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4 December 2019

Hon Hai increases stake in Taiwanese MNO, adding MNO to its list of roles

Hon Hai Precision Industries, parent of the world’s largest contract manufacturer, Foxconn, has been diversifying its business for several years now, seeking higher margins in a range of lateral moves, from chipmaking to own-branded devices to mobile services. Its latest move is to increase its stakeholding in Asia-Pacific Telecom (APT), the smallest MNO in Foxconn’s native Taiwan, from 19.7% to 40.7%. It will pay NT$10bn (US$328m) for the additional stake in APT.

This is part of the company’s push to leverage 5G’s broadening ecosystem to pursue new commercial opportunities, reducing its reliance on a few key manufacturing customers, notably Apple. iPhone manufacturing has been a lucrative business for Foxconn – one of its factories in China, which employs 350,000 people, makes half the world’s iPhones. However, this makes Foxconn vulnerable to the downward trend in iPhone sales, as well as to any supply chain shake-up by Apple. And the current stand-off between the USA and China over trade and security allegations could lead to restrictions on imports from Foxconn’s mainland Chinese facilities.

All these factors make it important to spread its bets, and this has not just meant looking for new manufacturing customers, but seeking to reinvent itself as a technology services company, expanding into areas, such as artificial intelligence (AI) that carry better margins than contract manufacture and assembly. Hon Hai says 5G, AI and robotics are now the key technologies underpinning its strategy.

The investment in APT will give it a testbed for 5G services and devices, while its investment will help the small operator to be more competitive in the Taiwanese 5G auction, which starts next week. Hon Hai said it is already working on 5G technology with APT, and the pair have joint test licences and plan trials in several locations in northern Taiwan. They have also partnered with Intel and Taiwan’s National Chiaotung University to build 5G applications.

Foxconn took its first stake in APT in 2014, shortly after it had acquired a 4G licence in an auction held the previous year. At the time, Foxconn founder and chairman Terry Gou said the company wanted to use Taiwan as a showcase “to prove that we can offer integrated hardware, software, content and services”.

It hasn’t quite achieved that goal, but it is diversifying quickly to protect itself from any Apple fall-out. Early this year, Bloomberg, which saw an internal Foxconn document, said the manufacturer planned to reduce its iPhone business costs by RMB6bn ($865m) and lay off 10% of non-technical staff, reflecting expected falls in revenue from this activity.

Last year, Hon Hai’s first fiscal quarter figures (for the period ended on March 31 2018) were hit by the delayed launch 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 still gets more than half its revenue from Apple, but  – though electronics manufacturing is still the heart of the business – it has diversified through a series of investments and acquisitions, and mounted a successful IPO, in China, of its Foxconn Industrial Internet (FII) subsidiary, which offers cloud services and smart manufacturing.

This 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 acquired Sharp and attempted to buy Toshiba’s memory chip division last year; and it is building a $10bn display factory in the USA.

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.