Tag Archives: Foxconn

HP PC Spinout Effects, by the Numbers

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Here’s the first report I’ve seen that gets into the nitty-gritty behind the possible supply chain effects of HP’s PC spinoff/sale.

TrendForce was good enough to pull together the PC market share rankings and puts forth a cogent explanation of several possible outcomes, including — believe it or not — a potential hindrance to the Foxconn manufacturing tank.

Interestingly, while many pundits don’t believe the Taiwanese ODMs have the financial girth to absorb HP’s market-leading PC unit, one of the emerging possibilities would be Samsung, whose incentive to snatch it up would go (far) beyond box sales. Indeed, as TrendForce points out, Samsung could leverage the PC chain to create additional sales for its components and batteries. Samsung is flush with cash — more than $55 billion on its balance sheet, of which $20 billion is in cash or equivalents. (The head of HP’s PC unit says it is worth more than $10 billion.) It could handle the financial strain of taking on HP’s PC arm, even though revenue runs in the tens of billions per quarter and its operating profit has grown seven of the past eight quarters.

If an outside suitor doesn’t materialize, HP has a successful track record of spinning off businesses, with Agilent being the most prominent. If that happens, the supply chain status quo might be maintained.

Something to think about.

 

 

Elcoteq’s Basket Had Too Few Eggs

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Thanks to Europe’s fairly generous insolvency laws, Elcoteq will likely survive having run out of cash (which isn’t easy for a $1.5 billion company to do). But the industry will be reminded — again — of the danger of having too few eggs in a given basket.

Elcoteq fared beautifully for years as Nokia’s primary EMS supplier. At one point, Ericsson and Nokia made up 92% of Elcoteq’s annual sales. Revenues almost doubled in 1999, then tripled in 2000. As the saying goes, it seemed like a good idea at the time.

But Elcoteq did not anticipate that the 20-year relationship with Nokia might be undermined by emerging markets and their concurrent price pressures. Nokia, saddled with innovation-debt and fierce competition, fell victim to the market share chase and effectively bolted to Foxconn and Jabil. Years of acquisitions had taken their toll on Elcoteq’s cash, which ran frightfully low during the 2009 recession. A deal with Shenzhen Kaifa Technology, which would have brought in much-needed cash, failed to materialize.

Despite turning a profit last year — its first since 2006 — cash from operations was just 9.4 million euros. You know things are bad when you are left to asking Hungarian banks for money.

As of today, Elcoteq employs 7,000 workers across all major regions. A year from now, I’m guessing it will be half that. The company simply hasn’t proved it can build a sustainable business without the generosity of a major patron.

Inside EMS

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I attended a fascinating conference yesterday on the state of electronics outsourcing and supply chain management.

Set on the campus of Tellabs in the Chicago suburbs and produced by Charlie Barnhart Associates, speakers and attendees patiently dissected current trends and needs.

So as not to inhibit discussion, I promised not to reveal any specific remarks or details prior without getting the individual speaker’s signoff, so for now I will stick to generalities.

Attending were representatives from about 10 EMS companies and a like number of OEMs, some from Fortune 100 companies. There were also various analysts and other talking heads/pundits. I was the only media person in attendance.

Topics ranged from the concrete to the speculative. Tellabs spoke at length on how and why the telecom gear maker decided to outsource its electronics assembly, and was refreshingly upfront not only about the pros and cons but about the mistakes it made along the way.

Researcher Matt Chanoff noted the startling success of the Apple iPad and wondered whether the reason it has managed to capture a 95% share of the tablet market despite more than 80 competing products has to do more with the “ecology” of Apple vs. the form, fit or function of the iPad itself. He also pointed to a few distinct trends in the electronics design and manufacturing space, noting an unprecedented product platform commoditization is underway, while at the same time a newish breed of hobbyists (“prosumers”) has emerged and created a niche market for very expensive, semi-retro (read: electromechanical) products like cameras.

