Taiwan's Biggest Company, Explained

Foxconn Examined

Author’s note: You can watch the video for this one below. I know it has some poor audio. I made it back when I was away from my main audio setup.

Author’s note: As I wrote out this profile of Foxconn, I had assumed that electronics assembly and manufacturing would always be the domain of the few dominant Taiwanese companies like Foxconn, Compal and Pegatron. But recently I came across a few interesting up and coming Chinese assembly companies. Foremost is Luxshare, a company based in Dongguan.

Foxconn naturally sees the assembly business as something that it does not want to lose, and the article makes it clear that the company is pushing hard to try to win everything that it can. But with how Foxconn has been moving business out of China into other places (a process that is definitely worth its own video), it seems like Apple feels that it would be good to have a Mainland Chinese company making the products to be sold into Mainland China. Having the Mainland Chinese buy a product assembled in Vietnam or India might not be the best look.

Foxconn’s future seems muddled to me. Whereas TSMC is a focused machine always looking towards the next node, Foxconn is not quite sure what to do. It makes a lot of sense to me that this company’s stock performance far lags behind that of TSMC.

They were already a big sprawling company that is hard to value and gauge. Then they bought ownership of Japanese electronics brand Sharp, but they haven’t really done a marketing push behind it to challenge Samsung or LG. And then it looks like they are trying to get into the electric automotive business. Are they trying to win the Apple car business here? Not quite sure what is going on with that too.

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Foxconn is a controversial company. Whenever people bring it up, they do it in the context of their labor practices. Usually for the purposes of implying, “If you buy Apple products, you are supporting slave labor.”

But Foxconn is bigger than just its Apple business. They make computers, laptops, TVs, mobile phones (the old school kind), that X-box everyone is excited about and so much more.

In fact, Foxconn is Taiwan’s biggest company by revenue. Yeah, bigger than TSMC. It made $178 billion last year. It is a corner stone of Taiwan’s electronic manufacturing industry. And it does so much more than just assembly.

In this video, I want to talk about Foxconn and its bombastic founder - Terry Gou.

But first, the name. Sometimes you hear it called Hon Hai. Sometimes Foxconn. The company’s official name in Taiwan is Hon Hai. The trade name is Foxconn - named as such because the company says that they can produce electronics at "fox-like" speed. I generally will refer to it as Foxconn here.

How big is Foxconn?

Foxconn is really big. It is not only Taiwan’s biggest company by revenue but also the third biggest technology company worldwide.

The company is also complicated. It is a sprawling company with over 200 known affiliates and subsidiaries. Its most prominent subsidiaries include:

American accessories manufacturer Belkin. Maker of Apple accessories, routers, surge protectors and USB hubs.

Sharp Corporation, the major Japanese manufacturer that makes televisions and other electronics. Foxconn acquired a majority share in the company in 2016 after extended wrangling.

FIH, manufacturer of mobile phones for Nokia. Listed stock on the Hong Kong stock exchange.

The company has made a variety of other acquisitions, but most of these are smaller companies with the goal of filling out Foxconn’s overall service and product lines.

History

Terry Gou founded Foxconn some 46 years ago first as Hon Hai Plastic Material Corporation - an electrical components manufacturer.

It got its start making plastic turning knobs for black and white televisions, just another company amongst many doing this sort of business.

But as Terry Gou researched the industry in an effort to figure out ways to make a better TV knob, he realized that the entire plastic molding procedure needed improvement.

He built a factory capable of improving the precision of making plastic molds. Customers were very impressed by the quality of his finished products.

Hon Hai‘s next big breakthrough came when Atari put in an order for 2,600 pieces of a plastic connector for their joystick cable.

Terry soon realized the potential of the US market. He flew to the US and visited 32 states in 11 months. In trying to acquire an order from a big US-based PC maker, he booked himself into a motel near an IBM facility in Raleigh, North Carolina. With persistence, he got an order for PC connectors from IBM.

By 1988, Hon Hai (by now rebranded as Foxconn) had NTD$1 billion in revenue. Three years later the company IPO’ed in the Taiwan Stock Exchange.

Around then the company began exploring production expansion in the Mainland, starting with a factory named "Haiyang" (ocean) located in the then-dusty city of Shenzhen. His first employees were 150 migrants from rural Guangdong, 100 of them were women.

Foxconn quickly expanded in China, building factories in Shenzhen, Shanghai, Chongqing and Kunsan. Local governments looking for economic growth and jobs offered preferential tax policies and good infrastructure. On the other side, a titanic macro trend in American and western companies to outsource the dirty work of their manufacturing to Asia. Foxconn ate it all up.

By 1996, Foxconn generated $500 million in revenue and China was its key production base. Today they have 32 plants in China employing hundreds of thousands of migrants.

In 2001, the company had $4.4 billion and became Taiwan’s largest private manufacturing company.

Four years later in 2005, revenues had exploded to $28 billion and Foxconn beat Flextronics to be the world’s biggest electronics manufacturing service provider.

In 2006, Foxconn took on the job of assembling Apple's iPhone. As Apple's fortunes rose, so did Foxconn's. Apple is Foxconn's single biggest client. Estimates say Apple contributes up to 50% of Foxconn's total revenue. Much of Foxconn's success comes as a result of the explosion in the mobile industry.

