[Stumo Note: China builds free plants for politically favored companies like Foxconn to build products to export to the US and other countries. Its one of many anti-competitive subsidies].
[By Lorraine Luk | Updated Oct. 23, 2014 | Wall Street Journal]
HONG KONG—Foxconn, the company that assembles the bulk of the world’s iPhones, is in preliminary talks to build a factory in northern China that would make high-end screens for the phones as well, in a sign of the company’s ambition to move up the electronics food chain.
Foxconn, formally known as Hon Hai Precision Industry Co. , is discussing a possible investment with the government of Zhengzhou, about 750 kilometers south of Beijing, according to people familiar with the talks. The two sides are discussing terms such as how to divide the investment, which could reach as much as 35 billion yuan ($5.7 billion), the people said.
The two sides haven’t yet formulated a concrete investment proposal, they said. If an agreement is reached, it could be Foxconn’s biggest direct investment to date in high-end parts manufacturing.
It remains unclear whether Apple Inc. —which relies on Foxconn to make the majority of its iPhones—or other investors are being approached to invest in the display plant. Currently, Apple uses screens made by suppliers in South Korea and Japan.
The development highlights Foxconn’s ambition to supply more expensive components to key customers like Apple. While Foxconn, with revenue of $130 billion last year, has been manufacturing some iPhone components already, like metal casings and cables, mobile displays are much more difficult to make and have higher margins.
That is important to Foxconn, whose sales grew only 1% last year on an annual basis, compared with 53% five years ago, while operating profit margin growth slowed to 2.8% in 2013 from 4.4% in 2009.
Foxconn also is looking for more sources of revenue since Apple, whose business comprises nearly half of its sales, is starting to outsource production of some of its iPhones and iPads to rivals including Pegatron Corp. and Wistron Corp.
With $19 billion in cash as of the end of June, Foxconn has the hefty amount of capital needed for an investment in advanced manufacturing facilities.
For Apple, buying displays from Foxconn would help the company diversify its screen suppliers beyond Japan’s Sharp Corp. and Japan Display Inc. and South Korea’s LG Display Co.
“Foxconn hopes to capture the growing demand for high-resolution, energy-efficient displays and supply Apple and other smartphone makers in the next few years,” said a person familiar with the situation.
Apple declined to comment.
To be sure, Foxconn Chairman Terry Gou is known for making ambitious statements and floating investment ideas that sometimes don’t materialize.
In 2012, Mr. Gou acquired a 50% stake in a Sharp Corp. display factory in Sakai, Japan, and at the same time Foxconn agreed to take a 10% stake in the Japanese company for ¥66.9 billion, or $819 million at that time. Foxconn pulled out of the deal after Sharp’s share price fell sharply. In January, speaking at the company’s 40th anniversary gathering, Mr. Gou said Foxconn is studying the feasibility of building an advanced-panel manufacturing plant in the U.S., though no details have emerged since.
Foxconn also has floated the idea of building a manufacturing plant for components and handsets in Indonesia, and Mr. Gou said he would consider investing at least $1 billion during a February visit to Jakarta. Last month, Foxconn said it is still reviewing the potential investment, while Indonesia’s Finance Minister Chatib Basri told The Wall Street Journal that the plan is stalled over unrealistic demands from Foxconn, including free land and import protections.
“The chairman always has lots of new business and investment ideas and he is also approached by many government officials,” said a Foxconn official, who declined to be named. “Only a few of them materialize as the chairman wants favorable terms that most governments can’t accommodate.”
Foxconn has had more success in China, where it has more than 10 manufacturing sites that employ more than one million workers.
The company already has a factory in Zhengzhou that mainly assembles the latest iPhones and makes components such as metal casings. Thanks to strong demand for bigger-screen iPhones, Foxconn has been heavily recruiting workers in Zhengzhou, where it has been producing about a half million iPhones a day, people familiar with the matter said.
According to the people, Mr. Gou visited Zhengzhou in August, where he met government officials to discuss the investment proposal. Foxconn General Manager Wu Yi-Wei, who leads the display operation, also went to Zhengzhou with a team to survey the site last month, the person said.
Mr. Gou has said he wants Foxconn to be a major player in the display industry.
Besides the stake in the Sharp factory, Foxconn owns an 11% stake in Taiwan-based Innolux Corp. , and an undisclosed stake in a $1.5 billion joint venture with the Shenzhen city government called Century Technology (Shenzhen) Co. Innolux and Century Technology make displays for phones, laptops and monitors and supply to Hewlett-Packard Co. , Dell Inc. and Lenovo Group Ltd. People familiar with the matter say the proposed new plant would use more advanced panel-manufacturing technology, capable of making screens with thinner frames that consume less power.
“It makes sense for Foxconn to build the display plant near its major iPhone production site in Zhengzhou. The supply chain is already established there and it would save the transportation cost of displays,” said CIMB analyst Wanli Wang.
But Alberto Moel, an analyst at Bernstein Research, said Innolux hasn’t been a competitive player in the display industry, and Foxconn’s potential investment would be a big gamble given hefty capital expenditures required to build an advanced liquid-crystal-display facility.
Write to Lorraine Luk at [email protected]