Tag Archives: original equipment manufacturer (OEM)

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.

An end to Taiwan’s high-profit OEM era?

After 15 years of 30 percent revenue growth, Hon Hai Precision Industry Company reported in its semi-annual report that the company would no longer be able to meet growth expectations. Hon Hai, the parent company of Foxconn International and the largest original equipment manufacturer (OEM) in the world, is not the only company with failing stock due to poor earnings. Quanta Computers’ gross profit in the second quarter of this year was reported at only 3.4 percent, the lowest since its creation 22 years ago. Quanta’s stock also dropped sharply. According to the Business Weekly, this could mean the end to the golden age of high-tech contract manufacturing.

In an interview with Bloomberg Businessweek, Terry Gou, chairman of the Hon Hai, said his company’s revenue growth rate would drop from 30 to 15 percent over the coming decade.

Hon Hai, Quanta, Compal , Acer and ASUS, are the five largest electronics companies in Taiwan. These so-called “electronics big brothers” achieved combined earnings of US$86.3 billion for the first half of this year, accounting for almost 20 percent of Taiwan’s GDP.

This amount is 4.7 times the combined revenue for the first six months of the year of Taiwan’s “five traditional big brothers,”  the Formosa Plastics Group, China Steel Corp., Taiwan Cement, Uni-President Enterprises, and Chunghwa Telecom.  

Surprisingly, the combined after tax net profits of the traditional five in the first half of the  year reached US$2.74 billion, beating the US$2.38 billion of the five electronics giants.  This is the first time in 10 years that the traditional five has earned more than the electronics firms.

The key point is in the net profit: the average net profit of the traditional five in the first half of the year was 15 percent, while that of the five electronics firms was a record low of 2.8 percent, a difference of more than five times.

The Business Weekly said, when the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China took effect on September 12  the Taiwan stock index rose 200 points, giving rise to expectations of a new golden decade for the traditional businesses.

Foxconn, which has the cell phone orders for the five largest brands in the world, lost US$143 million in the first half of this year. The cell phones Foxconn used to manufacture have given way to the popular new smart phones. Smart phone manufacturing needs a high level of software integration and thus is more difficult for hardware OEMs to handle. Except for iPhones manufactured by Foxconn, all other smart phone brand companies are making their own products. Without more smart phone orders, Foxconn is getting into trouble by losing traditional customers like Motorola and Nokia.

In 2009, Terry Gou entered the unchartered market of notebook computers. Hon Hai is set to produce 20 million notebook computers by 2011, but in order to be competitive it must continually lower its prices, thereby lowering its profit and revenue growth. At the same time, when Apple introduced its new iPad, it grabbed more market share and lowered the forecast for notebook, pulling the price of notebooks even further down.

The iPad comes with no key board, no hard drive, no DVD player, and far fewer  memory chips. While a notebook computer uses 1000 components, an  iPad uses only  500.

Simon Yang, vice president of Topology Research Institute, said the iPad is just accelerating the impact. Sooner or later, contract manufacturing of notebook computers will see the arrival of low profit and  revenue growth. The Business Weekly foresees a trend of low profit margins for Taiwan’s electronics industry set to arrive in less than two years.