Foxconn’s EV Push takes it back to the future

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Consider, if you will, a scenario where Foxconn Technology Group enjoys margins three times larger than Apple Inc. $100 billion a year, while whoever makes these devices earns 5% of that.

But that used to be the case. It was 1996 and Hon Hai Precision Industry Co., the flagship of Foxconn, posted a gross margin of 31% while Apple only delivered 9.8%. It was a historic low for the Cupertino company, during Steve Jobs’ hiatus from the company he founded. It was also a record for the Taiwanese electronics manufacturer. The roles have since changed and last year they posted figures of 42% and 6%, respectively.

Yet Foxconn has a plan to reverse its declining margin by returning to the core business that Terry Gou started nearly 50 years ago, a business that predated the iPod and iPhone and was driven by a boom in computers, the first game consoles and even matrix games. printers. If Gou’s successor, current chairman Young Liu, is right, today’s electric vehicles could be akin to the PCs of the 1990s and could become a catalyst for levels of profitability not seen in 20 years.

By the mid-1990s, personal computer adoption was booming, with consumers, schools, and businesses rushing to install these beige metal boxes on their desks. Companies like Compaq Computer Corp. and Dell Computer Corp. were growing rapidly and the Internet was in its infancy. Gou found his niche early on, developing and producing the myriad of small components that connect all parts of a computer – hence the Foxconn name. While these little pieces of technology had low prices, customers bought them by the bucket and Foxconn could charge huge markups.

Large-scale assembly of electronic gadgets didn’t happen until the turn of the century, when Jobs and his lieutenant Tim Cook needed someone to manufacture their new successful iPod on a large scale and with a deadline. fast execution. Soon, Foxconn’s factory in Shenzhen, southern China, was dubbed iPod city and would later become the global hub for iPhone assembly.

Although it has hired up to a million workers to assemble all the parts of a smartphone, Foxconn’s device assembly business is not so profitable and has very slim margins. Instead, the company makes more money by making or buying the parts that go inside and charging customers a premium on the cost. Assembly of the final product is seen more as an additional service for the customer, a service that gives Foxconn more control over the whole process and the components that go into it.

This is where electric vehicles come in.

At its annual shareholder meeting last week in Taipei, Liu – who took over from Gou in 2019 – spent a lot of time talking about the company’s plans for electric vehicles. Over the past three years, it has opened factories or entered into manufacturing agreements in the United States, Mexico, Taiwan, China, Indonesia and Thailand. Among its clients are the American startups Lordstown Motors Corp. and Fisker Inc. as well as European automaker Stellantis NV. Almost no mention was made of smartphones, let alone Apple, which accounts for half of its revenue.

Liu’s ambitions are bold, bordering on the fantastical. Within three years, he expects Foxconn to ship 500,000 to 750,000 electric vehicles, take 5% of the global market and achieve NT$1 trillion ($34 billion) in annual industry sales (or 15% of total 2021 turnover). Even more ambitious, it is aiming for a two-thirds increase in gross margin to 10% – a figure not seen since 2005, two years before the release of the iPhone.

But producing cars from Detroit-style assembly lines isn’t the goal. Instead, Foxconn thinks of EVs as PCs, a huge computer on wheels, which requires a ton of components inside. He wants to be the company that supplies those parts and enjoy the big margins that come with it.

Foxconn has already launched a consortium of partners – called MIH – to agree on industry standards, and has a reference design for any customer who wants an “off-plan” car. This is very similar to how the PC industry developed in the 1980s and 1990s, when a plethora of incompatible components and connectors – think flat ribbon printer cables – slowly gave way common technologies such as USB and Ethernet cables. This means that, just like with PCs, Foxconn doesn’t need to produce every electric vehicle in the world to make money from every unit it ships. For example, it counts Tesla Inc. as a customer for components while chief executive Elon Musk made the strategic decision to keep assembly in-house.

Foxconn is also betting on chips used in cars, which have been in short supply for the past two years. By the end of 2023, it will operate at least three semiconductor fabs, using older technologies best suited to automotive components. It may fail. Although Liu himself is an electrical engineer by training, the company’s chip prowess is unproven, especially compared to goliaths like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. the average car contains more chips than all the appliances in an average household combined.

If those bold plans come to fruition, Foxconn could become as ubiquitous in the electric vehicle industry as it once was in PCs – a position it now enjoys in the smartphone space. If not, the company that makes your iPhone may be remembered.

More from this writer and others on Bloomberg Opinion:

• Tesla is hedging its global supply chain bets: Anjani Trivedi

• Tech companies have found a way out of China: Tim Culpan

• Manufacturers embrace the DIY supply chain: Brooke Sutherland

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

More stories like this are available at bloomberg.com/opinion

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