CEO Cary Wood laid out the turnaround of 118-year-old Sparton, which came thisclose to bankruptcy before righting the ship. The current metrics are an impressive display of refocusing and rebalancing. He said that the bulk of Sparton’s EMS customers two years ago were money losers, and Sparton had to either cancel the programs or renegotiate terms. But the bigger issue was convincing the sales team to jettison bad customers. Wood was forthcoming about the specific policies they put into place, including standardizing templates for pricing and quoting, and installing a sales and incentive program based on profits. He also noted that given Sparton’s exceptionally long history in Michigan, they effectively had to relocate the headquarters because they were the big fish in that small pond, and after all the local layoffs and shutdowns, they would have been tarred and feathered. He also said they made the decision to separate HQ from a manufacturing site so as not to get too emotionally attached to a particular business.

Time and again, OEMs and EMS companies said it was advantageous for competitors to place programs with a single EMS and that IP concerns didn’t really factor into the equation. The EMS companies said that OEM competitors are attracted by the knowledge that the EMS knows how to build products for the target market and that the EMS would also know what the appropriate prices would be. (That latter point was made several times.) In short, IP concerns take a backseat to the hope that the EMS would ensure the build price remained consistent with their competitors’ products (which also hints that OEMs accept the commodity nature of most of their products).

Another speaker asserted that no EMS is too big to fail, Flextronics and Foxconn included. He pointed to the disruption such an event would have on supply chains, pricing and capacity.

The good folks at CBA put me to work moderating a panel made up of two OEMs (Tellabs and Eaton) and three EMS companies of varying size and geographical reach (Plexus, Morey and Creation Technologies). I’ll have more on that in a bit.

 

 

Terry Gou’s Latest Obsession

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There is no doubt Foxconn founder and megabillionaire Terry Gou is a smart man. But he’s also a master manipulator.

Take a look at his comments at Foxconn’s recent shareholder meeting. As reported by Business Insider, Gou had sharp words for fellow gazillionaire Warren Buffett, who has invested in BYD, which is engaged in litigation with Foxconn over IP infringement claims.

Here’s Gou calling out Buffett:

If Warren Buffett really believes in BYD’s electric car technology, then why doesn’t he drive a BYD car instead of an American car? Doesn’t that tell you something about what he really thinks of BYD?

It should be noted that Buffett spent $26.5 billion last year to acquire the second-largest US railroad. By Gou’s twisted logic, Buffett shouldn’t be driving at all — he should be taking a train everywhere. But then again, Gou didn’t get so rich by being a generous soul.

Blowing Smoke

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The deadly explosion Friday at Foxconn’s Chengdu site killed three workers and injured 15 others. Will the company, at long last, feel its workers pain?

It says here, no.

Apple, one of the larger customers for the site, released a statement that was at once nonjudgmental and noncommittal. In it, the iPad maker had this to say: “We are deeply saddened by the tragedy at Foxconn’s plant in Chengdu, and our hearts go out to the victims and their families. We are working closely with Foxconn to understand what caused this terrible event.”

Whoopee.

For a company that takes incredible umbrage at the slightest hint of disclosure, I suppose it would be asking too much for it to reveal any hint of emotion now. But Apple has long shown itself to be disinterested in the ugly goings-on at its largest supplier. Report after report has ripped Foxconn for worker abuses ranging from environmental conditions to overtime and penalties for mistakes generally associated with penal colonies.

Reportedly as much as 30% of the highly profitable iPad 2 tablets are built in Chengdu. If that’s the case, there is absolutely no reason Apple should not have an employee on site, 24/7, ensuring operations are running smoothly. This begs the question, where was that employee? Did he or she not know about the conditions in the polishing department where the explosion reportedly took place, and how workers complained “the department is full of aluminum dust” and “(e)ven though they have worn gloves, their hands are still covered by dust and so (is) their face and clothes?”

Other major Foxconn customers, such as H-P, Dell and Motorola, generally have avoided the scrutiny that Apple gets, but that doesn’t — or shouldn’t — make them any less culpable. It’s a convenient excuse to hide behind the veil of outsourcing as a means to ignore what goes on inside your supplier’s factories.

To me, it’s corporate-sanctioned cannibalism. We are supposed to be better than that.

