TAIPEI -- Foxconn's Android smartphone arm is scaling back its mobile business and moving into next generation automotive electronics in a bid to counter the impact of a deepening industry slump on the second tier brands that make up much of its client list.
Hong Kong-listed FIH Mobile, 62% owned by Taiwanese tech giant Foxconn, is one of the world's biggest contract manufacturers of Android phones with revenues of $14.9 billion last year. It is transferring hundreds of engineers and other resources from the Android smartphone operation, which makes up 90% of its revenues, to a newly established automotive electronics project, sources close to the subject told Nikkei Asian Review.
Three sites in Taiwan have also been consolidated into one as the resources dedicated to future smartphone development are cut back.
"FIH does not have as many smartphone orders as it used to have," said one person with direct knowledge of the plan. "It used to be one team serving three to four Android-smartphone clients... Now it is three to four teams serving one client."
An industry source familiar with the company's situation described its Android-phone manufacturing business as "miserable."
FIH counts Google, China's Xiaomi, Lenovo Group, Nokia, Sharp, and the little known Chinese firms Gionee, Smartisan and Meizu among its clients. Only Google's contract is profitable for FIH, senior sources said. Last year FIH Mobile recorded a net loss of $857 million - the largest since listing in Hong Kong in 2005 and its second consecutive year in the red.
Since the second half of last year, there has been an exodus of Taiwanese employees, including research engineers and project managers, from FIH, with more expected to leave in future, sources said. FIH does not disclose the movement of its workforce, but one of the engineering teams has seen 50% of its engineers reallocated to the automotive project. FIH had not responded to a request for comment by the time of publication.
The move by Foxconn's biggest subsidiary, launched after the Chinese New Year, suggests the parent company's push to become a broadly based tech company operating in the automotive, health and semiconductor industries is accelerating.
FIH's focus in future will be to build a business that can tap into the rapidly developing market for next generation vehicles, sources said. The project was at a very early stage, but FIH was aiming to develop solutions for automotive systems to be used in electric or autonomous cars. It would take years for the automotive project to bear fruit, four people familiar with the matter said.
"It takes time to certify supply chains," said one person with knowledge of the strategy. "It is an industry that requires a lot of patience."
The company's decision to look beyond the maturing smartphone industry for future growth comes as the mobile market suffers an unprecedented downturn, hit by the U.S.-China trade spat and a consumer shift away from regular upgrades. Industry giants such as Apple and Samsung Electronics have struggled against aggressive competition from Chinese rival Huawei Technologies, but the pressure on second-tier smartphone brands is even more intense, and has raised questions over the longer term survival of the weaker players.
The top five smartphone makers' combined market share has increased from 57% in 2016 to 67% in 2018, significantly squeezing all the second-tier device makers, said Joey Yen, an analyst at IDC.
"It's definitely more difficult for those smaller ones to stand out and to stay relevant in the market as they don't have deep pockets like Apple, Samsung and Huawei to launch those massive marketing campaigns and to invest in new and costly technologies," Yen said.
Last week, Sony said it would cut up to 50% of its smartphone workforce by 2020 to reduce costs while LG Electronics and Asustek Computer are suffering heavy losses in their mobile units. Brands such as Lenovo, Sharp, HTC, Coolpad, and ZTE are struggling to hold their positions in a shrinking market and many have been scaling back their overseas operations. China's Gionee filed for bankruptcy late last year after failing to pay back nearly $3 billion to its creditors.
FIH has suffered along with its clients, although not all customers have seen sales decline. Those still enjoying growing revenues such as Xiaomi are squeezing suppliers in order to keep their own prices low. This made the business less attractive to FIH, for whom profits are now the priority, said one person close to the company.
In particular, smaller Chinese smartphone clients were posing problems. "Chinese smartphone clients mostly pay very slowly, and rarely give suppliers reliable production forecasts," one person with direct knowledge of the situation told Nikkei. "To prepare capacity for the struggling smartphone industry clients is very risky," he said. FIH was often forced to hold clients' inventory when sales stalled and to keep its workforce in reserve, which "hits profitability badly," he added.
Sources with direct knowledge said that the company was not quitting the mobile market entirely. However it would be much more selective about the clients it took on in future, one insider said. Already the client list has shrunk. FIH had more than 20 smartphone clients between 2011 and 2015, but now it has fewer than 10.
The decision to make a strategic shift away from smartphones is also likely to have implications for its blue collar manufacturing workforce, largely based in China, market watchers said. FIH employed 92,000 people at the end of 2017.
"It is right for FIH to shift its attention to automotive electronics and away from the saturating and competitive smartphone industry in the long-term," said Chiu Shih-fang, a smartphone and supply chain analyst at Taiwan Institute of Economic Research. But, she added: "Automotive electronics requires more automation and a smaller workforce compared with smartphone manufacturing. Companies who wish to tap into this field will have to adjust their labor requirements."
Nikkei Asian Review Deputy Editor Zach Coleman in Hong Kong and Nikkei staff writer Akane Okutsu in Tokyo contributed to this report.