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Thoughts on Foxconn’s Electric Vehicle Ambitions
You might be wondering, “Oh. I don’t remember Asianometry releasing a video on Foxconn and electric vehicles.” And you would be correct. I haven’t. I finished this particular script intending to turn it into a video, but it felt too short. But I figured that it might work as an email-only exclusive. I hope it is an incentive to subscribe to the newsletter, ha!
EV technology and other renewables are hot right now. And I hope in the future to do more in this particular space. So keep an eye out for that.
Foxconn Hon Hai, Taiwan's biggest company and the world's biggest electronics manufacturing company, is making a push into the electric vehicle space. It is a curious move.
First was the announcement of the company's EV Open Platform Group, which is a consortium looking to accelerate the development of the EV industry.
Recently, the company has signed deals with design, marketing, and sales partners for whom they can handle manufacturing and technology. These companies include Fisker, the EV company associated with Henrik Fisker, and Chinese EV startup Bytom. Both companies have struggled with the business before Foxconn came along.
I have been thinking about this for a while now. Throwing around ideas in my head. Foxconn? Cars? Tesla is the $700 billion gorilla in this space but there are so many others. Why would Foxconn try to enter this bloody fray?
Here, I want to take a look at Foxconn’s interest in electric vehicles.
Foxconn and its Future
Let us start with the business case for electric cars: Foxconn needs growth. Throughout the 2000s and 2010s, the speed with which Foxconn grew to its current size was astonishing. In 1998, the company made $1.8 billion in revenues. Not bad, but not that big even in its own industry. By 2011, a mere 13 years later, the Foxconn Group delivered $117 billion.
This growth came almost entirely on the back of Apple, the world's most valuable company, and its majestic iPhone business line. That business remains massive, but Foxconn's continued reliance on this company is troubling. In 2013 (admittedly old data), the Economist calculated that 51% of Foxconn's revenues came from just Apple. You can correlate Foxconn's jumps in revenues to Apple's hit iPhones - the 6, X, and so on. As they say in business strategy class, that is a problem.
Foxconn continues to collect new customers in the mobile phone space. Some of their other notable customers include Amazon, Huawei, and Xiaomi. But there is only one Apple.
Furthermore, competitors are coming to try and take share from the incumbent. Contract manufacturing is immensely competitive. Product cycles are rapid and thus are on extremely tight schedules. Prices are extremely important in winning business from competitors. You want to be the lowest bidder.
And Apple has always sought to diversify its supply chain. They tried to dual-source their SOCs from TSMC and Samsung. They’re probably going to explore sourcing from Intel Foundry too. And a few years ago, they brought in Pegatron, Compal, Quanta Computers, and Wistron to go alongside Foxconn. Foxconn will never again represent 51% of Apple's product costs like it once did in 2012.
And in a previous issue of the newsletter, I mentioned the encroaching presence of mainland assembly companies like Luxshare Precision. This new competition will cut into Foxconn's handset assembly revenue growth and profitability. It might even shrink it.
And in addition, Foxconn is setting out to find another emerging hit electronic product. And it is pretty interested in electric vehicles. The automobile market is one of the biggest consumer spaces in the world. Capturing just a sliver of this economy would yield immense revenue. That is the prize growth that Foxconn wants.
How Foxconn Works
I have done a video on Foxconn's history and business strategy. If you want to learn more about the company first, you can watch it below:
The company practices a land-and-expand model that seeks to take over a client's entire manufacturing supply chain from beginning to end. It is their way of squeezing profits out of a very competitive industry.
As I mentioned, winning an electronics assembly deal is about the lowest bid. Foxconn wins bids on its economies of scale, ability to live on tight margins, and vertical integration. They scrape by with a small profit or even a loss on the actual assembly business line but seek to make up for it in other parts of the supply chain.
So the more parts made within the company's network, the more profits they keep. That means acquiring the makers of a few critical, high-value components. For instance, let us look at the iPhone 12. The single most expensive component in the phone is its 5G Qualcomm modem. Not because it is expensive to actually make, but because of its associated patent costs.
Side note. This is why Apple went to such great lengths to fight Qualcomm over their patent license strategy.
