Tag Archives: Terry Gou

Taiwan’s major IT companies face uphill struggle

As a result of reduced shipments of the iPhone 5, Hon Hai Precision Industry Co. (trading as Foxconn), suffered an 8.19 percent drop in its combined annual revenues in 2012. The company is the world’s largest electronics contract manufacturer, when measured in terms of revenue. HTC is another leading manufacturer in Taiwan, but in the last few years it has focused on branding its own line of products. Despite their successes, both companies are facing difficult times ahead.

In 2012, South Korea’s Samsung accounted for over 30 percent of the global smartphone market, well ahead of Apple’s 18.4 percent and HTC’s 4.8 percent. Samsung’s net profits also surpassed those of HTC for the first time (by 1.6 times). As two of Taiwan’s most successful hi-tech companies, Hon Hai and HTC’s success or failure will have a profound impact on the future of high-tech industries in Taiwan.

HTC seeks to upgrade

For Peter Chou, HTC’s CEO and president, 2013 will be a pivotal year, since it will determine whether the company can emerge from the depths of an extremely difficult 2012. Last year, total revenue fell an estimated 37 percent and its global market share fell from 10.7 percent to 4.8 percent. The company’s share price plummeted to a 7.5-year low, and its earnings per share of NT$20.14 (US$0.68) were barely a quarter of the NT$73 (US$2.47) in EPS posted by HTC in 2011, Commonwealth reported.

HTC has refused to succumb to the gloom, instead launching a series of new phones. The company’s “Butterfly” model represents the first weapon in the company’s arsenal to reverse its fortunes. HTC J smart phones, jointly introduced by HTC and KDDI, one of Japan’s largest telecom operators, have sold briskly in Japan. The two firms partnered again to introduce the five-inch screen HTC J Butterfly, which is also doing well in the market. According to KDDI’s hot sales list, the Butterfly even beat Apple’s iPhone 5 in Japan. The Butterfly J has enabled HTC to emerge from a dark valley and into the sunlight again. Additionally, HTC is reviewing its product and marketing strategies in order to remain competitive.

Fighting a David and Goliath battle

Although successful in Japan, another problem facing HTC is that its success in Japan cannot be easily replicated elsewhere. “Japan is an extremely closed market controlled by the major telecom vendors. Even Nokia and the iPhone have been unable to break into Japan,” said Lee Ji-ren, who lectures on business strategy and management at National Taiwan University (NTU). He explained that Japanese-brand smart phones hold a 70-percent share of the market, meaning HTC does not have to directly butt heads with Apple and Samsung, reported Commonwealth.

“Actually, HTC is still a profitable company. It’s just that it has run into the world’s two strongest adversaries,” said Victor Tsan, the vice president and general director of the Market Intelligence & Consulting Institute (MIC).

According to Commonwealth, these two adversaries are the largest competitors for HTC in the global smart phone market. Samsung’s revenue is nine times that of HTC. It has a market value 28 times that of HTC, and R&D spending 15 times that of HTC. Apple’s revenue is seven times greater than that of HTC, with a market value measuring 60 times that of HTC, and it spends four times as much on R&D.

How can HTC compete given such overwhelming odds? In facing Samsung which has 31 percent of the global market share, and Apple, which takes 60 percent of all profits in the smart phone business, HTC clearly understands that it has to fight to protect the company’s turf. HTC realizes it has to be financially fit to take on this monumental challenge. The company will have to find its own niche in defeating the Goliaths of the industry and overcome its inherent limitations.

Taking advantage of markets ignored by Apple  

There are still opportunities and one of them is to cater to China’s middle- and lower-end smart phone market, which has long been ignored by Apple and under-served by Samsung, said Commonwealth. In the third quarter of 2012, HTC sold 2.8 million smart phones in China, giving them a 5.8 percent market share and surpassing Apple’s tally.

“The iPhone’s average selling price is US$600, and that won’t come down. HTC already has strong product development and time-to-market capabilities. It now has to learn how to segment the market at price points below US$600 and take advantage of a market Apple ignores,” Lee suggested. And only time will tell if this market strategy will pay off for HTC.

HTC is determined to continue its focus on R&D and innovation to stay strong in Taiwan. “At least one company is still willing to keep its production line in Taiwan and to make the best products. I am proud to say that I stay in HTC to fight,” a senior HTC R&D official told Commonwealth.

