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Hon Hai Group

Terry Gou Joins the ‘Bandits'


The Hon Hai Group was Taiwan's biggest manufacturer in 2008, but revenue growth sagged and opportunities were missed. After toying with retirement, Chairman Terry Gou is back, hoping to restore his company's aura of invincibility.



Terry Gou Joins the ‘Bandits'

By Jimmy Hsiung
From CommonWealth Magazine (vol. 421 )

It was no surprise that the Hon Hai Group remained No. 1 in CommonWealth Magazine's 2009 survey of Taiwan's top 1,000 manufacturers. The company's consolidated revenues totaled NT$1.95 trillion in 2008, roughly equal to the budget of Taiwan's central government. It also kept a firm hold on its status as the world's largest player in the electronics manufacturing service (EMS) sector.

For Hon Hai to register nearly NT$2 trillion in revenues in 2008's turbulent economic environment was quite a feat, but revenue growth fell to 14.6 percent, less than half of the 30-percent annual growth Chairman Terry Gou foresaw for his company at the 2006 shareholders' meeting.

"Seeing the slumping economy, every part of me is full of fight," Gou said excitedly to the company's new recruits at National Taiwan University on March 29.

Gou had planned to retire in 2009 and had taken a less active role in the company in the past year, but at the company's shareholders' meeting, held two months ahead of schedule on April 16, he dashed that timetable.

"I won't be talking about retirement in the short term. As long as the stock price doesn't bounce back, I won't retire, because I know that the pensions of many shareholders are on my shoulders," he said.

He wanted to make one thing clear to Taiwan's 370,000 Hon Hai shareholders: Terry Gou is back!

That's good news for Hon Hai, especially as the company recently missed out on two important business opportunities.

Missing Out on Bandit Phones, Netbooks

Beginning at the end of last year, word leaked out from investors and industry insiders that Hon Hai's operations had run into trouble. One Hon Hai executive admitted that the difficulties stemmed from Hon Hai's absence in the "bandit cell phone" and netbook markets.

Not getting involved in bandit cell phones – phones made in China that usually copy the design and functions of branded handsets but sell for a fraction of the price – hurt Hon Hai the most.

While Lenovo, ZTE Corporation, Huawei Technologies, and even Hon Hai's old rival BYD Company were all plunging into the market to pursue orders, Hon Hai's handset assembly arm Foxconn Electronics was rejecting several unsolicited orders for the bandit models to protect its first-class global customers, according to a Shenzhen-based Taiwanese businessman involved in the electronics industry.

This year, however, Hon Hai's attitude toward the rebel handsets has changed. China's largest domestic handset maker Beijing Tianyu Communications Equipment and other bandit phone producers have suddenly sensed Hon Hai's enthusiasm to take orders. Gou as much as acknowledged the change in heart when, surrounded by reporters after this year's shareholders' meeting, he cheerfully blurted: "Bandit cell phones will soon become legitimate." 

Stressing the Bandit Phone Spirit

In fact, since returning to the helm this year, Gou has often invoked the bandit cell phones to motivate and pressure his people.

"Recently, the term most often uttered by Chairman Gou is ‘bandit spirit,'" says a Hon Hai vice president responsible for the company's notebook business.

Ji-Ren Lee, the director of Hon Hai's sustainable operations program and head of human resources, observes that the "bandit spirit" trumpeted by Gou is in fact a "small entrepreneur's spirit."

Li explains that such a spirit entails the use of unorthodox means so that small divisions within a big company can remain extremely agile. It also involves the concept of everybody sharing in the company's spoils, motivating employees to work especially hard.

Sinking Deep Roots in China

Gou's top priorities in returning to lead Hon Hai will be overseeing the relocation of the company's manufacturing capacity and employees in China, a project he has toiled over in recent years, and getting tangible benefits from Hon Hai's R&D efforts.

Of all the Taiwanese businesses in China and even other manufacturers from around the globe, Gou is the entrepreneur who has developed the deepest foothold in China.

A week before the shareholders' meeting, Gou returned to Taiwan from his ancestral home of Shanxi Province. A close look at Gou's heavy concentration on Shanxi reveals the effort Hon Hai is expending on its relocation of production capacity in China – a project designed to cut costs and take advantage of preferential tax breaks by moving inland to third-tier Chinese cities.

