Hon Hai’s bid to be less reliant on Apple is becoming urgent

Another organization which is far too reliant on Apple’s favors is Foxconn, the contract manufacturer owned by Hon Hai Precision Industry of Taiwan. The company has been making radical moves over the past few years to diversify its business and become less dependent on deals to make iDevices, and its recently released fourth quarter 2017 results show that these changes can’t come too soon.

Hon Hai’s figures 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.

The Taiwanese company reported net income of NT$71.7bn ($2.5bn) for the quarter, which was above expectations, but only because of the Sharp transaction, which saw Hon Hai sell $3.1bn worth of Sharp shares to ES Platform, an employee partnership. However, revenues were at a record NT$1.73 trillion.

“The main profit gains came from the non-operating end. Hon Hai disposed of Sharp’s special shares in the same period, recognizing up to NT$66bn,” Arthur Liao, an analyst with Fubon Securities, wrote in a note Saturday. “Without this, EPS in the quarter would only be around NT$1.44.” Other analysts thought the EPS figure might have been as low as NT$1.28, and that would mean net income totalling only about NT$25bn without the Sharp sale, the lowest result since 2010.

Hon Hai also missed analyst estimates in its gross margin and operating profit margin figures.

Full-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.

Hon Hai gets more than half its revenue from Apple, but is looking to move into other businesses. Electronics manufacturing is still the heart of the business, 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.

The company is also 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.

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 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.