Foxconn Explained: The Maker Behind iPhones

Did you know almost all of your favourite Apple products are made in China? Even if you don't see the stamp! Apple Inc. does not own a single manufacturing plant. Instead, it contracts third-party manufacturers to do so.

One of Apple's top third-party manufacturers is the Foxconn Group, which also owns the largest iPhone factory in the world, the Foxconn Zhengzhou factory. Where do you think the factory is located?

If you guessed China, you are absolutely right! 🎯

You might not know this, but Foxconn and Apple go way back to 2000. This was the year when Foxconn secured its first major contract to produce Apple's iBook G3 laptops. Fastrack to 2024, Foxconn is the largest contract electronics manufacturer in the world. Along with electronics, Foxconn also specialises in producing medical devices like ECG machines and electric vehicles.

And, today, Foxconn is also making new leaps in India: The upcoming Karnataka unit and a Joint Venture (JV) with HCL.

Before we get on with the story, let's understand what Foxconn does!

Foxconn's Business Model   

Think of Foxconn as a workshop. Instead of making their own products, brands like Apple send their designs to companies like Foxconn. Then Foxconn takes care of the entire process—from assembling parts to quality checks—allowing brands to focus on selling their products without having to invest in their own factories.

This is basically what an Original Equipment Manufacturer (OEM) company like Foxconn does in its day-to-day operations. The company excels in mass production, providing cost effective solutions and hence attracting brands like Apple, Microsoft, Amazon, etc. Impressive client base, right?

Foxconn's efficient manufacturing processes and supply chain efficiency help reduce costs and improve productivity. That's why big names like Apple prefer delegating electronics manufacturing to Foxconn instead of establishing their own manufacturing unit.

Coming back to the operational segment, 98% of its products surround 3C electronics (Computer, Communication, and Consumer Electronics). The products currently manufactured by the company are:

In the past, Foxconn focused on manufacturing services. Now, as part of its phased transformation, its business model is evolving to focus on platform solutions.

Foxconn's Business Model Transformation

The company has a very clear roadmap that involves 3 phases.

• Foxconn 1.0 focused on optimising the existing business. In this phase, the company used lean manufacturing to enhance governance and maximise margins.
• Foxconn 2.0 was more around embracing digital technologies for supply chain transparency, big data analytics, and automated procedures.

Before we get into phase 3, let’s see how phases 1 & 2 have affected the company. Its sales have seen a growth of around 5.8% CAGR over the last 5 years, in alignment with the industry's growth rate.

As you can see from the infographic above, its net profits grew at a CAGR of around 6.1%. The company's net profits are rising faster than its sales. This means that its business operations are becoming more efficient.

The stability of net margins (2.51% in 2023) and Return On Equity (ROE at 9.65% in 2023) is also a result of the improving operating efficiency.

However, its sales in 2023 (₹16.51 lakh crore) fell compared to 2022 (₹18.14 lakh crore). This is because Apple, its key client contributing over 50% revenue, is facing challenges in growing its sales in China.

• In the first 6 weeks of 2024, iPhone sales in China fell by 24% Y-o-Y.
• Apple's Chinese smartphone market has dropped to 4th place at 15.7%.

However, with Microsoft's new policy requiring all employees in China to use iPhones for work, effective September 2024, Foxconn's sales are expected to improve.

The company has managed to maintain a stable balance between its total assets and total liabilities. This shows that it can fulfil its financial obligations without being overburdened by debt. This stability is important for long-term sustainability and helping the company survive economic uncertainties.

Foxconn's Business Strategy

Now, let’s circle back to phase 3, called Foxconn 3.0, which involves the actual transformation. Foxconn is shifting from traditional manufacturing to high-growth sectors. The company's future development will be focused on 3 platforms:

• Smart Manufacturing
• Smart EVs
• Smart Cities

Each has significant potential and is currently valued at $1.4 trillion (₹115.5 trillion), with an over 20% Compound Annual Growth Rate (CAGR).