Terry Gou is retired now. He tried to make a run for the Taiwan Presidency but that did not work out. He lost to a Korean fish in the KMT primary.

It is weird to think that he would try for it in the first place - with Foxconn and himself having such close ties to the Chinese government. The government literally helped him create a customs-free zone in Zhengzhou city out of nothing so that they can build iPhones. It's hard to think that there isn't a relationship there.

Strategy

Foxconn’s general attitude is to stay out of limelight and to let the main brand shine. So it can be difficult to learn how they do what they do so well.

Their business strategy for their customers can be best described as “land-and-expand”. Their goal is to be a vertically integrated one-stop shop for all of their customers’ manufacturing needs.

Over the decades, Foxconn has persistently moved up the value chain. They started with connectors. Then they moved to cables. And from there to printed circuit boards and finally whole PCs.

Their subsequent acquisitions have been in service of this strategy. For example, they orchestrated a merger of their subsidiary Innolux with Chi Mei Optoelectronics to help build the largest TFT-LCD firm in the world.

Another Foxconn strategy is price. Foxconn is a late-comer to markets, but they enter with aggressive pricing.

Their size helps fund these new market entries. They are able to leverage their strengths and profits from one industry to pay for its extremely low prices in others.

In this, Foxconn is like any of the American tech giants. The big difference is that it focuses on manufacturing rather than the Internet or computer software.

There’s another reason why Foxconn can deliver such low prices. It is a source of a lot of the controversy and bad press surrounding the company. And that is their labor practices.

Foxconn and Labor

Foxconn builds their factories in areas with low cost of labor and preferential tax regimes. China, India, Vietnam, Brazil, Czechia. The like.

(Notice that Wisconsin is not included in that list. Who would ever think that Wisconsin had “cheap labor”?)

For example, their EU headquarters in Czechia. To find workers that meet their requirements, Foxconn recruited a range: From young workers from Slovakia and Poland to Romanian elders in their 50s. They use adverts to find their workers. I sat on a bench with one such ad.

In China, Foxconn uses adverts to source a supply of young rural workers - migrants from rural China between the ages of 16 and 29. Their pitch to these young people is: “Hurry towards your finest dreams, pursue a magnificent life. At Foxconn, you can expand your knowledge and accumulate experience.”

It is an entry level job - like how young people used to work at fast food restaurants as their first full time gig. No one ever sees themselves working there forever. (Though I know this trend is changing even in America, which is also sad)

Foxconn’s work culture can be best described as “authoritarian”. Strategies and goals flow from the senior management levels out of the Taiwan headquarters. Middle management in factory cities like Shenzhen and Chongqing try to devise ways to achieve those goals and delegate work to the lower levels.

Every Foxconn worker learns Gou’s work philosophies:

Successful people find a way. Unsuccessful people find excuses.

A harsh environment is a good thing.

Execution is the integration of speed, accuracy and precision.

And one of my favorites: “Obey, obey and absolutely obey!”

The job is tough. Factory workers are monitored via CCTV. Production discipline is maintained at all times. “No sleeping, no conversing, and no laughing” is the top rule in the factory.

You work 10 hours a day during normal hours. Busy season, it is 12 hours. Overtime is voluntary, but if you do not do overtime then you won’t make all that much money. So most end up doing overtime.

It is not slave labor. They’re paid. The pay in China got a boost after a few well-publicized jumping incidents. Now workers can make something like $400 to $700 a month depending on your level. This is actually not all that bad considering the 2017 Chinese minimum wage is $275. A few other changes include having no more than eight persons per dorm and capping overtime at 60 hours a week.

Workers often know about the realities of the job going in. They have a bit of black humor about it: “No jump, no pay increase” - one has said.

About Foxconn’s labor practices - I am not really a bleeding heart type. But neither am I a cruel, evil capitalist. Foxconn has a rather rigid work culture - but you do not get to employ a million people in China without offering something that those workers want. It is not the Mao era anymore. People can choose what they wanna do.

And to add, it is not like the white collar working life in China is all that much better either - Google 996 if you do not believe me. Or ask your Chinese (and Taiwanese) working friends. Least the factory workers get paid overtime.

Another thing. The jumping incidents and the subsequent pay raises made Foxcon's business more expensive for Apple. So starting in 2010 with the iPhone 4, Apple began mixing in iPhones made by one of Foxconn's competitors Pegatron.

Pegatron is a low cost competitor to Foxconn. Considering how cheap Foxconn is, that's an achievement. And it seems like their guaranteed pay is lower. But Pegatron stays out of the limelight and Foxconn gets slapped with the slave labor reputation.

Conclusion

Foxconn is such a big and sprawling company that I can’t cover the whole thing in just one video. My goal was to shed just a little light on a company that is much bigger than most people realize.

Foxconn is bigger than TSMC, but TSMC gets most of the glamor. Foxconn came along first, but TSMC remains the golden child of the Taiwanese economy. Few people want to think about the stuff that Foxconn does - it is nothing like the glamor of etching microchips with lasers. And TSMC is Taiwan-first, while Foxconn and Gou have an unpleasant close connection to China.

But Foxconn is as big and vital to Taiwan as the semiconductor manufacturers are. And Foxconn remains the leader in assembly - and that says as much about its market power as anything else out there.

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