Hon Hai is too big to fall

On January 10, Hon Hai Precision Industry Co. announced its 2012 non-combined revenues had reached NT3.2 trillion (US$107 billion). This broke its own record in monthly, quarterly and annual reports, an unprecedented high among all the private manufacturing businesses among the Chinese communities, Business Weekly reported. A month before this announcement, 62-year-old Terry Gou, chairman and president of Hon Hai, was included – for the first time – in Forbes’ World Most Powerful People list. Hon Hai was also listed as the tenth largest employer in the world by the UK’s BBC with 1.2 million employees in March, 2012. Nine months later, Hon Hai has almost 1.5 million employees.

At present, Hon Hai is a conglomerate “too big to fall,” said Business Weekly. Why? Because Hon Hai controls the supply of over half of the world’s desktop computers, as well as Apple’s iPhones, iPads, Sony’s liquid crystal display television sets, the PlayStation 3, and Nintendo’s Wii gaming machines. The company supports the livelihood of over 10,000 related companies. Not so long ago, Hon Hai contributed 20 percent of total revenues to the integrated industrial cluster of precision machine manufacturing in central Taiwan.

According to a study by the Topology Research Institute, without Hon Hai, the popularity of Apple’s iPhone, iPod, and iPad would have been delayed by two to three years, and the price of entry level desktop computers would be double, reported Business Weekly.

What does Apple’s decline mean for Hon Hai

After Hon Hai’s announcement of record high revenues came a string of bad news from Apple. News quickly spread that Apple intended to introduce a low cost iPhone to grab a share of emerging markets and break its own one-phone-per-year rule. This caused a sharp drop in iPhone 5 sales, the fastest depreciation and with the shortest life span in the history of the iPhone. Then Apple announced its intention to half its order of the iPhone 5. All these measures seriously hurt the company’s stock price. This means that Apple’s supremacy in commanding the highest market value in the world now faces a new challenge. It also casts a shadow over Hon Hai’s future.

Due to declining demand for the iPhone 5, Macquarie Securities believes iPhone 5 shipments will drop 32 percent from 44 million sets in the previous quarter down to below 30 million in the first quarter of 2013. Before the introduction of the iPhone 5 S in June, there will be two quarters of non-active operation, which will definitely affect Hon Hai’s revenue in the first half of 2013.

Gou has betted heavily on Apple in terms of capital and human resources. Almost 40 percent of Hon Hai’s 1.5 million-strong work force in China is reserved for making Apple products. Now the only breakthrough the world is expecting from Apple is iTV.

In 2012, Gou became a shareholder of Sharp’s Sakai Plant, a subsidiary of Sharp, and is planning to join Sharp too. Beside taking over the rights of management of Innolux Corp. (formerly Chimei Innolux Corp.), he has even used a large amount of his Hon Hai stock to borrow NT$20 billion (US$677 million) to bet on the success of Apple’s iTV.

Business Weekly noted that if Apple is not red hot any longer, Hon Hai, a conglomerate with revenues of almost NT$4 trillion (US$135.6 billion), is also bound to lose its luster.

Size a blessing and a curse

The flexible, innovative and fast developing IT industry has helped Taiwan earn the title of “Silicon Island,” playing an important role in the global supply chain over the last two decades. But after a paradigm shift bolstered by Apple and Samsung in recent years, Taiwan’s IT industry (OEM, ODM or key brands), is facing a crucial challenge and transformation.

HTC and Hon Hai definitely face significant challenges ahead. HTC is the world’s third-largest mobile phone brand, after Apple and Samsung, but in a much smaller company. The key for HTC’s survival will depend on its market development and marketing strategy.

Currently Hon Hai is expanding in central and western China by building a factory in Zhengzhou, Henan Province, and enlarging its facilities in Chengdu, Sichuan Province. However, Business Weekly reported, Hon Hai’s huge size is an advantage, but also a burden. Without transforming to increase its added value, will Hon Hai lose its advantage when China ceases to be a source of cheap labor?

And, because of its size, Hon Hai also has huge advantages, with its revenue accounting for 28 percent of Taiwan’s nominal GDP in 2012. The challenges faced by operating such a large operation can be illustrated by considering the company’s ability to feed its workforce at its sprawling factory in Shenzhen, Guangdong Province. On a daily basis the plant’s central kitchen faces the challenge of feeding up to 60,000 people per meal. Similarly, to sustain the firm into the future, Business Weekly asked, “Without Apple’s immense global brand value, who can satisfy Hon Hai’s appetite?”

Hon Hai’s chairman vows to overtake Samsung within 3-5 years

On June 18, Terry Gou, chairman of Taiwan’s Hon Hai, said his company will be partnering with Sharp (Japan) to develop large-size LCD televisions. With Hon Hai’s marketing and manufacturing strengths and Sharp’s key technologies, the two are looking forward to defeating their arch-rival Samsung (South Korea), Gou said.