This means that the company is growing beyond manufacturing electronics. Shifting its attention towards new areas like digital health, EVs and robotics, Foxconn wants to be involved in creating the hardware and software systems that make these technologies work better. Ultimately, this strategy aims to increase its relevance and influence in the rapidly changing technological world.

New products, industries and technologies planned:

The company is focusing on its defined "3+3 categories." These include 3 industries and 3 technologies, as you can see from the infographic above.

Foxconn's business model can be interpreted as Build, Operate and Localise (BOL). This means that the company:

• Invests and works with its customers to produce their products.
• Operates the plants where these products are manufactured.
• Makes these products for local markets.

iPhones in our country are quite expensive, but this process will make them much cheaper. Keep reading to find out more.

Foxconn to Make iPhones in India "for Indians"

Foxconn is expanding into India along with a massive presence in big markets like China, where it owns the largest iPhone manufacturing factory. This move is part of the company’s plan to reduce its dependency on China in support of the C+1 Strategy!

So, here is the 101 on Foxconn's Karnataka manufacturing unit. The company is set to establish a major mobile phone assembly plant in Karnataka, known as Project Elephant. It might become the second-largest iPhone manufacturing plant in the world, creating 40,000 new jobs.

Did you know that Foxconn's full name is "Foxconn Hon Hai Technology India Mega Development Pvt. Ltd."? Quite a mouthful, huh?

Foxconn is taking more than just the iPhone route to expand in India. Here’s how:

a. Semiconductors

Foxconn has been bolstering its layout in Integrated Circuit (IC) design. This will help its customers use these technologies conveniently. The company has also formed a JV with HCL to set up a semiconductor plant in Uttar Pradesh. This facility will focus on Outsourced Assembly and Testing (OSAT) of semiconductor chips.

Foxconn holds a 40% equity stake and plans to invest approximately $37.2 million (~₹312.44 crore) in this venture.

b. Electric Vehicles (EV)

Foxconn uses the Contract Design and Manufacturing Service (CDMS) business model to perform professional division of labour. This means that the company takes care of the design, spare parts, and manufacturing of EVs while its customers can focus on building their brand and differentiating their products. This model helps bring the best Time to Market and Time to Cost.

Foxconn is in talks with the Tamil Nadu government to set up a Battery Energy Storage System (BESS) unit that will focus on electric vehicles. This BESS unit aims to support the growing EV market in India. It is forecasted to expand from $3.21 billion (₹26,322 crore) in 2022 to $113.99 billion (~₹9,463.17 crore) by 2029, with a 66.52% CAGR.

It seems like Foxconn may bring new competition to existing players like Tata Motors and Ather Energy.

Speaking of competition…Foxconn is a leader in sales, earning a revenue of ₹16,51,000 crore in FY2023. Compared to its biggest competitor, Flex, which has sales of ₹2,40,900 crore, Foxconn's sales are about 5x higher.

Other competitors like Jabil, Pegatron, and Wistron trail even further behind, as you can see in the infographic above.

The Bottom Line

Now that you are all caught up let's sum up Foxconn's expansion and what it means for India. This expansion is going to bring a major shift in the country's Electronic Manufacturing Services (EMS) landscape. The Indian EMS sector is expected to grow at a CAGR of 32% from 2021 to 2026. And Foxconn is a huge contributor to this trend. The company has already invested around $1.4 billion (~₹11,756.61 crore) in India, with more plans for the future.  

Foxconn’s investment can really help India grow. Additionally, it also contributes to the success of the Global China+1 strategy. This trending strategy has been driving investments towards India. As other large factories continue to set up, the country's future might be full of growth and increased employment opportunities. Foxconn’s Project Elephant is set to add 40,000 new jobs.

Do you think it could also make iPhones cheaper? Let me know in the comments!

*Disclaimer: The stocks and companies discussed above aren't a recommendation from Finology Insider and shall not be construed as a replacement for professional advice. Consult a professional or conduct the necessary research before making investment decisions.

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