Foxconn's return to the future with the EV push

By returning to its earliest business model, the Apple supplier might be able to thrive beyond iPhone assembly.

Consider a scenario where Foxconn Technology Group is three times more profitable than Apple Inc. The latter company makes iPhones and earns close to $100 billion annually while the production company earns less than 5% of that. It used to be that way. 

The year was 1996 and Hon Hai Precision Industry Co., Foxconn's flagship company, delivered an incredible gross margin of 31%, while Apple maintained a crude 9.8% figure. The move marked a historical low for the Cupertino company, on the eve of Steve Jobs's departure from the company which he founded. 

Taiwanese electronics manufacturers also set a record high for the year. They have since switched roles, and last year their numbers were 42% and 6%, respectively. Foxconn plans to reverse its margin decline by going back to a core business Terry Gou started almost 50 years ago, one that was driven by early computers, games consoles, and even dot matrix printers.

In Gou's successor, current Chairman Young Liu's view, electric vehicles will be akin to PCs in the 1990s - and could cause the company to experience levels of profitability that haven't been seen in 20 years. 

In the mid-1990s, the personal computer market was booming as consumers, schools, and businesses adopted those beige metal boxes. The internet was nascent at the time and companies such as Compaq Computer Corp. and Dell Computer Corp. were growing rapidly. 

The Foxconn name is derived from the myriad small components that connect all the components of a computer. Gou quickly mastered this skill.  Foxconn could charge huge markups on these inexpensive pieces of technology. 

The electronic assembly came only at the turn of the century when Jobs, and his lieutenant Tim Cook, needed someone to make their hit new iPod at a massive scale and with a fast turnaround.

The Foxconn factory in Shenzhen, China, became known as iPod city soon after opening, and later became a global hub for iPhone assembly. 

Apple's device-assembly business has razor-thin margins, even though Foxconn employs up to a million workers to slot together the parts of a smartphone.  As opposed to making or buying the parts inside, the company makes more money by charging clients a premium over their costs. 

Foxconn sees the assembly of the final product as an extra service for the customer, a service that allows greater control over the entire process. The electric vehicle fills that need. In Taipei last week, Liu - who took over from Gou in 2019 - spent a lot of time talking about the company's electric vehicle efforts. 

In the past three years, it has opened factories or signed deals to manufacture in the United States, Mexico, Taiwan, China, Indonesia, and Thailand. 

Lordstown Motors Corp., Fisker Inc., and Stellantis NV are among the clients. There was virtually no mention of smartphones, much less Apple, which accounts for half its revenues.

Liu has ambitious plans that border on the fantastic. He predicts Foxconn will ship 500,000-750,000 EVs within three years, take 5% of the global market, and achieve NT$1 trillion ($34 billion) in annual sales.  The company is ambitiously targeting a two-thirds increase in gross margin to 10% - a figure last seen in 2005, two years before the iPhone debuted.

A Detroit-like assembly line isn't the goal. Foxconn sees EVs as big computers on wheels, which require a great deal of hardware inside. To supply these parts, it wants fat margins.

Foxconn has already forged a partnership - called MIH - to set industry standards, and has a reference design that clients can use if they want a vehicle 'off the plan.' This remembers how the PC industry slowly developed in the 1980s and 1990s, leaving incompatible components behind, like flat-ribbon printer cables.

For Foxconn to make money from each electric vehicle it ships, it does not need to make every electric vehicle in the world, as it does with PCs. Tesla Inc. is one client for components while Elon Musk chose to keep assembly in-house.

Foxconn is also investing in automotive chips, which have been in short supply over the past two years. Upon completion of three semiconductor manufacturing facilities by the end of 2023, it will be using the older technologies best suited for automotive components. It may not succeed. 

Liu himself is an electrical engineer, however, his company has unproven chip capabilities in comparison to Goliaths like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp.  The average car has more chips inside than all the household devices combined, so success here would give the company even greater power. 

Foxconn could become as ubiquitous in EVs as it was for PCs, a position it currently enjoys in the smartphone market. Otherwise, the iPhone manufacturer may not be remembered.

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