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How Does Foxconn Do It?
By Adam Pick, iSuppli Corp. -- Electronic News, 8/14/2006
During the past five years, contract manufacturers have looked at rival Foxconn Electronics with a mixture of awe and bewilderment as the company increased its revenue by nearly tenfold and rose to the top of the industry heap.
Foxconn’s revenues have grown from $2.9 billion to more than $27 billion, and it has climbed from sixth to first place in the EMS industry, in just five short years. For competitors seeking to emulate Foxconn’s success, the burning question is: What kind of magic beans does company CEO, Terry Guo, possess that have endowed the company with such beanstalk-like growth?
iSuppli Corp. has conducted an analysis of Foxconn’s strategy and has identified four key factors behind its success:
• Focusing on a select set of elite customers
• Servicing customers and extending the company’s reach
• Making the most of the China advantage
• Employing the “vertical-plus-assembly-plus-design” model successfully
Customer Concentration
For Foxconn, the registered trade name of Hon Hai Precision Industry, selecting the right customers means concentrating its sales efforts on its top-10 clients. Foxconn’s top-10 customers accounted for 80 percent of its revenue in 2005, the highest level among the leading EMS providers. While analysts often sing the praises of customer diversification, Foxconn’s performance shows that maintaining a focus on a small group of leading buyers is a winning growth strategy in the EMS industry, iSuppli believes.
Foxconn also has benefited from its seemingly unlimited devotion to serving its customers’ needs—a commitment so deep it compels the company to undertake multimillion or billion-dollar acquisitions in pursuit of that goal. The company over the past few years has purchased Ambit Microsystems, Chi Mei Communications and Premier Image Technology, spending vast quantities of cash in order to extend its EMS tentacles deeper into the outsourcing budgets of Cisco Systems Inc., Motorola Inc. and Sony Ericsson Mobile Communications AB.
Fine China
The competitive advantage brought by low-cost manufacturing in Asia has forced several international contract manufacturers to shift production to Far East facilities in locations including Malaysia, the Philippines and Korea. China, in particular, has received significant investment from global oiginal design manufacturer (ODM) and EMS providers.
Among all of the contract manufacturers, Foxconn has led the way in embedding the advantages of Chinese manufacturing into its cost structure. Guo opened Foxconn's first production facility in China in 1993 and now operates five industrial parks with a co-located supply base. Because of its early and rapid production shift to China, Foxconn can compete on a price structure better than any other EMS company.
Get Vertical
One of Guo’s most important contributions to the EMS business has been development of the vertical model, which involves fulfilling multiple elements of electronics design and manufacturing—without the brand.
Before it took on the EMS business in the 1970s and 1980s, Foxconn was a component supplier. During that period, Foxconn integrated up the component value chain into modules, circuit boards and enclosures.
As the outsourcing movement swept through the markets in the 1990s, Foxconn saw an opportunity to extend its model and drive organic component sales through motherboard and systems assembly. This “Trojan Horse” strategy continues to work for Foxconn today.
Foxconn's components and module businesses comprised 11 percent and 28 percent of its revenue in 2004 respectively. According to financial analysts, Foxconn drives gross margins up to 30 percent on its modules. This “module-margin lift” offers the company yet another advantage as a counterbalance to the low gross margins of the traditional assembly work, which are in the 6 percent to 7 percent range. In some cases, it is reported that Foxconn can offer quotes 10 percent to 20 percent less than its competitors.
Over the past 24 months, both Flextronics Corp. and Sanmina-SCI Corp. have glorified the concept of a vertical model. Both companies have signaled to the market that this model will satisfy the increasing needs of their OEM customers and increase the margins of their almost profitless industry. For Sanmina, the vertical model has been challenging. During its last conference call Sanmina CEO, Jure Sola acknowledged that both its printed circuit board and enclosures businesses have failed to achieve their targeted margins of greater than 10 percent.
That Old Guo Magic
Whether Foxconn’s competitors can successfully emulate Guo’s strategies and recreate his success remains to be seen. However, it’s clear that Foxconn’s remarkable run to the top of the EMS market will continue to have a strong influence on the rest of the industry.
Adam Pick is the senior analyst in the EMS/ODM service at iSuppli Corp. A more detailed version of this analysis can found in Pick’s new whitepaper, “Foxconn’s Strategic Coup: How Does Terry Guo Build Success?” For a free copy of this whitepaper, click here.