Gou was in Shanxi to attend the opening ceremony of the 2009 Taiyuan Global Magnesium Conference & Exhibition organized by the International Magnesium Association. According to local news reports, Gou delivered a speech that covered a range of topics, from making lighter cars to the applications of magnesium, an indication of his knowledge of the mineral and his expectations for its development.

Shanxi is the only province in China where Hon Hai has two large-scale manufacturing bases – one in Taiyuan, the other in Jincheng. At the shareholders' meeting, one foreign institutional investor asked Gou, "When will Hon Hai's China relocation plan begin showing tangible returns?"

Without any reservations, Gou answered that he began pushing the redeployment plan roughly three years ago, and that it has taken that long to select sites, break ground, complete the facilities, and relocate and move factories. "I think the benefits will definitely emerge in 2009 or 2010," he said. "They will begin to reach a peak in 2011."

Manufacturers always need factory capacity and land to expand, Gou said, "and we will have an advantage when the next wave of economic recovery arrives."

Of course, Gou did not forget to mention that aside from exports, he was also preparing these sites for roles in selling products to China's domestic market. "From now on, I want to do business domestically with Chinese customers," Gou said.

Just looking at last year's level of investment helps to understand the boldness of the manufacturing deployment plan and Gou's hopes for the project. According to Hon Hai's 2008 financial statements, the company added more than NT$70 billion in fixed assets (gross property, plant and equipment) last year, roughly equal to the company's paid-in capital of NT$74.1 billion.

Investment in R&D was another category showing a substantial increase last year. R&D expenditures totaled NT$23.66 billion in 2008, 54 percent higher than the NT$15.34 billion spent a year earlier.

R&D spending rose dramatically even at a time when Hon Hai's profits were shrinking. In 2006 and 2007, Hon Hai's total income was NT$66.27 billion and NT$77.69 billion, respectively, but it fell to NT$55.1 billion in 2008. Yet R&D as a percentage of total revenues grew all three years, from 0.8 percent in 2006 and 0.9 percent in 2007 to 1.21 percent last year.

No Longer Calling the Shots

Hon Hai's big investment in R&D stems from its ascension from a components and assembly supplier to a notebook system manufacturer. Simon Lin, chairman & CEO of notebook maker Wistron Corporation, believes that Hon Hai's new positioning in the supply chain will definitely hurt its existing business. He expects that his company, along with fellow notebook producers Quanta Computer, Compal Electronics and Inventec Corp., will soon begin reducing their purchases of casings, connectors and other sub-assemblies from Hon Hai.

But he acknowledged that because notebook manufacturing has become Taiwan's biggest subcontracting sector, "if Hon Hai wanted to grow, it was bound to enter the field some day."

The key competence in notebook production is original design manufacturing, which puts a premium on design and R&D, unlike the electronics manufacturing service sector Hon Hai has dominated, which values cost, speed and yield.

Compal Electronics president Ray Chen says frankly that stepping into the ODM field requires genuine prowess in R&D. "In this new competitive environment, it (Hon Hai) won't be able to call the shots as it has in the past," he says.

In fact, as a result of intense competition, vertical integration and strategic alliances, ODM vendors now can match EMS specialists at what the EMS companies do best. But the R&D capabilities of EMS suppliers still lag behind those of ODM vendors, and they face an uphill climb in catching up. As a result, Hon Hai's key to victory in the future will be its R&D and design capabilities.

"During an economic slowdown, you absolutely cannot cut R&D spending," says Gou, who believes that once the impetus to cut costs during a recession extends to R&D, it's akin to killing the goose that lays the golden eggs.

"At this time, you definitely must put money into R&D. When the next wave of prosperity hits, the winner will be the one who has the technology," Gou says.

John Hsuan, honorary vice chairman of United Microelectronics Corp., described Gou as somebody who "can chart a course far into the distance, but does not do distant things."

To Gou, dreams have no boundaries or distances – no matter how far off, he believes they can all be fulfilled one day. And now, back at the helm of his company, he is still showing the same courage to dream that has always been his trademark.

Translated from the Chinese by Luke Sabatier