Foxconn Wants Change. Terry Gou Needs a New Mindset First

(Bloomberg Gadfly) -- Terry Gou wants to transform his empire. First, he'll need to reform his approach.

As chairman of Foxconn Technology Group, Gou gets half his revenue from Apple Inc. That business model is pretty straightforward: gather all the parts that go into an iPhone -- many of which are made by his own business units -- and assemble them with the help of up to one million workers.

Straightforward, yes. Easy, no. The fact that Foxconn is so good at scaling up production makes it seem simple. His flagship, Hon Hai Precision Industry Co., has dominated in the face of competition from compatriots Pegatron Corp., Wistron Corp. Compal Electronics Inc. and Inventec Corp., proving that not just anyone can churn out 25 million iPhones a month. It also means that Tim Cook needs Gou as much as the reverse.

That's why talk of Foxconn weaning itself off the teat of Cupertino is just that. Hon Hai garnered $73 billion in annual revenue for 2016, or 54 percent of the total, from just one client. That's a lot of milk and honey.

Foxconn Wants Change. Terry Gou Needs a New Mindset First

I have no doubt that Gou was serious when he told employees at Foxconn's year-end party on Sunday that he plans to focus more on new fields, including automation, IoT, artificial intelligence and big data.

But he's said all this before, often with great fanfare. Five years ago Foxconn announced plans to work with the Mozilla Foundation to develop "a brand new integrated approach to providing hardware, software, content and services." That went nowhere, and Mozilla recently laid off dozens of staff. Similar can be said for Gou's moves into data centers, retail, and software development.

Gou's biggest problem is his mindset. He still thinks like a manufacturer. This was evidenced over the weekend wherein he claimed that manufacturing is the foundation of the real economy, and without which there'd be no real industry. Kind of true, I guess, in the same way that without mining, you wouldn't have smartphones. But it almost ignores the fact that some of the world's biggest technology companies are decidedly non-hardware.

Gou also manages like a manufacturer. His staff are accustomed to being on-call 24-7, working crazy long hours, rushing to hit deadlines, and rarely given a chance to breathe or think outside the box. Business units run their own profit and loss accounts, meaning that even some research divisions must come up with ways to make a dime.

Foxconn Wants Change. Terry Gou Needs a New Mindset First

Such a work environment isn't conducive to the types of new industries Gou wants to develop, where creativity, room to experiment, and freedom to fail are important spurs for innovation. Even staff at various Foxconn incubators set up to nurture new talent tend not to last long, or start looking for the exit within their first year.

That said, few of these diversification efforts have really hurt the company, yet. Some have actually found success, such as Foxconn's move into automation, which helped margins improve amid a maturing of the smartphone, PC and consumer electronics markets. Operating margins, for example, expanded from 2.4 percent in 2011 to 4 percent in 2016.

Foxconn Wants Change. Terry Gou Needs a New Mindset First

They haven't added much though, either. Last year's 8 percent growth rate is an improvement over the prior year, but a long way from the salad days of pre-2010. Size could be used as one reason for the slowdown, but the heavy weight that Foxconn places on just one client indicates this also is just an excuse.

It makes sense that Terry Gou wants to develop new businesses. But he needs to develop a new mindset first.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

  1. That figure is likely to fall for amid those iPhone X woes.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

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