A septuagenarian man tries his hand at car manufacturing again, why won't Terry Gou give up?

08/06 2024 396

Terry Gou is too "indecisive", especially in areas he is not familiar with.

Recently, Terry Gou, the founder of Foxconn, has made new moves again, sending his trusted subordinate Liu Yangwei, Chairman of Foxconn, to visit Henan three times in a row, signing a deal worth 1 billion yuan and committing to build a global headquarters in Zhengdong New District.

According to the plan, this will be an innovative industrial base integrating new energy vehicles and batteries, with much higher technical content than a mobile phone assembly factory. Foxconn, a subsidiary, has also recalled old employees with salaries of no less than 7,200 yuan, a 20% increase from the original average salary.

Gou's demeanor suggests a great enlightenment, and netizens are joking that he has been "taught a lesson by reality." What does this mean?

A few years ago, this septuagenarian man said something outrageous, "It's not Foxconn that can't live without mainland China, but mainland China that can't live without Foxconn." With these arrogant words, he reduced the production scale of factories in mainland China and laid off employees while increasing investments in Southeast Asia and the United States, following Apple's footsteps.

However, this unwavering stance was shattered by reality two years later.

The septuagenarian has come back to rethink his strategy in mainland China. There was no choice but to do so, as Foxconn's technological transformation requires a vast market, and China is a hard market to bypass.

Remember when Gou appointed Liu Yangwei as his successor. He hoped Liu would accomplish two major tasks: one was semiconductor and chip business, and the other was car manufacturing.

So far, only the semiconductor business has flourished, earning media praise as a "rising star in the semiconductor industry." It is reported that in 2023, Foxconn's semiconductor revenue exceeded 22.7 billion yuan, with an expected performance target growth of 10%-20% in 2024.

Regarding car manufacturing, after more than a decade of twists and turns, there are two phrases that describe it: "Got up early but missed the evening market" and "persistent despite repeated failures." However, born in a military dependents' village and known for being "forceful, dominant, and ruthless" as the son of a policeman, Gou refuses to give up and has embarked on a new round of struggles in his car manufacturing endeavors.

"Escape Plan" Collapses Midway

Why did Gou come back after leaving?

The reason is straightforward: "Unable to survive, one can only turn back from the sea of suffering."

At the time, following Apple's footsteps, Gou hoped that Foxconn and Hon Hai Group could reduce their dependence on mainland China and explore new business territories in Southeast Asia. Therefore, they eagerly established factories in India and Vietnam to transfer iPhone orders while rushing to the United States to pledge to build factories there, "providing at least 10,000 jobs."

Gou still has the old habit of making empty promises.

Gou often says, "What I'm best at is planning," planning for supply chain layouts and corporate survival. He is a businessman skilled at standing at the forefront of trends, with a strong personal heroism style.

Those who don't understand him may find him domineering or even cunning, while supporters see him as compassionate and righteous. However, there is a consistent image among former Foxconn employees who often describe him as "prioritizing attention-grabbing ideas."

Indeed, he has succeeded in grabbing attention, but with more talk than action.

To reduce costs and dependence on the Chinese market, Apple gradually shifted its supply chain to Southeast Asia. Always following Apple's lead, Foxconn also invested heavily in building iPhone production lines in India as per Apple's requirements.

Last March, Liu Yangwei received a high-level reception from Indian Prime Minister Narendra Modi, shaking hands with him and conveying Gou's ambition to the world. With a wave of his hand, Gou pledged to invest $19.5 billion to jointly build a chip factory with Vedanta Resources Limited in India.

On the other hand, factories were eagerly built in the United States. At the time, Donald Trump personally attended the groundbreaking ceremony of Foxconn's factory in Wisconsin, hailed by the media as an "uncommon precedent."

For a while, Gou was in the limelight. Coupled with good news like the Indian factory's skilled assembly of iPhone 15 and the imminent commissioning of the American factory, the septuagenarian was overjoyed.

However, his smile didn't last long as Gou's "Escape Plan" collapsed midway.

Firstly, the chip manufacturing plan with India failed after just 130 days. While officially stated as Foxconn's 28nm chip factory not meeting Indian standards, everyone knows the real reason: India, known for its "only taking in, never giving out" policy, is unlikely to subsidize a foreign enterprise. Without subsidies, it's extremely difficult for Foxconn to realize its chip manufacturing plan in India.

Secondly, the yield rate of Apple products manufactured by Foxconn was only 80%, too low for Tim Cook to feel at ease. Last year, iPhone 15s assembled in India were even found to contain E. coli, leading to frequent returns and forcing Apple to lower prices by 2,300 yuan for promotions.

Frightened, Cook immediately flew to Foxconn in India, halting the assembly of iPhone 16 there and urging Gou to quickly transfer orders back to mainland China.

Recruitment in the United States encountered trouble. Gou intended to pay workers the local minimum wage of $16 per hour, amounting to $4,000 per month, but labor unions demanded a raise to $6,000 per month, almost seven times the mainland salary level.

