Hon Hai remains unstoppable, despite problems

Few Taiwanese conglomerates can match the growth of the Hon Hai Precision Industry Company, whose annual revenue reached NT$3 trillion (US$100 billion) in 2010. The company’s total revenue is equivalent to about one fourth of Taiwan’s annual GDP, or the total annual GDP of Hungary, a country of 10 million people. With over one million employees, Hon Hai ranks as the second largest employer in the world (only after Walmart, the largest private corporation in the US), reported Global Views monthly.

Global recession shadows even Hon Hai

Founded in Taiwan by its current CEO Terry Gou in 1974, Hon Hai is more commonly known by its trade name, Foxconn. It is the world’s largest contract original electronics manufacturer (OEM), making computers, consumer electronics, communication equipment, and other electronics products. Its customers include all the well-known high-tech companies like Apple, Cisco, Dell, Nokia, and Sony.

However, the company has not been without its fair share of problems in recent years. In 2010, more than a dozen young employees committed suicide at two of the company’s subsidiary Foxconn factories in China, in part due to the pressure imposed on employees.

In 2011, a new global recession hit Taiwan’s technology industries, and not even Hon Hai was exempt from the downturn affecting brand names and OEMs. The company was no longer able to maintain the 30 percent annual growth that it had boasted in the past. Hon Hai’s annual revenue growth dropped to 15 percent in 2008, and to zero in 2009, the worst in its history. In 2011, Gou said in an interview with the American magazine Business Week that the company’s annual growth target would be set at 15 percent from 2011 onward, half that of the glory days.

Tough times ahead

Global Views reported that Hon Hai’s debt to assets ratio dropped from 47 percent in 2008 to a whopping 59 percent in 2009. According to financial analysis, a debt ratio of 50 percent is considered high for any steadily growing company.

Half of Hon Hai’s revenue came from the manufacture of personal computers, which only registered single digit growth, while the other half came from consumer electronics and cell phones (especially smart phones), which registered about 30 percent of the total. The average of these two sectors although only accounting for 15 percent of the company’s growth, translates into revenue total of NT$450 billion (US$15 billion) – equivalent to the total annual revenue of the Taiwan Semiconductor Manufacturing Company (TSMC).

In a cover story, Global Views reported not just the short term problem posed by the global economic recession, but also the tricky issues facing Hon Hai as it strives to manage structural changes within the organization.

These include, the major generator of income for Hon Hai, that is, from the “3C” products (computer, communication and consumer electronics). Such products are now showing limited growth and stronger competition, while selling prices have fallen along with profits.

Secondly, Hon Hai has encountered problems in expanding from its original business and culture into new areas. These changes naturally take some time to net results with little apparent contribution to the whole company’s revenue growth.

Thirdly, Hon Hai’s advantage has been as an OEM. Transitioning from operating as an OEM into new business areas involves the development of new capacity.

Size matters

Hon Hai has several advantages that its competitors do not have, such as Apple as a loyal customer. Apple looks set to remain a dominant player with its iPod, iPhone and iPad. With excellent manufacturing capability, quality control, and reliable customer service, Hon Hai is positioned to remain as a trusted partner in the manufacture of Apple products.

Another opportunity for Hon Hai is the capability to expand into the manufacture of medical equipment, which is currently under-represented in Taiwan. Hon Hai’s size means that it is well positioned to expand into this market.

Plus, Hon Hai is large enough to wield substantial financial resources. One suggestion of an avenue open to Hon Hai for expansion could be to use its huge cash reserves to build luxury five-star hotels and expand into the commercial real estate market as a developer, or in running brand name distribution channels.

In short, Global Views points out that the future growth of Hon Hai will be similar to the existing model. Yet, with further diversification Hon Hai will be able to create other key areas of business. Operating as an OEM of the original 3C products has been the foundation of Hon Hai’s success, but since the growth of these 3C products is now slowing down, Hon Hai must diversify to safeguard its leading position.

Personal desktop computers are being replaced by tablets and traditional cell phones have been eclipsed by smart phones, while an emerging trend called the internet of things (IOT) looks set to herald a new era in communications technology. The ability of Hon Hai to capitalize on such new fields is likely to determine its future growth prospects and performance.

Terry Gou is synonymous with Hon Hai

With Hon Hai remaining such a global force in the electronic sector, Global Views is reminded of a funny story circulating inside Hon Hai. It predicts that in a few decades, there will be only two companies in the world: one will be Hon Hai, the manufacturer of all our daily necessities, and the other will be Walmart, the seller of all of Hon Hai’s products.

For a conglomerate with annual revenue in excess of US$100 billion, and with 541 subsidiaries, branches and reinvested companies globally, Hon Hai is known to some only by the name of its CEO. Terry Gou, is synonymous with Hon Hai, just as Steve Jobs was with Apple.

Gou once talked about his challenge of managing such an enormous company. “I cannot find a book anywhere in the world to teach me how to manage a business with one million employees,” he said. There has been no apparent change in Gou’s unwavering management ability and perseverance. And his ambition with regard to the businesses he wants to manage shows little sign of slowing down. This is exactly why some people are concerned about the future of Hon Hai.

Perhaps the biggest issue for Hon Hai in the future will be who will succeed Gou. At present it seems hard to know who will step into his shoes, according to Global Views.

The magazine stressed that part of the future roadmap for Hon Hai, as set out by Gou, must include a succession plan. Just as the US 7th Fleet could not replace all its smaller ships with a single aircraft carrier, so Hon Hai must be managed and operate as smaller leaner units to allow for future challenges and retain the capacity for flexible strategic maneuvering.

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