Hon Hai Precision Industry Co. chairman Terry Gou attended an event at the American Institute in Taiwan (AIT) early on the morning of April 16 to mark the fortieth anniversary of the Taiwan Relations Act.

Before heading inside, in response to persistent questioning by members of the media about whether he has decided to run for president, Gou let it slip that he might participate in the Kuomintang (KMT) party’s presidential primary.

Spreading rapidly over online media and television news, word of Gou’s response stunned all of Taiwan, as people wondered if the rumors of Taiwan’s richest man perhaps becoming president were true.

Speaking to CommonWealth, an unnamed source familiar with the inner workings at Hon Hai revealed that Terry Gou first toyed with running for the presidency after such atypical politicians as U.S. president Donald Trump and Kaohsiung mayor Han Kuo-yu defied expectations to win their respective races.

“Terry Gou is a very proud man,” relates the source. This explains why Gou remained mum about his intentions at first, being careful to first set the stage for a run behind the scenes, starting with Facebook and LINE fan pages in January and March, respectively, as a platform for airing his views on national issues and take the pulse of the potential reception. A team was even established inside Hon Hai to conduct public opinion polls and test the waters for a prospective run.

Once again surrounded by media during a break during the meeting on the sixteenth, Gou began speaking at length, addressing issues “at the presidential level.” As the atmosphere began to resemble a campaign speech, a reporter suddenly asked, “Chairman Gou, could you really let go of Hon Hai?”

Photo by Chien-Ying Chiu

“That’s a great question,” he answered seriously before proceeding to share an anecdote he had never spoken about before, about the late Formosa Plastics Chairman Wang Yung-ching, the “god of management”.

Learning to Let Go Allows Staff to Learn and Grow

“I once spoke with Chairman Wang,” he said. “You might not know this, but Wang had retreated to the second line by then.” In 2006, two years before his death, Wang Yung-ching retreated to the second line with his brother, Wang Yung-tsai, handing over decision-making authority over the Formosa Plastics Group to a seven-member policy team.

Gou believes that he planted the seed with advice he gave Wang, relating that the Qianlong Emperor’s 60-year reign was a key contributor to the decline of the Qing dynasty. Therefore, one should hand responsibility over to younger people.

Changing course, he spoke about the executives at his own company, saying, “I trained them and have worked with them for 40 years. I need to learn how to let go so they can learn and grow.”

Judging from Gou’s public pronouncements, a potential presidential run is still in the long-term consideration stage. However, “letting go” and “stepping back to the second line” appear to be inevitable.

According to the Public Official Property Reporting Act, publicly listed and over-the-counter stocks held by a presidential candidate (including spouse and minor children) must be placed in a trust and reported within three months of the inauguration date. Should Gou’s 1.33 million shares of Hon Hai stock all be entered into a trust, he would not risk losing his eligibility as CEO of Hon Hai Precision.

That said, general popular sentiment could become an issue if the nation’s top official were also at the helm of a large corporation. Should Gou decide to declare his candidacy, he would surely have to distance himself from Hon Hai to a certain degree.

However, is Gou really prepared to “let go” of Hon Hai at this point?

Warning Signs Lurk Behind Soaring Stock

Currently, Hon Hai Precision’s stock price is the best it has been in the past six months. Since late March, Hon Hai’s published fourth quarter 2018 performance far exceeded expectations, causing a 22-percent surge in its stock price (as of April 16), to help the company recapture the position of the second most valuable listed company.

That said, several recent research reports by foreign investment firms still point to warning signs behind the brilliant stock price.

Photo by Chien-Tong Wang

For instance, JPMorgan, which has taken a conservative stance on Hon Hai since September 2017, gave Hon Hai a “buy” rating on April 11, with a target price of maintaining the NT$105 per share level of last December. In the report, analyst Gokul Hariharan pointed to three main factors for ratings adjustment:

1. Key investors’ three main concerns, namely sluggish iPhone shipments, stagnant 2019 Hon Hai revenue, and unclear future strategy, have been reflected in the stock price.

2. FIH Mobile Limited, a Hon Hai subsidiary, recorded a record loss of NT$26.8 billion in 2018, which was the main culprit in the previous big dip in Hon Hai stock prices. However, the FIH rescue plan has been conceived and is underway.

FIH Mobile began supplying Nokia brand mobile phones designed by Finnish startup HMD in the second half of 2017, saddling the company with huge losses. Given that FIH has subsequently pulled out of the Nokia supply chain in 2019, profits should rise appreciably starting in the second half of this year.

At the same time, Hon Hai has begun slashing operational costs. As shown in the company’s fourth quarter 2018 financial report, operational profits began moving upwards, while costs dropped 15 percent compared to the same period the previous year. Accordingly, operational profits should be expected to climb in 2019.

