This article is part of a series. You can find Part 1 here.
Historical Background (Continued)
The company continued to grow, but didn’t make a name for itself like most companies.
As the business grew and grew, Terry Gou expanded overseas into China. Not only was he armed with an understanding of Chinese language and culture, but he also took advantage of important reforms instituted by Deng Xiaoping in the late 1970s that allowed more foreign business in the country. Gou built giant factories in multiple cities, and vertically integrated them to unprecedented levels. They brought in experts to make their manufacturing operations as lean and efficient as possible.
The next big sales breakthrough was building computer chassis for Compaq desktops. HP, IBM, and even Apple followed. Few of the things the company made had the Foxconn or Hon Hai names on them, as the finished product was meant for other manufacturers to sell to users, but Foxconn nonetheless became a giant in the industry.
In 2001, Intel chose Foxconn to manufacture its Intel-branded motherboards. Next came the smartphone revolution, and Foxconn rode that with Apple from the very beginning by doing the actual building of the phones. By growing and growing and growing, while mostly staying under the radar, Foxconn found its way into everyone’s household while not becoming a household name.
There’s a good chance you’re reading this on a device made by Foxconn, or built using components Foxconn made. I’m writing this on a Dell computer, but built by Foxconn.
Factories are now all over the world, including some in Mexico and even the United States.
The Dark Side To All This Growth
It wouldn’t be fair to write about Gou and Foxconn without also writing about the dark side of the business. Foxconn was extremely good at solving engineering and manufacturing problems, which is what got them the work to begin with. But, they are also very good at playing politics and squeezing everything they can out of workers. This not only passes on savings to Foxconn’s customer companies, but it also insulates them from the dirty work.
When it comes to politics, keep in mind that Gou is from Taiwan and most of his factories were in China (but that’s something he more recently said the company should change). Despite the mistrust and animosity in the Taiwan strait, he managed to talk the Chinese government out of billions in subsidies, including building “iPhone City” and all of its infrastructure, plus billions more in grants. He even got the Chinese government to recruit, train, and even house many of the employees. They even made a special economic zone just for Apple’s products.
As Foxconn’s footprint expanded into other countries (including the United States and Mexico), he did the same, pushing for as much economic benefit from governments as possible.
Employees also felt the crunch. Long, long work hours were the norm, up to seven days a week at times. Pay, of course, was kept as low as possible. Factories were even built to make every person quickly replaceable, so that there was no feeling of job security. Things got so bad that the company had to install a suicide net at its iPhone factory, to keep workers from jumping off the roof to their deaths.
Apple, like all Foxconn customers, is insulated from these practices, but improvements are made whenever the press manages to bring negative publicity. In all other cases, Foxconn tends to be very ruthless.
Foxconn’s Attempt To Move Out Of Contract Manufacturing
Initially, Foxconn executives thought that moving into electric vehicles could be a way for the company to move away from being a contract manufacturer toward selling their own goods to consumers with Foxconn or Hon Hai branding. Why? Because contract manufacturing is a very low-margin business. While Foxconn’s revenues place them among the world’s top tech companies, they only keep a tiny fraction of those revenues as profits.
If they did raise margins, the competition would quickly eat them. Dell, HP, Apple, and all of the other companies that use them for manufacturing frequently switch suppliers to whoever can give them the best pricing, sometimes just to remind Foxconn that they are replaceable. This keeps the pressure on to continue squeezing governments and workers, but also keeps the company from becoming a competitor.
This left Foxconn with two ways out of the rut it’s been in: buying consumer brands and moving into entirely new industries. When it comes to buying new brands, that’s something it’s been marginally successful at. It has come up with majority shares in Sharp and Belkin, but it’s also bought dead companies like Nokia to run an entire business from manufacturing to sales.
Its other option is to enter new product categories, and EVs are one of those categories. But, they’re finding like all automakers do that vehicles are a low-margin business, even for companies with intensive vertical integration and innovative technologies. So, Foxconn remained in talks with companies to potentially partner with and/or purchase, but found out that this approach wasn’t going to produce a high-margin industry for the company to go into.
In other words, they decided to not focus on becoming an Original Brand Manufacturer (OBM). What they apparently did find was that it was possible to at least jump from being an Original Equipment Manufacturer (OEM) to becoming an Original Design Manufacturer (ODM) in many cases.
Earlier this year, Foxconn’s new partnership with Yulong, a Taiwanese car manufacturer, yielded a new brand: Foxtron. Foxconn does intend to sell cars under the Foxtron brand, with its stealth bomber logo, but its bigger plan is to move into being a hyper-flexible company that focuses on working behind the scenes to become the #1 EV manufacturer, even if nobody knows that they’re driving a Foxtron vehicle.
The company has even gone as far as to say that it thinks Tesla will have no advantage over the Fox in 5 years.
In Part 3, I’m going to introduce Foxtron’s other manufacturing and vehicle partners, and then go on to explain why Foxtron’s strategy could really propel it to take most of the industry over without most people knowing about it.
Featured image by the United States Air Force (Public Domain).
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