Terry Gou, CEO of Foxconn
Largely because of its role as Apple’s lead manufacturer Foxconn has grown into the world’s largest contract electronics manufacturer. The business was founded in 1974 and in three decades the company’s 1.2 million employees now produce an estimated 40% of the world’s consumer gadgets, including most of Apple’s iPhone's. But with Apple’s innovation pipeline apparently slowing down, labour costs in China rising, and NGO pressure to improve worker conditions growing, can the Taiwanese giant sustain its growth? At the moment, investors are sceptical: over the past year, Foxconn’s share price slipped nearly a third, from a high of 123 to a low of 70, and only recently climbed back to 79.
Foxconn opened its first mainland Chinese plant in 1988, and now operates 13 factories in nine Chinese cities and a growing constellation of factories in nine foreign countries. Founded by Taiwanese entrepreneur Terry Gou with $7,500 he borrowed from his mother, Hon Hai/Foxconn has grown into a Fortune Global 500 company and China’s largest exporter, a $31-billion giant with 55,000 patents in its portfolio. It also continues to innovatet: according to the Hon Hai 2012 annual report, the company ranked eighth in terms of number of patents on a global basis, and climbed from the number 60 in the Fortune Global 500 to number 43. It has a long-standing relationships with most of the world’s top tech brands, including Hewlett-Packard and Dell, and most importantly, Apple, which in recent years has relied on Foxconn to make most of its top-selling iPods, iPads and iPhones and contributes about 40% of Foxconn’s revenue.
Unlike most other tech enterprises, Foxconn employs a vast workforce: its 1.2 million employees constitute China’s largest private employer, it is the world’s third-largest private employer (after Walmart and McDonald’s), Foxconn has grown so vast that some of its facilities are now virtual cities, complete with their own stores, banks, hospitals and television networks. This scale helped give Foxconn a major competitive advantage over smaller and less nimble rivals, but it has also created some challenges as well. Client expectations of low cost and fast turnaround times have created tremendous pressure inside some Foxconn facilities–and led to a spate of worker suicides in 2011.
What Next for Foxconn
Foxconn has now begun to move beyond the confines of its original contract manufacturing niche into building its own consumer business. Foxconn invested $840 million for a one-third stake in a Sharp Electronics’ LCD panel factory in Sakai. Next, it recruited Radio Shack in China, Vizio in the US, and some broadband providers in Taiwan under their own brands. The company also invested $200 million for an 8.9% stake in GoPro, a California-based digital camera company that specializes in cameras for surfers, skiers and other active people. “Strategically, for them to grow, it’s got to be in a more diverse customer base and in more diverse product areas,” says Bob Ferrari, Managing Director of the Ferrari Consulting and Research Group, a Boston-based global supply chain consultancy. “I think that’s what we’re witnessing now, the unfolding of that strategy.” “In the pure contract manufacturing industry itself, the margins are razor thin,” Ferrari explains. “Foxconn is running around 3% or even less than that in terms of product margins or operating margins. That’s not an easy task for any company. Foxconn also have to be very cognizant of the fact that they are a contract manufacturer for many brands, and it’s not just the Apple brand. There is a real sensitivity there for a contract manufacture in terms of not issuing their own consumer brand, which would be perceived as a conflict. So they have to tread very carefully in this area, and they are treading very carefully,” Ferrari says.
So why BlackBerry?
Given Foxconn’s exceptional ability to manufacture complex products quickly, Foxconn would seem to have the freedom to expand in almost any direction. However, the company’s existing client relationships and the fickle nature of consumer electronics are a big barrier to successfully executing such a plan.
Jagdish Sheth, the Charles H. Kellstadt Chair of Marketing at the Goizueta Business School, Emory University, and corporate strategist, sees three possibilities ahead for Foxconn: The first, he says, would be to find more Asian original equipment manufacturers who will let them take on their manufacturing. the second to, develop a white label product, which could be sold under anybody’s brand. Third, to launch its own line. “It’s not that uncommon for a contract manufacturer to have his or her own brand while they’re making it for others, so long as the competitive boundaries are defined,” Sheth says. This name need not be its own: one possibility Sheth raises is BlackBerry, and this is where it becomes a potentially interesting synergy. If Foxconn were to launch an own brand smartphone it would need an operating system. IOS is obviously not in play and while Android is a competent enough operating system for consumers it would mean playing ball with Google and that might not be something that a man like Terry Gou would relish. Enter BlackBerry OS10! Can you imagine millions of OS10 devices being sold into the developing markets, currently the only markets worth chasing. I can and I think John Chen can too.