3. The iPhone sales forecast is currently at its nadir, although sales are expected to recover in the short term. If Apple were willing to adjust pricing, the situation could be improved.

However, Hon Hai’s current stock valuation sits at a historical low, with the 2019 net stock valuation at just 0.9 times - even lower than during the 2008 financial crisis. This is one of the chief reasons JPMorgan called Hon Hai a “buy” stock.

In other words, the upward correction to Hon Hai’s stock price is largely due to one-time factors such as the slashing of costs and the bottoming out of the bearish market.

In reality, JPMorgan does not look favorably upon Hon Hai’s turnover momentum going forward, forecasting negative growth for 2019, and only negligible growth for 2020 and 2021, with no recurrence of the high growth of recent years in sight.

Other foreign institutional investors hold similar views. According to Deutsche Bank, Hon Hai’s fourth-quarter profitability should be exceptional; however, as this is the result of cost-down measures, it is unsustainable over the longer term.

What is more, taking the long view, Deutsche Bank believes that reducing costs could impede Hon Hai’s diversified operations strategy. Consequently, in spite of raising its target and EPS forecast, it continues to take a neutral position.

‘Post-Apple curse’ Lingers Despite Transformation Efforts

Citibank is even more pessimistic regarding Hon Hai’s long-term outlook, believing that in spite of 4Q 2018 numbers having steered clear of danger, the future does not look so good, largely due to declining mobile phone demand and intense industry competition. Although the stock market is expected to rise, fluctuations in profitability will be amplified, so it is still too early to call Hon Hai a “buy now” stock.

That is to say, in spite of various attempts at transformation, such as acquiring Sharp and reviving the Nokia brand, the NT$5.3 trillion Hon Hai mothership has yet to shake off the “post-Apple curse.”

Accordingly, it will continue to sink slowly with sluggish sales of consumer products.

Following its takeover of Sharp, Hon Hai managed to turn losses into profits, originally forecasted at two to four years, one year ahead of schedule. (Photo by Chien-Ying Chiu)

Many people are surely curious about the Huawei orders that were all the buzz on TV and in the newspapers not that long ago. As Huawei is the smartphone brand with the strongest momentum for growth this year, landing orders would be a shot in the arm for Hon Hai.

Earlier reports related that Huawei’s new P30 model handset would be assembled at Hon Hai’s Zhengzhou plant. However, this was summarily dismissed by a source familiar with the Hon Hai supply chain, who said, “the Zhengzhou facility is used exclusively for the assembly of iPhone handsets; Apple would never permit another competitor to come along and share it with them.”

It is believed that Huawei’s current orders are being fulfilled by pan-Hon Hai subsidiary FIH Mobile, which handles mobile handset assembly for brands other than Apple, such as Huawei’s previous popular Mate20Pro. However, assembly of the P30 is not being done by FIH, but rather at Huawei’s own Dongguan facility.

Who Will Take Hon Hai’s Reins If Gou Runs for President?

Wang Yung-ching and his brother were able to take a step back largely due to the success of their investment in the Sixth Naphtha Cracking Project and excellent prospects looking a decade ahead.

However, Gou continues to scramble tirelessly to find momentum for Hon Hai’s growth in the post-Apple era, and the company’s investments in its Wisconsin plant and Sharp facility in Hawaii have yet to become profitable.

Should Gou decide to run for president at this juncture, letting go to allow top executives to “learn how to grow,” who has what it takes to fill Gou’s shoes?

Reuters has predicted that Sidney Lu, chairman and CEO of Foxconn Interconnect Technology Limited (FIT), could be Gou’s successor. However, one anonymous top Hon Hai Group executive claims never to have heard anything regarding Lu being tapped as Gou’s successor.

“Lu is certainly an excellent leader who can lead business operations, and (Sharp) President Tai (Jeng-wu) is also a formidable executive. But “Mother Money” Huang Chiu-lien (Hon Hai’s chief financial officer) is the best at making money,” related the high-level executive, noting their respective strengths.

As one senior technology analyst observed, the Hon Hai Group has begun to act like a “holding company” in recent years, sending its golden hens out to be publicly listed individually, while the mother hen retains majority ownership. Its strongman having retreated behind the scenes, Hon Hai resembles a federation rather than a country.

“Right now, the Hon Hai Group is like the warlord period (of Chinese history), with each warlord controlling its own territory, where each company is listed separately, and doesn’t take heed of the others. Right now Terry Gou is still around to mediate, but once he is no longer in the group as the chairman and helmsman, and the Hon Hai group has no central leadership, will the empire crumble?” The senior analyst adds, “If you think closely about it, that would not be good for Hon Hai.”

Translated by David Toman
Edited by Sharon Tseng