The stalls in the market are laden with Indonesian batik clothes, leather shadow puppets and other Javanese handicrafts. Just a stone's throw away is the kraton, or Sultan's palace. As the sun sets behind the ancient Buddhist temple of Borobudur, a UNESCO world heritage site, the fertile countryside around it is bathed in golden light. No one would have expected Hon Hai chairman Terry Gou to pick this picturesque center of classical Javanese arts and culture as the starting point for the electronic giant's transformation.

Shortly before Christmas 2013, BlackBerry signed a five-year cooperation agreement with Hon Hai Group company FIH Mobile Limited – formerly Foxconn International Holdings Limited – to design and manufacture low-end handsets for BlackBerry. Industry insiders expect FIH Mobile to churn out more than 10 million handsets in 2014 alone. The first model, a touch screen phone called Jakarta, will be released in the first quarter of this year.

Saddled with huge losses, the Canadian smartphone maker decided to get out of the hardware business to focus entirely on software development and services in a bid to compete with rivals Samsung and Apple.

Currently, the largest customer of FIH Mobile, which has seen its revenue slip 10 percent over the past three years, is Chinese handset brand Xiaomi. By teaming up with BlackBerry, FIH can venture into the smartphone sector, which signals a shift from mere contract manufacturing to hardware design. More importantly, the cooperation with BlackBerry sparked Hon Hai to move forward with its investment plans in Indonesia.

Why Indonesia?

First of all, the U.S. Department of Defense has stated explicitly that it will not allow BlackBerry devices to be manufactured in China. Quanta Computer previously hired more than 2,000 employees in Taiwan who exclusively produced tablet computers for BlackBerry. In 2013, Wistron Corporation, another Taiwanese contract manufacturer, manufactured 22 million BlackBerry mobile phones at its plant in Mexico.

Terry Gou has all along regarded Indonesia as a country with great potential where "the coconut trees will grow into a forest." It also comes in handy that Indonesia is BlackBerry's largest market outside North America.

Yet contrary to widespread expectation, Hon Hai chose not to invest in the teeming modern metropolis of Jakarta. Instead, spokesman Hsing Chih-ping confirmed, it will build a new facility in the ancient Sultanate of Yogyakarta.

The Yogyakarta Special Region in Central Java is about twelve times the size of Taipei City. The city boasts a population of 3.4 million people, some 35 percent of whom are ages 15 to 35. Such a young population implies a large workforce whose productivity and consumption could drive the economy.

Still, Gou is lured not only by the area's young population, but also by its talent cluster effect.

Endless Potential Thanks to Market and Talent

Last year, the World Bank found in its report Doing Business in Indonesia that it is easiest to start a business in the university city of Yogyakarta. Long before the report was released, entrepreneurs from Singapore, Malaysia and South Korea had found their way to Yogyakarta, opening hotels and denim factories, or producing leather gloves.

Gameloft SE, a French-based international publisher and developer of game apps for mobile devices, has also invested in Yogyakarta.

Thanks to a large number of state and private universities, Yogyakarta boasts a huge talent pool in the fields of software and design. Hon Hai can draw on these resources to speed up its transformation into a diversified high-tech conglomerate.

"I'm not just building a factory. I want to bring in a whole high-tech supply chain," Gou told CommonWealth Magazine on the sidelines of the Asia-Pacific Economic Forum (AEPC) leaders' summit in Bali, Indonesia, last October. "Indonesia will be our most important growth area aside from Taiwan and China. I hope to bring about a transformation from low-end to high-end and stimulate long-term advancement in electronics, machinery, optics and semiconductors."

Located inland, Yogyakarta does not have a harbor. However, goods for export can be shipped via the international airport, while the highway provides access to the country's huge domestic market of more than 200 million people.

Gou thinks that domestic demand in Indonesia offers business opportunities that the company must not let slip away.

According to former Indonesian Economic Minister Gita Wirjawan, who now plans to run for president, the number of middle-class Indonesians is expected to swell from 45 million now to 135 million before 2030. This means that in 20 years Indonesia's middle class will grow by an amount four times larger than Taiwan's entire population. This demographic constitutes an average per capita GDP of US$3,500. And that is the reward that Taiwanese high-tech manufacturers will get for their investment.

Hon Hai will probably not limit its investments in Indonesia to a single kind of mobile phone for a single customer. It is possible that upstream production, including IC printing, connectors and casing, will all eventually be relocated to Indonesia. BlackBerry only represents Hon Hai's initial move in the game.

"Profits are going to come from parts and components sales, maintenance, and inventory management. FIH Mobile is like a large reservoir. It can bring down contract manufacturing costs, expand revenue and make money from upstream parts and components," says Fubon Financial Holding analyst Arthur Liao. If FIH wants to exclusively target the Indonesian market and produce in the hinterland after bringing in its entire upstream supply chain, it will enjoy the advantage of comparably low land costs and preferential tax rates, Liao points out.

For Gou, who got burnt in China by rising wages and a series of employee suicides that painted the electronics giant in a bad light, Yogyakarta, where Buddhist and Hindu heritage sites radiate an aura of peaceful coexistence, has an undeniable advantage: There are hardly any labor strikes.

Risk Aversion in the City of Tolerance

In 2011 Sultan Hamengkubuwono X, who is both the monarch and the elected governor of Yogyakarta, sat down at his palace for an interview with CommonWealth Magazine, and expressed the hope that Taiwanese high-tech companies would invest in the Yogyakarta Special Region. After a two-year effort, the sultan eventually convinced Gou to invest in Yogyakarta.

In the past 15 years, Yogyakarta has had just one labor strike, and that was due to a factory closure, the sultan asserts. At that time he sat down with the redundant workers and arranged for a reemployment program to calm the storm. Hamengkubuwono is proud of his city's spirit of tolerance. Yogyakarta hosts students from all over Indonesia with different religious beliefs, an environment he likens to a "salad bowl" of different cultures.

Yogyakarta, its sultan, and BlackBerry are helping Hon Hai find a new starting point for its transformation.

Translated from the Chinese by Susanne Ganz