The iPhone’s second most expensive component, and most expensive to actually manufacture, is the OLED panel from Samsung. Displays have consistently been the most expensive components going into Foxconn's tech gadgets. Thus, many of Foxconn's largest and most important strategic corporate acquisitions have been about displays.
In 2009, Foxconn helped Innolux acquire two Taiwanese display companies to create one of the world's biggest TFT-LCD panel makers. Then in 2016 Foxconn acquired a controlling stake in Sharp, another big TFT-LCD industry player.
Foxconn will want to practice the same playbook as they enter the electric vehicle industry. So they need to build or acquire the supplier ecosystem.
Building an EV Supplier Ecosystem
The four critical components in a single electric vehicle - disregarding other critical fundamentals like charging stations and what not - are:
The high efficiency EV motor drive;
The battery pack;
The power electronics;
The electronic control software;
Many of these are items that Foxconn has had little experience with. They do not have affiliates in battery pack technology like they do in displays. Which is why we have started to see news items of Foxconn reaching out and sniffing out partnerships with suppliers in Vietnam and elsewhere.
Furthermore, those disparate components need to put together and work in harmony at an acceptable cost, which means a whole lot of system integration expertise.
They cannot count on the home island for much help in this regard. It is not like in gadget assembly, where there is a thriving ecosystem of electronics giants that Foxconn can tap for expertise and talent. Taiwan does not have a good history when it comes to automobile manufacturing. While there are a few domestic brands like Luxgen, they are small.
For now, this is alright since the engineering that goes into an EV and a traditional car are so different, but it is something to think about.
Go to Market Strategy
Foxconn might be thinking of something like MediaTek. MediaTek’s business strategy is to create reference designs of products for others to license and resell. For instance, they provide a chipset to enable other companies to put out a plethora of cheap, brand-less mobile phones. Thanks to this business model, they are now one of Taiwan’s biggest electronics companies.
The thing about pursuing this strategy though. Who will be the resellers? Where is the demand going to come from?
The car business is way different from the phone business. Has there been an EV company other than Tesla that’s really taken off in the States? It needs so much capital. A mobile phone brand needs just half a million dollars to launch with MediaTek. That’s not the case with an EV.
A few EV startups have pursued the role of handling just the sales and design while outsourcing the manufacturing abroad. But they haven’t really gotten traction. Coda Automotive is one that tried, but folded after selling 117 cars. Fisker themselves attempted to do this before failing and eventually filing for bankruptcy. Even with Foxconn handling some of the manufacturing, car design and sales still requires an immense amount of capital.
Recently, Reuters announced that Xiaomi is seeking a partnership with Chinese automaker Great Wall Motors to build and offer electric vehicles. Xiaomi's ecosystem of networked electronics makes them a valuable potential customer. And they already work with Foxconn for their gadgets. The fact that they would rather partner with a traditional carmaker implies that Foxconn's EV assembly chain is not ready yet for prime time.
The Apple Question
Perhaps they are waiting for Apple to move forward with their Apple Car product. It would not be the first time they have spun up things in the hope of getting Apple's business. They had repeatedly offered their display technologies for use in Apple products - a request Apple has not yet taken up.
I know I keep hearing about an Apple car. There are a lot of rumors. And Apple is one of the few companies who can bring really good software expertise to a car project. They know how to tie together those disparate parts into a beautiful, unified experience. They have done it before.
But cars are long lived things. You buy and use them for years, maybe decades. They are too expensive otherwise. You need to build for that in mind. And while an iPhone has relatively good longevity in its industry, it is still nowhere near 10 years or more.
So to be honest, if you ask me right now I think it is more just exploration than actual product. But Foxconn is putting a lot of wood behind their EV manufacturing arrow. I hope they have more info than me.
And one more thing. I don’t think they are gunning for Tesla as a customer either. Tesla practices a lot of vertical integration and tends to keep things pretty much in-house.
So is this going to go anywhere? Foxconn’s chairman has previously said that he thinks that electric vehicles has as much potential for the company as its mobile phones business.
My honest thoughts? If they can’t get Apple to sign on then I think this is going to be a dead end. Sucks, but Foxconn still has a $180 billion business to fall back on.