Tag Archives: Foxconn

Should Flextronics Be Broken Up?

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The findings of a new study by Boston Consulting Group suggest that, over time, many tech companies are guilty of mission-creep, especially large ones.  And when that happens, those companies do not provide the shareholder value they could if they were leaner and more focused.

As part of its study, BCG analyzed total shareholder return, defined as the bottom-line return from capital gains and cash flow contribution. When it did so, it found little distinction between large-cap and small-cap companies:

“The clear takeaway is that regardless of company size, the more diverse the portfolio, the more difficult it is to generate high TSR—and the greater the set of management skills a company needs in order to handle that diversity. Companies must therefore be more deliberate and more explicit in rationalizing each element of their portfolio.”

BCG likens the strategy to the 3 R’s, in this case, Resize, Reform and Rejuvenate.  Marc Andreessen, the founder of Mosaic (later Netscape), put it this way: “If they’re more than 20 years old, then [companies will] probably benefit from being broken up, and many of them will probably be forced to break up if they don’t do it voluntarily.”

So for the EMS pseudo-conglomerates (Foxconn, Flextronics, Sanmina, etc.), what this means is there are arguments to be made — indeed, being made — that having bare boards, assemblies, design services, box build, ODM products, and a host of other products and services under a single umbrella is not an optimal  strategy.

There’s always been some debate over whether publicly traded EMS firms should be compared to other tech firms like Cisco and Microsoft or to traditional manufacturing companies (say, Caterpillar). It’s tough for a mid-size or larger contract manufacturer to attain repeated organic double-digit topline growth, and their margins are never going to be Wall Street pretty. Dumbing down the peer group makes sense.

But the bigger question being asked is whether their size is actually a hindrance. There must be a point at which that happens. Can the data analysis pinpoint that yet? And will market impatience make all of this moot?

 

Who Needs 2 Newspapers?

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Juxtapositions can funny, even when the subject is serious.

From DigiTimes today:

Foxconn considering lawsuit over leukemia report

“Foxconn Electronics (Hon Hai Precision Industry) is considering taking legal action against UK-based Daily Mail for its recent report claiming Foxconn employees working in Shenzhen plants have developed leukemia.”

Foxconn promises assistance for ill workers in response to leukemia report

“Foxconn Electronics’ (Hon Hai Precision Industry) plants in Shenzhen, China reportedly have seen many of their workers develop leukemia because of long-term operations in the presence of electronic cleaners.”

 

 

Does Rising Nationalism Pose Threat to Electronics Supply Chain?

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The amount of geopolitical discord around the world at present is stunning: Thailand, Vietnam, Korea and other major electronics manufacturing hubs are seeing a rise in nationalism and severe internal tension over how to address foreign pressure.

Thailand in May endured yet another military coup — its 19th since declaring independence from its monarchy in 1932. Some observers feel the military wants a permanent seat in the national parliament, a move that could hinder its democratic movement.

In Vietnam, citizens are outraged at what it feels is Chinese strong-arm tactics. Its Northern neighbor has provoked many Southeastern nations over the past few years, often by occupying seaborne territory that others had staked claims to in the past. (The Philippines have a similar complaint dating to 2012, when China evicted Philippine fishermen from their long-held fishing grounds.) Lately, Chinese oil rigs took up in Vietnamese waters, leading to riots at Fittec, Foxconn and elsewhere, where domestic workers took aim at their Chinese* employers.

Korea is losing business to Vietnam, aided in part by its own OEMs: Korea is now the largest investor there, pumping in nearly 23% of all outside investments in the first quarter this year. As Samsung relocates its cellphone manufacturing there, Vietnam is on track to produce 250 million handsets this year, versus 200 million in China and just 30 million in South Korea. As the linked article indicates, as of March 2014, Samsung Electronics subcontractors had invested an aggregate $2 billion in Vietnam. Meanwhile, while Samsung buys a reported 53% of its parts from Japan, South Koreans now view Japan as their second-leading military threat, next to North Korea, and resentment from World War II is rising once again.

Indonesia is suffering through a contested presidential election, one that involves an ex-general and the possibility of an overturned ballot result.

Japan, my friend Dr. Hayao Nakahara tells me, has essentially stopped investing in new manufacturing sites in China, with the only new developments minor capacity add-ons to existing plants. The two nations have been at odds over everything from possession of uninhabited islands in the East China Sea to a rehashing of wartime atrocities.

Southeast Asia is home to the bulk of the world’s electronics production, and holds the majority share of products built for the consumer, industrial/instrumentation, telecommunications, PC and peripherals end-markets (not to mention the vast majority of the raw materials and components supply). We’ve absorbed several of nature’s bullets of late — flooding in Thailand, the typhoon in Malaysia and of course the 2011 earthquake and subsequent tsunami in Japan. I am told that the media reports have exaggerated what’s happening on the ground in Southeast Asia, and that on a day-to-day basis little dissent is noticeable. That may be true, and to be sure, the self-inflicted disruptions have thus far been held to a minimum. Given the number of countries involved — unprecedented in recent times — and the enormity of what’s at stake, we can’t help but feel it will take some luck if the next supply-chain breakdown is only as bad than the last.

*Fittec is based in Hong Kong, Foxconn in Taiwan, but most employees and manufacturing for both companies are in China.

Could Foxconn Deal Bite Apple?

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The notion that Foxconn might take a large stake in a major Taiwanese telecom equipment company poses a litany of interesting questions for its largest customer — Apple.

