But this was the case once. The year was 1996, and Hon Hai Precision Industry Co., Ltd. Foxconn Leader – 31% gross margin while Apple delivered only 9.8%. It was a historic low for Cupertino, during Steve Jobs’ hiatus from the business he founded. It was also a record for a Taiwanese electronics manufacturer. The roles have since switched, and last year they posted numbers of 42% and 6%, respectively.
However, Foxconn has a plan to reverse its declining margins by returning to the core business that Terry Gou started nearly 50 years ago, which predated the iPod and iPhone and was driven by a boom in computers, early game consoles, and even dot matrix printers. If Joe’s successor, current chairman Yong Liu, is right, today’s electric cars may be akin to the PCs of the 1990s — and could become a catalyst for levels of profitability not seen in 20 years.
In the mid-nineties, the popularity of personal computers was booming as consumers, schools, and businesses rushed to install those beige metal boxes on their desks. Companies like Compaq Computer Corp and Dell Computer Corp were growing fast and the internet was in its infancy. Gou found his niche early on, developing and releasing the myriad small components that connect all parts of a computer – hence the name Foxconn. While these small pieces of technology have low price tags, customers have bought them by the bucket and Foxconn can charge huge fees.
Large-scale assembly of electronic gadgets didn’t come until the turn of the century when Jobs and his assistant Tim Cook needed someone to manufacture the new, widely successful iPod with a rapid turnaround. Soon, the Foxconn factory in Shenzhen in southern China was called iPod City, and later became the global iPhone assembly center.
Despite employing up to a million workers to connect all the parts of a smartphone together, Foxconn’s hardware assembly business is not entirely profitable and has very slim margins. Instead, the company makes better money manufacturing or purchasing the parts that go in, charging a premium on the cost to customers. Putting the final product together is seen as an additional service to the customer, one that allows Foxconn to have greater control over the entire process and the components that go inside.
This is where electric cars come in.
At last week’s annual shareholder meeting in Taipei, Liu – who took over from Joe in 2019 – spent plenty of time talking about the company’s electric plans. In the past three years, it has opened factories or concluded manufacturing deals in the United States, Mexico, Taiwan, China, Indonesia and Thailand. Clients include US startups Lordstown Motors Corp and Fisker Inc. In addition to the European automaker Stellantis NV. Smartphones are almost never mentioned, let alone Apple, which accounts for half of its revenue.
Leo’s ambitions are bold and close to imagination. Within three years, Foxconn is expected to ship 500,000 to 750,000 electric vehicles, capture 5% of the global market, and garner NT$1 trillion ($34 billion) in annual sales from the segment (equivalent to 15% of the total revenue for the year 2021). Even more ambitious, it’s targeting a two-thirds increase in gross profit margin to 10% — a number we haven’t seen since 2005, two years before the iPhone was launched.
But getting cars off assembly lines like Detroit isn’t the point. Instead, Foxconn sees electric vehicles just like computers – a huge computer on wheels, which requires a lot of components that go inside. You want to be the company that supplies those parts, and enjoy the fat margins that go with them.
Foxconn has already started a group of partners – called MIH – to agree on industry standards, and has a reference design for any customer who wants an “off-plan” car. This is very similar to the way the personal computer industry developed in the 1980s and 1990s, when a plethora of incompatible components and connectors—think flat ribbon printer cables—slowly gave way to popular technologies like USB and Ethernet cables. This means that, just like with computers, Foxconn doesn’t need to produce every electric car in the world to make money from every unit shipped. For example, Tesla Inc. as a component customer while CEO Elon Musk made the strategic decision to maintain the assembly within the company.
Foxconn is also betting on chips used in cars, which have been in short supply for the past two years. By the end of 2023, at least three semiconductor manufacturing units will be operational, using legacy technologies best suited to automotive components. may fail. While Liu himself is an electrical engineer by training, the company’s chip prowess is unproven–especially when compared to Goliaths like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. The average car has more internal chips than all the appliances in the average home combined.
If those bold plans come to fruition, Foxconn could be just as ubiquitous in the electric car industry as it once was in computers — a position it now enjoys in the smartphone sector. If not, the company that makes your iPhone may be remembered as being.
More from this writer and others at Bloomberg Opinion:
• Tesla is hedging its own global supply chain bets: Anjani Trivedi
Tech companies have found a way out of China: Tim Colban
• Manufacturers embrace DIY supply chain: Brooke Sutherland
This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.
Tim Colban is a columnist for Bloomberg Opinion covering technology in Asia. Previously, he was a technical reporter for Bloomberg News.
More stories like these are available at bloomberg.com/opinion