The Economic Daily News reported that Gou talked openly about the company’s cooperative plans for the first time at the regular meeting with Hon Hai shareholders. He said Sharp is expected to join forces with Chi Mei Optoelectronics and Chi Mei Materials Technology Corp., both subsidiaries of the Hon Hai Group, to create a model of manufacturing LCD televisions with a brand name and allowing them to integrate vertically in order to achieve cost advantages.

According to Gou, Sharp has a reputation for being strong on front-end technology of flat panel displays, while Hon Hai is better at the back-end section, such as backlight panels, molds, and assembly. The combination of these strengths is likely to put the two firms on a par with Samsung.

He stressed that the joint project between Hon Hai and Sharp is a very important leading industrial indicator, because more than 10 Japanese companies have expressed a willingness to join their effort. If successful, this type of cooperation will be repeated in the future so as to form a larger Taiwanese-Japanese alliance.

The Taipei-based China Times reported Gou as saying, “I guarantee with my life” this cooperation project with Sharp will succeed. He said, Sharp is good at technology but not at sales, while Hon Hai has a lot of production capacity and is good at quickly reducing costs. Both sides face a common enemy: Samsung. Gou stressed his current most important task is to make sure Taiwan and Japan join forces to beat Samsung “within 3-5 years.”

According to the Central News Agency, Hon Hai announced in late March its acquisition of roughly a 10 percent stake in Sharp for US$800 million, which made it the company’s largest shareholder. Hon Hai will begin operating Sharp’s plant in Sakai, Japan on July 1. Gou said he plans to list the factory on the Taiwan stock exchange within three years.

Under the deal, Gou agreed to acquire a 46.5 percent stake under his own name in Sharp’s Sakai-based 10th-generation LCD panel plant, for an additional US$800 million. The plant is the only facility in the world capable of mass producing 60-inch to 80-inch panels.

Part of the plant’s assembly line will be moved to Hon Hai’s headquarters in Tucheng City, Taipei, to create jobs in the area, the Central News Agency reported.

Taiwanese conglomerates lack succession planning

Leaders of Taiwan’s largest enterprises are faced with the problem of passing the baton on to the next generation, according to a survey conducted by Commonwealth monthly. More than 60 percent of the 30 largest enterprise groups in Taiwan do not have a clear leadership succession plan, and only 20 percent have named their successors. In the survey, companies with leaders under the age of 60 and deemed not to be in need of an urgent succession plan, fell from 12 in 2009 to five in 2012.

The survey revealed that 60 percent of the top 30 enterprise groups with leaders over the age of 60 have no clear succession plan. Among them, seven had “no clear succession status” because there were no clear signs of successors emerging in the last three years. They included: Hon Hai Precision Group (chairman Terry Gou, 62), MediaTek (chairman Tsai Ming-kai, 62), Taishin Financial Holding Group (chairman Thomas T L Wu, 62) and Siliconware Precision Group (chairman Bough Lin, 61 years), Lin Yuan Group (chairman Tsai Hong-tu, 60), BenQ Group (chairman K Y Lee, 60) and ASUS (chairman Johnny Shih, 60).

It is uncertain what the founders of Evergreen Group (Chang Yung-fa, 85), ASE Group (Jason C S Chang, 68), and Quanta (Barry Lam, 63) intend to do, but they now share in the pressing challenge of maintaining quality leadership and business continuity. Only Morris Chang, 81, chairman of Taiwan Semiconductor Manufacturing Company, has announced a plan to groom three “co-chief operating officers” to head up research and development, operations and business development.

Even those who have passed the reigns to the second or third generations face the problem of untangling corporate property issues and other red tape. They include companies such as Chinatrust Financial Holding (chairman Jeffrey Koo, 79), Far Eastern Group (chairman Douglas Hsu, 71), Kinpo Group (chairman Rock Hsu, 68), Shin Kong Financial Holding Group (chairman Eugene Tung Chin Wu, 67), MiTAC Synnex Group (chairman Matthew Miao, 66), Tatung (chairman Lin Wei-shan, 66), and the Formosa Plastics Group (president Wang Wen-yuan, 65).

Evergreen Group chairman Chang, Wang Group chairman Dai Sheng-yi, Ruentex Financial Group chairman Samuel Yin, and Hon Hai Group chairman Gou, all announced that they intend to donate over 80 percent of their wealth. Thus, it seems that they are not necessarily focusing on the next generation taking over their businesses, reported Commonwealth.

These leading companies are vital to Taiwan’s economic transformation, with a total market capitalization of NT$13 trillion (US$433 billion). The magazine reported that only 20 percent of the 30 largest conglomerates have announced their leadership succession plans publicly.

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.