Unable to reach an agreement, recruitment was hindered. After the factory was built, Foxconn held a large-scale job fair, but only 300 people showed up for interviews, and the promised factory with thousands of workers ended up hiring only 1,000. Furthermore, with the global panel industry taking a downturn, the local government reneged on its promise of tax incentives, causing the American factory to stall.

Gou received a rude awakening and began pondering the meaning of his "escape." After two years of leaving, it seemed he had only gained some lessons, which were somewhat "not worth the effort" for Hon Hai's business expansion and Foxconn's transformation.

Hence, the septuagenarian humbled himself and made three visits to Henan to discuss investments.

A Septuagenarian Pursuing His Dream Despite Struggles

The keyword in Foxconn's agreement with Henan this time fell on "Innovative Industrial Base for New Energy Vehicles + Batteries." In other words, Gou is again ready to "suffocate" for his dream of car manufacturing.

Describing him as "suffocating for his dream" is not an exaggeration. Despite 19 years of planning in the automotive industry, his previous layouts only yielded scraps. When it comes to the "soft power" of connected vehicles and autonomous driving, Foxconn is generally not the first that comes to mind.

Gou's idol is Genghis Khan. He has the ambition to "shoot hawks with a bent bow," but lacks Khan's "patience" to expand territories.

Every investment and layout he makes is an attempt to position Hon Hai and its subsidiary Foxconn at the forefront of trends to "wait for the pigs to fly." Cloud computing, IoT, big data, 5G, electric vehicles... Wherever there's heat, there's Gou's shadow.

"Wherever the sun sets, that's where we strike." This is his strategy.

However, not every trend can make pigs fly. Over the years, the fields Hon Hai has ventured into have all been trendy, but apart from semiconductors, few have reached the top position, even though its customers span the globe, covering almost all famous brands in the IT industry.

This is attributed to Gou's management philosophy: direction, timing, and degree must all be accomplished with speed. Once he senses risk, he quickly retreats to safety, leaving partners in disarray.

"Taste but not swallow" aptly describes his approach.

As a result, Foxconn's car manufacturing endeavors have mostly ended abruptly. Originally holding the upper hand, others ended up laughing last.

Gou's pursuit of car manufacturing is not an impulsive decision but dates back to 2005. That year, Foxconn bought Antai Electric, one of Taiwan's four major automotive wiring harness manufacturers, and began manufacturing automotive electronics such as battery cables, reverse sensors, and smart devices, seen as the starting point for entering the automotive industry.

Many domestic automotive brands like Geely, Chery, and BYD emerged around 2003. Timing-wise, Foxconn's entry into the automotive industry in 2005 can be considered "an early start." Over the following decade, Foxconn broke into the supply chains of automakers like Tesla, BMW, and Mercedes-Benz.

Even in electric vehicles, Foxconn got in early. On the eve of the electric vehicle boom in 2015, Foxconn partnered with Tencent and HeXie Auto to establish Byton and AITO's predecessor, HeXie FuTeng, before withdrawing investment and fleeing in 2016.

Disillusioned with car manufacturing, Gou even said he had lost heart in it.

Long-time associates of Gou say that when he believes he has the capacity to capture a larger market share, he won't hesitate. But once a crisis emerges, he'll quickly make adjustments. Like his enthusiasm for HeXie FuTeng, which lasted only a year before he withdrew investment.

Later, Gou also invested in XPeng Motors, formed a joint venture with Geely Auto, and partnered with Stellantis Group, US EV maker Fisker, and Yulon Motor to develop and produce pure electric vehicles. However, none of these endeavors panned out.

His relentless efforts stem from his desire to shake off dependence and achieve technological upgrades. He once said, "An Apple car is just an iPhone on four wheels. If we can make iPhones, why can't we make electric cars?"

Clearly, he underestimated car manufacturing. Moreover, Gou is too "indecisive," especially in areas he's not familiar with.

Foxconn's partnership with Geely was once seen as a turning point for Gou's car manufacturing dreams. After all, both Gou and Group CFO Huang Qiulian attended the signing ceremony. Huang's presence typically signifies important strategic layouts and developments for Foxconn.

However, the joint venture has since been dissolved, and public interactions between the two parties have been virtually non-existent since the cooperation was established. The signing ceremony, attended by Li Shufu, Chairman of Geely Holding Group, and Gou, has become a mere photograph with no further significance.

In 2021, Foxconn finally unveiled its pure electric vehicle brand, Foxtron, introducing three new models: the mid-size SUV Model C, luxury flagship sedan Model E, and electric bus Model T. Contrary to expectations, Foxconn lacked manufacturing experience, and quality control was inadequate, making the new vehicles virtually invisible.

After stumbling into the "car manufacturing game" for over a decade, Gou returned as an "outsider." Elon Musk once bluntly stated, "Compared to mobile phones and smartwatches, cars are incredibly complex. You can't just go to a supplier like Foxconn and say, 'Make me a car.'" Even though Foxconn has become a supply chain partner of Tesla.

