How Does Foxconn Do It?

Adam Pick - August 14, 2006

During the past five years, contract manufacturers have looked at rival Foxconn Electronics with a
mixture of awe and bewilderment as the company increased its revenue by nearly tenfold and rose
to the top of the industry heap.

Foxconn’s revenues have grown from $2.9 billion to more than $27 billion, and it has climbed from
sixth to first place in the EMS industry, in just five short years. For competitors seeking to emulate
Foxconn’s success, the burning question is: What kind of magic beans does company CEO, Terry
Guo, possess that have endowed the company with such beanstalk-like growth?

iSuppli Corp. has conducted an analysis of Foxconn’s strategy and has identified four key factors
behind its success:
• Focusing on a select set of elite customers
• Servicing customers and extending the company’s reach
• Making the most of the China advantage
• Employing the “vertical-plus-assembly-plus-design” model successfully

Customer Concentration

For Foxconn, the registered trade name of Hon Hai Precision Industry, selecting the right customers
means concentrating its sales efforts on its top-10 clients. Foxconn’s top-10 customers accounted for
80 percent of its revenue in 2005, the highest level among the leading EMS providers. While
analysts often sing the praises of customer diversification, Foxconn’s performance shows that
maintaining a focus on a small group of leading buyers is a winning growth strategy in the EMS
industry, iSuppli believes.

Foxconn also has benefited from its seemingly unlimited devotion to serving its customers’ needs—a
commitment so deep it compels the company to undertake multimillion or billion-dollar acquisitions
in pursuit of that goal. The company over the past few years has purchased Ambit Microsystems, Chi
Mei Communications and Premier Image Technology, spending vast quantities of cash in order to
extend its EMS tentacles deeper into the outsourcing budgets of Cisco Systems Inc., Motorola Inc.
and Sony Ericsson Mobile Communications AB.

Fine China

The competitive advantage brought by low-cost manufacturing in Asia has forced several
international contract manufacturers to shift production to Far East facilities in locations including
Malaysia, the Philippines and Korea. China, in particular, has received significant investment from
global oiginal design manufacturer (ODM) and EMS providers.

Among all of the contract manufacturers, Foxconn has led the way in embedding the advantages of
Chinese manufacturing into its cost structure. Guo opened Foxconn's first production facility in
China in 1993 and now operates five industrial parks with a co-located supply base. Because of its
early and rapid production shift to China, Foxconn can compete on a price structure better than any
other EMS company.

Get Vertical

One of Guo’s most important contributions to the EMS business has been development of the
vertical model, which involves fulfilling multiple elements of electronics design and
manufacturing—without the brand.

Before it took on the EMS business in the 1970s and 1980s, Foxconn was a component supplier.
During that period, Foxconn integrated up the component value chain into modules, circuit boards
and enclosures.

As the outsourcing movement swept through the markets in the 1990s, Foxconn saw an opportunity
to extend its model and drive organic component sales through motherboard and systems assembly.
This “Trojan Horse” strategy continues to work for Foxconn today.

Foxconn's components and module businesses comprised 11 percent and 28 percent of its revenue
in 2004 respectively. According to financial analysts, Foxconn drives gross margins up to 30 percent
on its modules. This “module-margin lift” offers the company yet another advantage as a
counterbalance to the low gross margins of the traditional assembly work, which are in the 6
percent to 7 percent range. In some cases, it is reported that Foxconn can offer quotes 10 percent to
20 percent less than its competitors.

Over the past 24 months, both Flextronics Corp. and Sanmina-SCI Corp. have glorified the concept
of a vertical model. Both companies have signaled to the market that this model will satisfy the
increasing needs of their OEM customers and increase the margins of their almost profitless
industry. For Sanmina, the vertical model has been challenging. During its last conference call
Sanmina CEO, Jure Sola acknowledged that both its printed circuit board and enclosures businesses
have failed to achieve their targeted margins of greater than 10 percent.

That Old Guo Magic

Whether Foxconn’s competitors can successfully emulate Guo’s strategies and recreate his success
remains to be seen. However, it’s clear that Foxconn’s remarkable run to the top of the EMS market
will continue to have a strong influence on the rest of the industry.

Adam Pick is the senior analyst in the EMS/ODM service at iSuppli Corp. A more detailed version of
this analysis can found in Pick’s new whitepaper, “Foxconn’s Strategic Coup: How Does Terry Guo
Build Success?” For a free copy of this whitepaper, click here .