope of marketing SoftBank's humanoid robot Pepper to the world.

     Gou told shareholders that Foxconn and Alibaba are injecting funds into a major Indian e-commerce leader, possibly referring to Snapdeal, which secured $627 million from SoftBank last year. The three market leaders also appear to be collaborating on helping Micromax, India's leading smartphone supplier, with mass production.

     Separately, Foxconn and SoftBank have formed a joint venture with Indian conglomerate Bharti Enterprises to tap the solar and wind energy market. Foxconn itself, meanwhile, is in talks with India's Adani Group to develop solar energy and set up electronics manufacturing facilities.

     However, all the assorted schemes may not bear fruit soon, Yuanta's Chen said, as a profitable business model has not emerged for the new businesses. In Pepper's case, Chen said the robot, priced at 198,000 yen ($1,597), is being sold for one-third of its cost, with Foxconn absorbing the losses.

Labor rows persist

As Foxconn works to grow, it continues to be dogged by criticisms over labor rights. Working conditions for the 1 million employees at the company's facilities in China remain harsh, according to various rights groups.

Labor rights activists rally in front of Foxconn headquarters in suburban Taipei to protest against work conditions at the company's Chinese facilities.

     Concerns about conditions at Foxconn's factories first came to light in 2010, when a string of suicides occurred on its Shenzhen campus in southeastern China. Labor rights groups attributed the suicides to substandard conditions at the facilities, including military-style management, low wages and too much overtime.

     Since then, the Taiwanese company has introduced significant measures to improve the welfare of its Chinese factory workers. It set up 24-hour hotlines and care centers with doctors and psychiatrists at its Chinese campuses to offer medical and consultation services. The company also increased its minimum wage to at least 50% above the legal requirement.

     About three dozen labor activists rallied at Foxconn's headquarters in the gritty Tucheng district in suburban Taipei shortly before the shareholders meeting began. During the meeting, Gou became agitated when a British fund manager brought up labor conditions.

     "Britain should send its best investigators here to audit Foxconn and see how we compare to British factories," Gou said. "If you feel we are not good enough, then do not buy our shares ... I am confident I am no worse than British facilities."

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