Foxconn moves further into chipmaking as it loosens the ties to Apple

Taiwanese contract manufacturing giant Foxconn has been extending its business model for a couple of years now, to reduce its reliance on assembling handsets – for Apple in particular. Having taken a majority stake in Japanese display maker Sharp, it now looks set to leverage that to build its first semiconductor fab.

This move, reported before the holiday by the Nikkei news agency, would take Foxconn – also known as Hon Hai Precision – a big step further on its road to making its own components and devices, rather than justs assembling for others. It already makes its own tablets under a brand licensed from Nokia, as well as operating mobile services under an MVNO deal in its home country.

The company plans to invest $9bn in a fab near Zhuhai City in southern China, according to the reports, though much of that sum will come from the Zhuhai government. The plant would reflect China’s desire to spend large sums to build up its own chipmaking industry and reduce its dependence on the west, as well as the increasing expansion of Taiwanese manufacturers and assemblers into mainland China.

Foxconn, which took control of Sharp – a display supplier to Apple – in 2016, will initially build its plant around the Japanese firm’s activities, Nikkei says. Sharp makes a range of chips including LCD drivers, processors for games consoles, CMOS sensors and other components. It operates its own fab in Fukuyama.

The new fab will initially make chips to support Sharp – for instance, for 8K televisions and camera image sensors – as well as sensors for industrial applications and connected devices. The aim is to expand the 12-inch chip facility over time to make more advanced chips for robotics and autonomous vehicles, said Nikkei.

“One of the Hon Hai group’s goals when acquiring Sharp was to gain semiconductor technology,” Yasuo Nakane, an analyst with Mizuho Securities, told EETimes. “If the overall investment totaled ¥1 trillion ($9bn), we would expect Hon Hai group and Sharp to pay ¥200bn and ¥100bn, respectively” [and the local government to invest the rest].

Foxconn is also building a 10.5G LCD plant in another southern Chinese city, Guangzhou, with production due to start in the fourth quarter of this year. Foxconn and the local government are splitting the investment about 30:70. Between them, Foxconn and Sharp have production facilities, many focused on displays, in China, Taiwan, Vietnam, Japan and India. The more Foxconn moves into chips, rather than just displays, the more investment it is likely to be able to command from China’s central government, and not just from local administrations.

However, the latest plan in China casts doubt on a previously discussed proposal for Foxconn to build an LCD plant in Wisconsin, USA. With trade tensions between the USA and China worsening, analysts believe Foxconn will reallocate funds for the Wisconsin project to ramping up its chip activities in China.

Foxconn has made other moves into the semiconductor industry in recent years, and as far back as 2003 it acquired the wireless IC module division of Ambit, formerly part of the Acer group. That unit now focuses on smartphone power amplifier modules, mainly for Apple and Samsung.

Nakane speculates that the Taiwanese firm may look for alliances with smaller foundries to increase its scale.

The diversification of Foxconn’s business is becoming urgent as Apple’s iPhone business faces slowdown, and as the contract manufacturer gets drawn into Apple’s battle with Qualcomm. Apple still accounts for about half of Foxconn’s revenues, and in November the latter said it would be forced to eliminate nearly $3bn in costs in 2019 because of likely production cutbacks in the iPhone, as well as rising competition for its core business.

According to Bloomberg, which saw an internal Foxconn document, the manufacturer plans to reduce its iPhone business costs by RMB6bn ($865m) this year and lay off 10% of non-technical staff, reflecting expected falls in revenue from this activity. The document said Foxconn faces “a very difficult and competitive year”.

A spokesperson for Foxconn said: “We regularly review our global operations. The review being carried out by our team this year is no different than similar exercises carried out in past years to ensure that we enter into each new year with teams and budgets that are aligned with the current and anticipated needs of our customers, our global operations and the market and economic challenges of the next year or two.”

Last year, Hon Hai’s first fiscal quarter figures (for the period ended on March 31 2018) were hit by the delayed launch, last year, of the Apple iPhone X, indicating how the Taiwanese firm’s fortunes remain too closely tied to those of its largest customer. Analysts said that, were it not for a one-time gain of $2.2bn from selling shares in Sharp, this would have been Hon Hai’s worst holiday quarter for at least seven years.

Hon Hai also missed analyst estimates in its gross margin and operating profit margin figures. Full fiscal year net income was NT$138.7bn, down for the first time since 2008, and profits were hit in the second half of the year, largely because of the delayed iPhone X shipments.

As well as moving into new businesses, Hon Hai is looking to mount an IPO, in China, of its Foxconn Industrial Internet (FII) subsidiary, which offers cloud services and smart manufacturing. The value of this unit could be US$43bn, compared with Hon Hai’s US$56bn. That could make the company a powerhouse in emerging technologies, including 5G.

FII aims to use the proceeds of the IPO 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.

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.