Foxconn IPO would fund projects to turn it into a 5G powerhouse

Foxconn has come a long way from contract manufacturing and being best known as the iPhone maker, and is poised to become a powerhouse in emerging technologies, including 5G.

Electronics manufacturing is still the heart of the business for its parent, Hon Hai Precision Industry of Taiwan, but in recent years, the firm has been looking for higher growth, higher margin businesses to offset competitive pressures in manufacturing and the slowdown in the smartphone sector. As a result of that quest, it has diversified through a series of investments and acquisitions, and is now looking to invest heavily in new areas like 5G.

One of Hon Hai’s units, Foxconn Industrial Internet, aims to use the proceeds of an IPO in China to support CNY27.3bn ($4.3bn) of investment in hi-tech projects. In particular, one public, the division is looking to fund eight new technology projects, according to its IPO prospectus on the China Securities Regulatory Commission website.

Two of the projects would enhance the core business, focusing on artificial intelligence in manufacturing and intelligent manufacturing capacity. However, others are more general – 5G, IoT, Industrial Internet, advanced data centers, cloud computing, and communications and cloud service equipment.

These could be harnessed commercially in various ways – for intellectual property licensing, or to accelerate Foxconn’s recent moves to become a designer of technology, not just a manufacturer of it.

Those moves have included the launch of a tablet based on Nokia reference designs and a new partnership with cinema company RED to work on smaller, cheaper professional quality 8K cameras.

But Foxconn has also been attempting to take full control of some of the components it uses in its manufacturing, such as screens and memory chips, which would give it an enhanced position in the value chain and better control over supplies and margins. It has acquired Japanese display maker Sharp and attempted to buy Toshiba’s memory chip division last year; and it is building a $10bn display factory in the US.

Its new projects would give it a bigger play in advanced technology at the R&D stage and enhance its role still further. Foxconn said it will support the projects with bank loans if share proceeds aren’t sufficient. The company is looking for something more than assets to bolster its core business. It wants to be a technology powerhouse – hence why, a year ago, it invested US$600m to buy a 54.5% share of Softbank Asia Capital, the regional technology investment fund run by the Japanese operator.

Foxconn said at the time that the fund would blend “SoftBank’s investment expertise” with its own “leadership in advanced manufacturing and technology services” and global presence. It added: “The establishment of this joint venture is in line with Foxconn’s overall investment strategy and will enable the company to explore and tap new investment opportunities that will drive Foxconn’s sustainable business development.”

Foxconn is also an investor in the far larger investment vehicle, Vision Fund, set up by Softbank and its chairman Masayoshi Son, which has raised $93bn so far and, according to Softbank’s latest financial reports, has already deployed one-third of that capital.

Foxconn may not be in that league but it has been making bold moves itself, epitomized by the acquisition of Sharp, the largest overseas investment ever made in a Japanese company.

With Sharp, it will be able to sell screens and other key components directly as well as including them in its own-branded or white label devices. That will reduce its exposure to the low-margin handset assembly sector, in which rivals like Wistron and Pegatron are creating a price war.

However, turning Sharp around to become a growth driver not an albatross will be a tough task for Hon Hai CEO Terry Gou. “I have no illusions about the challenges facing this strategic investment,” he said at the signing ceremony at Sharp’s Sakai plant last year.

He has promised not to break the Japanese firm apart, despite the downward trajectory of its earnings, but Sharp has a wide range of products apart from the screens, many of them in slowing markets. Its lines include home appliances, TVs, mobile devices and solar panels. Sharp is in the process of upgrading many of these products to be web-connected and to integrate some of them within an umbrella smart home platform, but a direct-to-consumer model like that is alien to Foxconn and will require an estimated ¥60bn of investment. By contrast, Sharp’s most profitable business – business printers and projectors – is the one which requires the least emergency aid.