Foxconn's EV push takes it back to the future

Consider, if you will, a scenario where Foxconn Technology Group enjoys margins three times fatter than Apple Inc. That may be hard to imagine because the developer of iPhones is one of the largest companies in the world, earning close to $100 billion annually, while the one that makes those devices brings in 5% of that. 

But this was once the case. The year was 1996, and Hon Hai Precision Industry Co. — Foxconn's flagship — posted a gross margin of 31% while Apple delivered just 9.8%. It was a historic low for the Cupertino company, during Steve Jobs's hiatus from the business he founded. It was also a record high for the Taiwanese electronics manufacturer. The roles have since switched and last year they posted figures of 42% and 6%, respectively. 

Yet Foxconn has a plan to reverse its margin decline by going back to the core business that Terry Gou started almost 50 years ago, one that preceded the iPod and iPhone and was driven by a boom in computers, early games consoles and even dot-matrix printers. If Gou's successor, current Chairman Young Liu, is right, then today's electric vehicles might be akin to the PCs of the 1990s — and could become a catalyst for levels of profitability not seen in 20 years. 

In the mid-1990s, personal computer uptake was booming, with consumers, schools and businesses rushing to install those beige metal boxes on their desks. Companies like Compaq Computer Corp. and Dell Computer Corp. were growing fast, and the internet was in its nascent phase. Gou found his niche early on, developing and churning out the myriad small components that connect all the parts of a computer — hence the name Foxconn. While these little pieces of technology had low price tags, clients bought them by the bucket, and Foxconn could charge huge markups. 

Divergence  | Apple's profit margins kept rising during the iPhone era, while its chief assembly partner Foxconn went in the opposite direction
Large-scale assembly of electronic gadgets didn't come until the turn of the century when Jobs and his lieutenant Tim Cook needed someone to manufacture their hit new iPod at a massive scale and with a fast turnaround. Soon, Foxconn's factory in Shenzhen, southern China was dubbed iPod city, and would later become the global hub of iPhone assembly. 

Despite hiring up to a million workers to slot together all the parts of a smartphone, Foxconn's device-assembly business isn't all that profitable and has razor-thin margins. Instead, the company makes better money from manufacturing or procuring the parts that go inside, and charging clients a premium over the cost. Putting the final product together is seen more as an extra service for the client, one that allows Foxconn to command greater control over the entire process and the components that go inside.

That's where electric vehicles come in.

At its annual shareholder meeting last week in Taipei, Liu — who took over from Gou in 2019 — spent a lot of time talking about the company's EV plans. In the past three years, it's opened factories or inked manufacturing deals in the US, Mexico, Taiwan, China, Indonesia and Thailand. Clients include American startups Lordstown Motors Corp. and Fisker Inc. as well as European carmaker Stellantis NV. Almost no mention was made of smartphones, let alone Apple, which accounts for half its revenue.

Liu's ambitions are bold, bordering on fantastical. Within three years he expects Foxconn to ship 500,000 to 750,000 EVs, take 5% of the global market, and garner NT$1 trillion ($34 billion) in annual sales from the sector (equivalent to 15% of 2021 total revenue). Even more ambitious, he is targeting a two-thirds increase in gross margin to 10% — a figure not seen since 2005, two years before the iPhone was released.

Value Difference | Apple's iPhone propelled it to becoming one of the world's most valuable companies. Foxconn, which makes the hit device, hasn't fared as well
But churning out cars from Detroit-like assembly lines isn't the goal. Instead, Foxconn sees EVs as being just like PCs — a huge computer on wheels, which require a ton of components that go inside. It wants to be the company to supply those parts and enjoy the fat margins that go with it.

Foxconn already started a consortium of partners — called MIH — to agree on industry standards, and has a reference design for any client who wants a car "off the plan." This is very similar to how the PC industry developed in the 1980s and 1990s when a plethora of incompatible components and connectors — think flat-ribbon printer cables — slowly gave way to common technologies like USB and Ethernet cables. 

This means that, just as for PCs, Foxconn doesn't need to produce every electric vehicle in the world to make money from each unit shipped. By example, it counts Tesla Inc. as a client for components while Chief Executive Elon Musk made the strategic decision to keep assembly in-house.

Foxconn is also betting on the chips used in cars, which have been in short supply over the past two years. By the end of 2023, it'll be operating at least three semiconductor manufacturing fabs, using the older technologies best suited for automotive components. It may fail. 

While Liu himself is an electrical engineer by training, the company's chip prowess is unproven — especially when compared to Goliaths like Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. But success here would set it up for even greater power, and profits, given that the average car has more chips inside than all the devices in the average household put together. 

If these bold plans pay off, Foxconn could become as ubiquitous to the EV industry as it once was in PCs — a position it now enjoys within the smartphone sector. If not, the company that makes your iPhone may be remembered as just that.

Tim Culpan. Sketch: TBS

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News. @tculpan

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.