’s Hon Hai, poster child of electronic products OEM

KIM Chang-Do Senior Business Analyst of POSCO Research Institute

ew people know about the Taiwanese company Hon Hai Precision Industry (鴻海), but is widely known because a series of worker suicides last year triggered heated F debate on China’s poor work environment. Foxconn is the trade name Hon Hai used when it entered the US market in 1985. Hon Hai was founded in 1974 by Terry Gou (郭台銘) with USD 7,500 in capital as a manufacturer of parts for black and white television sets. Hon Hai grew fast after building its manufacturing base in in 1992. The company ranked 112th among the Global Fortune 500 Companies last year.

○● Growth without its own brand Hon Hai first manufactured plastic knobs for black and white television sets, and then mainly PC connectors. The quality of knobs and connectors depends on mold design. In 1977, Terry Gou, who had raised significant

130 POSRI Chindia Quarterly�Summer 2011 Hon Hai ’s sales (Unit: $100 Mil.) 800 704 65% CAGR of sales from 1996 to 2008 618 593 600 518 405 400 280 172 200 107 44 71 5 7 12 18 28 0 1996 1998 2000 2002 2004 2006 2008 2010

Note: Sales of 2010 are based on accumulative sales during Jan-Nov. 2010. Source: Hon Hai website (www.foxconn.com.tw), Fortune global 500 capital, considered three options for investment: to bring state-of-the-art mold facilities from Japan to Taiwan; to buy land to build a plant, because land prices were constantly rising; or to procure raw materials in a lump sum and store them, because raw material prices were also rising. Keeping his company’s long-term vision in mind, Gou chose to stake his company’s future on acquiring Japanese facilities. His decision hit the mark; mold facilities introduced from Japan made mass production possible from 1980, and his company outpaced its competitors. The black and white television industry declined after that, but Hon Hai continued to record high growth rates by adapting the mold technologies it had acquired to personal computer technologies. The core of Hon Hai is Original Equipment Manufacturing (OEM). Hon Hai is often dubbed an Electronic Manufacturing Service (EMS) provider because of its concentration in electronics. Terry Gou always emphasizes that Hon Hai’s main business is mold production, and asserts, “We should not have competitors in our field.” Hon Hai has become the world’s leading EMS provider thanks to its philosophy of working only for “top customers.” In the early stages of his business, Gou pledged to work only with the world’s leading companies. In

131 Summer 2011�POSRI Chindia Quarterly fact, Hon Hai is the major OEM for many world-class companies, including Apple, IBM, Intel, Cisco, Motorola, , Sony, and Dell. Even though Hon Hai has the capability to produce finished products, it has never built its own brand. However, almost every electronic product around the world contains parts made by Hon Hai. Global companies prefer to collaborate with Hon Hai because, with no brand of its own, Hon Hai has no potential to become a competitor. This is the biggest reason behind Hon Hai’s rapid growth.

○● Hon Hai began seeking investment opportunities in China in 1977. It established a plant in Shenzhen in 1988, and hired about 100 workers. Hon Hai was one of the first Taiwanese companies to enter the Chinese market, and the most successful. Foxconn’s success story began when its Longhua Science and Technology Park was established in Shenzhen in 1996. Foxconn has been the biggest exporter in China for eight consecutive years. However, a series of Foxconn worker suicides last year cast a dark cloud over Foxconn’s success. Ten workers killed themselves by May of 2010, five in May alone. Foxconn’s corporate culture, which emphasized speed, made workers work so hard; they did not even have time to talk to co- workers while working. Some point out another reason: most young workers born in the 1980s or later have never experienced severe financial troubles, and they have no ability to endure such intensive labor. This drove Foxconn workers to the extreme measure of committing suicide. Seeing the gravity of the situation, the Chinese government set out to address the problem. Guangdong Communist Party Chief, Wang Yang (汪 洋), stated in May of last year that “the government must work together with Foxconn to take effective measures to prevent similar tragedies from happening again.” Foxconn swiftly paid compensation of nearly four times yearly salary to the families of the workers who killed themselves; hired

132 POSRI Chindia Quarterly�Summer 2011 consultants to counsel employees; and made large investments in workers’ leisure and welfare. Following the Foxconn worker suicides, the minimum wage of workers in almost every region increased by more than 20%. Foxconn also offered its workers a 33% pay raise in June and a 67% pay raise in October. Despite its troubles with worker suicides, Foxconn is still regarded as a good place to work by many workers. Since July of last year, Foxconn has held large-scale recruitment events each week at the Personal Exchange Center in Zhengzhou, Henan Province. According to its recruitment advertisement, Foxconn offers “attractive pay and bonuses, stock, and housing.” Sometimes, in an unusual scene, more than 10,000 candidates have waited in a long line stretching over a kilometer to apply for the company.

○● Relocation of manufacturing to Central and Western China Hon Hai’s market power is growing as Apple increases iPhone and iPad production. A world-class EMS provider, Hon Hai holds more than 50% of market share in the world. However, gradually decreasing profit margins suggest that growth though OEM has reached its limit. Hon Hai is considering relocating its manufacturing to China’s central and western areas because of rapidly rising labor costs and shortages of workers. In October 2010, Hon Hai announced plans to build a plant costing USD 2 billion in Chengdu, Sichuan Province. In addition, to move to the next level from simple assembly and production, Hon Hai is trying to adapt state-of-the-art technology from Silicon Valley to OEM. In November 2010, Hon Hai cemented an alliance with three venture capital companies—NEA, Onset, and DCM—to provide support to twelve Silicon Valley start-ups, including Splashtop, a software company providing an “instant-on” platform for computing devices; Enovix, a developer of rechargeable batteries; and AuthenTec, a developer of biometric security devices.

133 Summer 2011�POSRI Chindia Quarterly