The ‘Sale’ of Foxconn

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Foxconn Precision Electronics, the cellphone manufacturing arm of — guess who? — Foxconn, is for sale.

Well, actually it has been sold.

To Foxconn.

Allow me to explain. Hon Hai, which trades under the Foxconn name, has myriad subsidiaries. Some of those subsidiaries have other subsidiaries. Despite the growing handset market, FPE’s parent, Foxconn International Holdings, has been losing money — $218 million last year alone. So despite sales of $6.63 billion last year, FPE  has been sold to China Prime Rich Holdings, a wholly owned subsidiary of — wait for it — Hon Hai.

If that wasn’t awkward enough, the sale price was HK$550.4 million, which in US currency is $70.7 million.

In other words, Foxconn bought from Foxconn an entity the size of Celestica for about four days’ worth of revenue. No word yet what the company directors paid themselves for what must have been an exhausting maneuver.

Only in China.

 

Apple’s Bad Form

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Reports today are crediting Apple for moving quickly after a number of suicides at Foxconn last year put the iPhone maker’s largest supplier in media peril.

But what, exactly, did Apple do? From its progress report, released yesterday, it’s hard for me to tell. Yes, Apple upped its supplier audits to 127 last year from 102 in 2009. But is that significant? After all, Apple’s report does not say how many suppliers it has, or whether that number changed from 2009 to 2010. Of the 127 sites audited, 97 were looked at for the first time. For a company that relies so heavily on Third World labor, that’s nothing to be proud of.

Then there’s the little matter of the relationship between Foxconn and Apple. Apple reportedly owns the lines inside Foxconn’s Shenzhen facility. Foxconn builds almost all of Apple’s many lines of iPhones, iPads and iPods, not to mention its other PC products. Few other suppliers have the capacity to handle the volumes of these lines. Thus, can the two really be parted? And if not, then what teeth do Apple’s audits truly have?

Predictions, Revisited

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In mid July, I made five predictions for the second half of this year.

Here’s how I fared:

Prediction 1. All of 2009’s 10 largest EMS companies – Foxconn, Flextronics, Jabil, Celestica Sanmina, Cal-Comp, Elcoteq, Venture, Benchmark and Plexus – will be intact at year end, and with the exception of Elcoteq, will finish 2010 in the same order. Outcome: Fourth quarter sales remain to be reported, but given their outlooks, I nailed it.
Prediction 2. One of the mid-tier publicly traded EMS companies will be acquired, however. Outcome: Nope. After the Sanmina-SCI bought Breconridge (announced in late April), things became awfully quiet, especially given the amount of cash many top tier EMS players have on hand. I’m guessing concerns over end-market visibility coupled with tight external financing are keeping the major players on the sidelines.
Prediction 3. Component availability issues will not ease until mid 2011. Outcome: TBD, but parts are becoming somewhat easier — but not easy — to get.
Prediction 4. Foxconn’s many employee problems will blow over as the media tires of the story. Outcome: Got this right.
Prediction 5. “Computer-aided innovation” will become the big buzzword in software. Outcome: Wrong.
So for those scoring at home, that’s two right, two wrong, and one partial.

Flextronics Showing PC Muscle

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How can you not like what Flextronics is doing in the computing space right now?

The world’s second-largest EMS player just opened its fourth end-to-end computing campus in China, a one million sq. ft. behemoth that offers complete design and manufacturing services for desktop, computers, notebook products and tablets.

More significant, the move underscores that Flextronics is going right after Foxconn. Unlike some competitors that have chosen to cede entire industries to Foxconn, Flextronics is turning that approach on its head.

While most analysts see computing as a relatively flat industry over the next few years — a prediction that is complicated by the growth of 4G smartphones, which act like de facto PCs — Flextronics has grown its revenue in the segment by taking market share from the very players most saw as the entrenched winners. From practically non-existent a few years ago, Flextronics’ PC segment is expected to nearly double to $2 billion this year and is forecast to hit $4 billion in 2012.

American companies pioneered volume manufacturing. There’s no reason they should not compete in that domain anywhere in the world.