Quartermaster of the Apple Empire
Hon Hai’s alliance with Apple rakes in NT$8 trillion in operating revenue a year. With Apple's sales in decline, Hon Hai boss Terry Gou is betting heavy, in an effort to sustain a relationship that accounts for 70 percent of its profits.
Quartermaster of the Apple EmpireBy Elaine Huang
From CommonWealth Magazine (vol. 520 )
The roughly NT$8 trillion technological alliance between Hon Hai Precision Industry Co. (Foxconn) and Apple is raising some hackles within the global mobile devices industry.
Apple's sales have recently been falling shy of expectations, but according to the calculations of one Taiwanese tech firm boss, through March of this year “Apple has continued to maintain a market capitalization in excess of US$400 billion (about NT$12 trillion), greater than that of Intel, Microsoft, HP and Dell combined.”
Since the launch of the iPhone in 2007, Apple has to date sold more than 200 million of the smartphones. Apple has also sold more than 60 million iPads since the introduction of their tablet computer in 2010.
In five short years, Apple has altered the living habits of people around the world, generating in excess of US$150 billion (about NT$4.7 trillion) in annual operating revenue, a feat unmatched by many nations.
Buttressing the expanded domain of the Apple empire is a shadow empire that one simply cannot overlook: Hon Hai.
With Apple's launch of the iPod in 2006, Hon Hai's operating revenue breached the NT$1 trillion threshold for the first time. But with the explosive sales growth following the subsequent launches of the iPhone and then the iPad, Hon Hai's annual operating revenue surpassed NT$3.5 trillion within five years, equal to the total operating revenues of Taiwan's other Top Ten manufacturers combined.
Hon Hai boss Terry Gou has gone from buying electronic components for assembly, to buying manufacturing plants in pursuit of expanded export orders, rapidly developing a specialized “EMS” (electronics manufacturing services) model to snag orders from various major European, American and Japanese brands. Today, a single client – Apple – now accounts for half of annual operating revenue and as much as 70 percent of profitability. The two have become as close as lips and teeth, as the Chinese idiom goes, each constituting the “too big to fail” client/contractor of the other.
What does Terry Gou have that makes him indispensable to Apple?
Technologies the Client Needs: Gou and Hon Hai last year moved to acquire stakes in two Taiwanese wireless networking equipment companies: Microelectronics Technology Inc. (MTI) and Tai Tung Communications Co., Ltd.
“He [Gou] is capitalizing on Apple's anticipated launch of the future iTV and iWatch by obtaining relevant 4G technologies through stock investment and corporate acquisition now,” opines a vice president at a Taiwanese contract manufacturer of notebook computers.
Improving In-house Capabilities
Gou has further invested heavily in touchscreen technology know-how to solidify Hon Hai's position with regard to Apple's NT$1 trillion orders.
Production Capacity: Gou ordered the construction of the biggest of Hon Hai's 28 China plants at Zhengzhou in Henan Province. The facility will be dedicated to iPhone 5 production.
Gou had a complex of eight plants constructed in Chengdu in Sichuan Province in less than 100 days. The eight plants now account for more than half of iPad production.
“Now possessing the cumulative experience of having produced 80 million iPads, we may now dare say that no one, aside from that Korean outfit [Samsung], has produced more than three to five million units,” Gou proudly told last year's shareholders meeting. “Our competitors can't do it, because keeping it thin and rigid is no easy task.”
Meeting Key Component Needs: The touchscreen on the iPhone 4S, for example, accounts for 11 percent of its total materials costs. That figure rises to 27 percent for new-generation iPads. With the coming launch of the iTV, materials costs for the touchscreen alone will exceed 30 percent of total costs for that product line.
Such a high-value key component will invariably involve a core Apple technology. Consequently, Gou and Hon Hai first acquired loss-making Chi Mei Optoelectronics Corp. and merged it with Hon Hai's Innolux Display Co. to create Taiwan's largest maker of flat-panel displays, thereby securing additional production capacity.
Hon Hai has even invested in its own production of specialized glass required by clients. When the iPhone 4 and iPhone 5 were still in the developmental stage, Gou set about acquiring G-Tech Optoelectronics Corp., a company awash in red ink, to get a handle on glass processing and tempering techniques previously best handled in Japan.
Due to the expanded sized requirements of the iTV display, Gou dipped into his own pockets, through his wholly-owned SIO International Holdings, Ltd., to acquire a 38-percent stake in Sharp Corp.'s display unit, which will be renamed Sakai Display Products Corp. and operate a 10th-generation LCD display factory near Osaka, providing Hon Hai with a line of large, high-definition flat panel displays for televisions.
Key components like display screens were once handled solely by the branded company, in this case Apple. But Gou has shown a willingness to get out ahead of the customer, upping the ante across the board in terms of client services offered, to keep them on the hook.
Yet stretching their battle lines so thin and digging so deeply into their resources on behalf of a single client also carries risk for Hon Hai.
“For the past three days, we've been holding internal review meetings, from 7 a.m. to 10 p.m., Gou exclaimed to employees at a year-end corporate banquet in early February. “Now I can relax a little.”
As the comment revealed, in such a vast corporate entity, even an internal review meeting is a long and arduous affair.
15-Hour Internal Review
On April 10, Hon Hai announced that operating revenue for the first quarter of this year had declined nearly 20 percent from the same period last year.
After work resumed following the Lunar New Year holiday, Hon Hai's China operations announced their first-ever temporary hiring freeze. Due to a decline in Apple sales beginning in the fourth quarter of last year, output projections for the second half appear less than optimal.
For Terry Gou, the upside is all Apple, and the downside is all Apple.
“Over the long term there are major concerns for Hon Hai,” says Daniel Chang, head of Macquarie Securities in Taiwan.
But Gou believes the vitality of a corporation cannot be seen during a rising tide.
“When the waters recede we'll see who's got the muscles and who doesn’t,” he says.
Whether the NT$8 trillion multimedia Goliath Apple and Hon Hai have created can continue to sustain the success of the Taiwanese-American technological alliance will be the shared challenge of Gou and Apple CEO Tim Cook.
Translated from the Chinese by Brian Kennedy.