Foxconn's Terry Gou & OEM's Global Pecking Order

Designed in the US, manufacturing logistics determined in Taiwan, made in China.

Actually, the post's title is a bit inaccurate insofar as all except two of the world's top electronics contract manufacturers--otherwise known as original equipment manufacturers (OEM)--are Taiwanese in origin. Both Flextronics (which makes XBox One among other things) and Jabil have American roots, but the rest hail from Formosa. Something they all share, though, is that they have been among the biggest winners from setting up shop manufacturing electronics in the PRC. The global value chain is eerily familiar regardless of the OEM concern in question: Some Western firm comes up with new designs--say, a tablet or smartphone that rotates images together with screen orientation--and then these OEM manufacturers devise ways of producing such designs on a large scale. Once they figure out how to efficiently manufacture these widgets, the grunt work of assembling and finishing them is then transferred to China.

In the value-added chain, then, Taiwanese occupy the middle position. They don't quite harvest the largest profits like Apple does by virtue of having a commercial monopoly on a globally recognized brand name. At the same time, they aren't just stuck with the grunt work either which is Chinese manufacturing, Rather, they represent fairly sophisticated middlemen who are able to translate others' designs into production on a large scale together with distribution to key consumer markets such as North America. Their place in global value chain governance is thus modular or relational in that they are able to deal with complex transactions given their formidable and expanding capabilities as suppliers. According to Terry Gou (founder and chairman of Foxconn - Hon Hai Precision, the world's largest OEM concern):

Our company grew from being a mere EMS (electronics manufacturing service) provider, or assembler, quite a while ago. Today we do upstream processes for our customers. For instance, we provide BlackBerry with IIDM (innovative integrated design manufacture) services, in which we take over from the product planning. We also work with the Canadian company in sales in Asia as well as customer support. We make our own smartphones under the InFocus brand by engaging in all stages, from planning to sales, and this helps to bolster our IIDM service.

There are some questions here, though. For one, wouldn't the likes of Foxconn want to take the next step in the supply chain and be the next Apple instead of just making stuff for them? Terry Gou rightly points out that there are very few name brands that have made it globally--readers of a certain age will remember consumer electronics forays by Nixdorf and Olivetti--both of whom now just display those wares in museums. By leaving marketing challenges to those brave enough to take risks, Foxconn remains in a safe position insofar as many of them will have their products made on an OEM basis anyway. In other words brands will come and go, but the (Taiwanese) folks who actually make these things remain the same:

Foxconn aspires to become a high-tech service company for the information age. We do not have to be a brand name. The business results of brand companies justify that. Except for a handful of them, these companies haven't generated sizable profits.

In the information age, a long-established brand can't necessarily retain consumer trust and adoration. Tesla Motors of the U.S. is a case in point. Its history is far shorter than that of Toyota Motor, or Germany's Daimler and Porsche. Nevertheless, Tesla cars are gaining popularity against those brand automakers at bay area. I myself own two Teslas. The vehicles offer a totally new driving experience.

Quibble if you will with his business practices, but few would doubt that Terry Gou knows what direction to take his business in. He is obviously a smart guy, and the other Taiwanese aren't too far behind. BTW, kudos to Nikkei Asian Review for another fine article with this interview. It is becoming a go-to source for Asian business news.