"Gou has never made any money investing in the automotive business," as those in the know often say.

In fact, Gou's entry into car manufacturing was not that of an ascetic but rather backed by Hon Hai, a manufacturing giant. Hon Hai's vertical integration has always adhered to the principle of "if you can't beat them, buy them," acquiring and forming joint ventures to enter the upstream and downstream automotive industries, expanding its layout from China to Indonesia and Thailand, and investing in areas ranging from complete vehicles to battery materials and smart cockpits.

While everything seemed ready, Gou often wavered and fled at the first sign of trouble. However, car manufacturing requires patience.

Gou lacks patience but remains Perseverance "suffocating for his dream."

Finding a "Vision" for Hon Hai

Why persist in car manufacturing despite repeated setbacks?

"I hope you won't call us a factory," Gou emphasized in an elective course at Tsinghua University. "We are a smart manufacturing base." He spares no effort to preach, aiming to tell the story of Hon Hai Group's "smart manufacturing" transformation.

At the same time, constrained by Apple, with low gross margins and weak bargaining power, Foxconn's gross margin is only one-eighth of Apple's. As the mobile phone market continues to shrink, revenue pressures are also increasing daily.

As profits dwindle, Gou realized that he needed to find a "vision" for Foxconn and Hon Hai.

This 3C contract manufacturing giant hopes to embark on a new journey by focusing on semiconductors and car manufacturing. Equipping manufacturing with chips and logos to become the future Huawei is the mission Gou entrusted to Liu Yangwei.

On the Fortune Global 500 list, Hon Hai consistently ranks among the top 30, second only to Apple and Samsung in the electronics industry. Hon Hai's semiconductor business surpassed NT$100 billion in revenue in 2023, a remarkable achievement.

However, when examining Hon Hai's profitability data, it's hard to believe it's a tech company. The gross margin is in single digits, and the net profit margin is "stably" around 3%. This explains why Gou insists on integrating Hon Hai into the car manufacturing landscape.

Foxconn hopes to build a technological moat in automotive software and hardware. Last year, Terry Gou formulated the "3+3 Transformation Strategy" for Foxconn. The first "3" refers to Foxconn's involvement in three new industries: contract manufacturing of new energy vehicles, digital health, and robotics. The second "3" is the independent R&D of three new technologies: AI, semiconductors, and mobile communications.

Through the "3+3 Strategy," it can be seen that Foxconn aims to become a high-tech company driven by R&D and mastery of core technologies. Its initial intention in participating in vehicle manufacturing is also to promote the open platform MIH.

As an electric vehicle development platform, the MIH platform currently has 1,500 partners, many of whom are generally not strong. At the time, Wei Guozhang, who was responsible for software on the MIH platform, hoped to see a "softer Hon Hai" on MIH.

However, Foxconn's strengths lie in manufacturing and supply chain management, electronic component R&D, and abundant resources. The core competitiveness of new energy vehicles lies in key technologies such as chips, batteries, autonomous driving, and intelligent connectivity. Foxconn has weak technical accumulation and lacks independent R&D capabilities.

From Liu Yangwei's remarks, it can also be seen that one focus of Foxconn's vehicle manufacturing plan is to build production bases and provide contract manufacturing services externally. Liu said, "I hope to help Tesla build cars someday." Terry Gou has also repeatedly stated that contract manufacturing of electric vehicles is easy for Foxconn.

"Foxconn can play a critical role in electric vehicles."

Can previous contract manufacturing experience and technology be replicated in the electric vehicle production field? Liu Yangwei believes he can replicate the same success in the electric vehicle sector. The value Foxconn provides is reducing the significant investments required for automotive development and manufacturing.

The situation is not as relaxed as one might think. Although Foxconn is involved in upstream and downstream operations in the industrial chain, they are relatively dispersed.

Terry Gou is not unaware of the situation; on the contrary, it is precisely because he sees it clearly that he has made three visits to Henan Province to reinvest. Foxconn has a desire to break the ice. This time, Terry Gou not only attended in person but also brought an investment of up to 1 billion yuan, planning to build a new corporate headquarters building in Zhengzhou.

The choice of Zhengzhou is easy to understand. Firstly, Foxconn has operated there for many years, earning a certain market recognition. Additionally, Zhengzhou is no longer the underdeveloped city it once was. Many new energy vehicle projects, such as those from BYD, SAIC Motor, Yutong, and FAW, have successively settled in Zhengzhou, providing more development capital and a foundation for Foxconn to "draw materials locally" for vehicle manufacturing.

The re-emergence of the septuagenarian is also influenced by Apple's choices. For the upcoming iPhone 16, Apple has added BYD and Luxshare Precision to its supply chain, making them new contract manufacturing partners.

Apple's decision to bypass Foxconn without notice has made Terry Gou thoroughly uneasy. However, how long can Terry Gou persist in entering the vehicle manufacturing industry this time around? It remains to be seen.

After all, after 19 years of vehicle manufacturing, Foxconn returns with nothing.

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