For example, Foxconn, which gets 40% of its revenue from Apple, could now be in position to become both a major Apple supplier and a major enabler, since millions of iPhones and iPads would conceivably be connected via Asia Pacific Telecom’s network. What influence could Foxconn thus have over Apple’s ability to operate in key Southeast Asia markets? Would it possibly seek to leverage that network by negotiating with Samsung to force better pricing from Apple? Will other major EMS/ODMs that play heavily in this space (Jabil, Pegatron, Compal, Wistron) follow Foxconn’s lead?

The EMS/ODM model continues to evolve. Foxconn seems intent on speeding that evolution ever faster.

 

 

 

Poison Apple?

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Move over, Foxconn. First Pegatron and now Jabil have joined you on the Apple-watcher hit list.

In June, the New York-based employee rights group known as China Labor Watch singled out three Pegatron sites for worker abuse. The alleged violations are now like a refrain: excessive overtime, harsh working conditions and employment of underage workers.

Today it was Jabil’s turn, as its Green Point unit in Wuxi drew CLW’s ire. Perhaps most concerning is the accusation that Jabil workers must agree to a “list of punishments.” That sounds sickening and demeaning.

The common thread, of course, is Apple, whose corporate standards are apparently more for show than practice.

Chinese law prohibits more than 49 hours of work per week. Yet the CLW report shows 80% of the 80 Jabil workers interviewed put in more than that. While both Apple and many workers claim they want the overtime, the sad truth is they need to work the extra hours in order to make sufficient wages. Yet with Apple sitting on more than $100 billion in cash, it’s illogical to argue that company needs to suppress wages in order to make its iPhones and related products affordable to Western consumers.

Just 18 months ago, then Jabil CEO (and now chairman) Tim Main excoriated Foxconn for its “very abusive policies, employment policies.”

“I think their business will begin to suffer because of the way they treated their employees,” Main told Jabil shareholders. “And you can all be quite comfortable and proud that, you know, that’s not your company. We treat people like human beings like we want to … treat our own kids. So you don’t have to worry about that with us.”

Sadly, CLW’s report says something very different.

At the time of Main’s comments, Apple had just become a 10% customer of Jabil. Now, Apple is estimated to make up 13%, or $2.23 billion, of Jabil’s annual revenue. So like Foxconn and Pegatron, does serving Apple necessarily cost a company its soul?

Correlation is not causation, but the circumstantial evidence is getting mighty difficult to ignore. Will any EMS company be able to resist the temptation of Apple’s poisonous riches?

 

Brazilian Blowup?

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Which way is Brazil headed?

It looked up, after Foxconn decided to invest — how much is the subject of much speculation, as one report pegs it at about $500 million, another at as much as $12 billion — in new manufacturing campuses in São Paulo and elsewhere.

But Multek recently bailed, leaving the country without its largest bare board fabricator, and now Benchmark is leaving too, citing customers that were “challenged by some of the regulation challenges there.”

Brazil has eased some of its notoriously rigid (and expense) laws that taxed imports, rules designed at essentially forcing companies to build their supply chains inside the nation. It’s a tremendous potential market, with nearly 200 million residents. A few companies leaving isn’t necessarily a trend. But the flow always starts with a trickle.

 

 

 

Believing Foxconn Means Suspending Belief

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The Foxconn makeover is in full swing, with the latest this piece from the New York Times that supposes that the world’s largest ODM is worried that Apple — yes, Apple — might be bringing it down.

When Apple was subsequently criticized for low wages and poor working conditions at his factories in China, it was Mr. Gou’s company, the Foxconn Technology Group, and not Apple, that caught the most heat.

What this conveniently ignores, of course, is that no matter how demanding and dictatorial Steve Jobs could be, those weren’t Apple employees jumping to their deaths from their Cupertino offices.

Such unpleasantries aside, what the story also reveals is that Foxconn does not intend to go head to head with its customers. There’s ample evidence to the contrary already, of course, not the least of which are the Foxconn retail stores popping up all over China, not to mention the litany of ODM phones and other consumer electronics it design and makes.

To paraphrase an old saw, believe what I say, not what I do.

 

 

 

 

 

Broken Signal

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Lots of mainstream media hand-wringing over reports that Apple has returned a large number (5 million? 800 million? a gazillion?) iPhones to Foxconn for repairs.

Two things are on display here. One, that calling the companies involved for clarification or comment doesn’t appear to be part of the playbook. And two, the mainstream business press doesn’t totally grasp the Apple-Foxconn electronics manufacturing model, especially the part about repairs/returns.

 

 

Slowdown at Foxconn

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Could PCs do what the rest of the EMS industry could not — derail the Foxconn train?

Over the past decade, Foxconn has been practically unstoppable. Not a backlash against China, outrage over dozens of worker suicides, at least two plant explosions, campus riots, or other pressures could stop the Taiwanese manufacturing titan.

But as Apple goes, so does Foxconn. And nowhere are the reverberations from the occasional Apple hiccup felt more than at Foxconn, where sales dropped nearly 20% both year-over-year and sequentially during the recent March quarter. While Apple also uses other big and small name suppliers, and is a 10% customer of Jabil, Foxconn’s sales to Apple could be in the range of $60 billion to $70 billion (although I tend to doubt they are quite that high, as Apple’s cost of goods sold for 2012, less depreciation and amortization expenses, were $84.5 billion, and Apple buys its own components).

Worse, however, is that the main market Foxconn plays in — PCs — continues to shrink, with no obvious signs in sight of turning around. So as HP, Dell and other key Foxconn accounts experience double-digit declines, the near-term outlook at the world’s largest electronics contract assembler has suddenly dulled.

Could the PC (as in personal computer) customers do what the PC (as in politically correct) crowd couldn’t? Finally fell Foxconn?