Contract Manufacturing: The Case Study of Foxconn

In 1974, the Taiwan-based firm Hon Hai Precision Industry Company Limited, better known in Western mar­kets by the name Foxconn Technology, was founded by Terry Gou (Hon Hai Precision Co. 2013). During the first years of its existence, the company produced channel-changing knobs for television sets. In 1988, it be­gan to invest in mainland China by establishing production locations in several regions of the country and by expanding its business to computer assembly. Nowadays, Foxconn is one of the largest partners in terms of original equipment manufacturing (OEM) in the world (Yiwei 2014). A broad range of OEM contracts have helped Foxconn to learn and assimilate advanced technological knowledge from globally leading firms. Fox- conn has re-invested the profits made in OEM business, in building the firm’s owned global research and development, manufacturing and sales network.

For example, in 2010 Sony’s state-of-the-art LCD television set plants in Slovakia and Mexico were bought by Foxconn (European Commission 2010). In 2016, Foxconn finalized the acquisition of Sharp, a deal worth approximately 3.5 billion US dollars. As part of the acquisition, Sharp’s president and chief executive officer Kozo Takahasi stepped down from the role, with Tai Jeng-Wu, vice chairman of Foxconn, named as his re­placement (Chanthadavong 2016). In 2018, Foxconn acquired Belkin, a privately company with more than 1,400 employees with products sold in more than 50 countries around the world. Headquartered in Playa Vista, California, Belkin International Inc., designs and assembles Wi-Fi networking devices for home and business; mobile accessories for laptops, smartphones, tablets; home energy management, home automation and intelligent water solutions; plus, a broad range of connectivity and energy power products. (Belkin 2018).

Today, as one of the globally largest contract manufacturers, especially for global consumer electronics com­panies, Foxconn employs more than one million people in China and Taiwan and operates over 200 repre­sentative offices and subsidiaries across Asia, Americas and Europe (Foxconn 2019a). Foxconn is the major assembler of computers for Hewlett Packard, Dell, and Acer; and it manufactures iPhones and iPads for Ap­ple Inc., PlayStations for Sony, the Nintendo Wii, Nokia smartphones, and Amazon’s Kindle Fire and Echo devices (Foxconn 2019d). Foxconn represents one of the largest suppliers for Apple Inc. About 40 percent of its revenue is generated by the OEM partnership with Apple. Apple’s relationship with Foxconn became so extensive that the Taiwanese firm has been building factories for the exclusive purpose of assembling Apple products (Chan, Pun, & Selden 2016). In addition, Foxconn designs its firm organization with partic­ular consideration of Apple. The rise of Foxconn positively correlates with the success of Apple. Two ‘Apple business groups,’ named the ‘integrated Digital Product Business group’ (iDPBG) and ‘innovation Digital Sys­tem Business Group’ (iDSBG) have become ‘rising stars’ at Foxconn in the past years according to a Foxconn production manager (Chan et al. 2016). These ‘Apple’ business groups have become a separate unit of Fox- conn’s firmorganization. Foxconn’sbusinessgroupsprovide customersservicessuchasdesign development, trial production, small-scale production, mass production, global logistics and after-sale services (Foxconn 2019c). Several business groups compete within Foxconn on cost efficiency and speed, engineering service and added value in order to maximize the firm’s profits. The iDPBG Business Group was established at Fox- conn in 2002. At the beginning iDPBG was a relatively small business group handling contracts with Apple. According to Foxconn production manager, Foxconn assembled Macs and shipped them to Apple. A couple of years later, Foxconn recorded higher order volumes for Apple Macs and iPods than for any other contract partner of Foxconn (Chan et al. 2016).

Apple’s high quality standards forced the Taiwanese contract manufacturer to sharpen its technological edge. When it came to the iPhone, Foxconn not only handled manufacturing and met tight delivery deadlines but also played a crucial role in realizing Apple’s aesthetic product vision. Foxconn was able to seamlessly com­bine aluminum parts with frictional heat, and used a technique called anodization to process the surface of the metal. It is no exaggeration to say the success of the iPhone depended on Foxconn, and Foxconn’s growth hinged on the iPhone. Their lock-step approach extends beyond the factory, too. Foxconn, along with its Japanese unit Sharp, joined Apple in investing in SoftBank Group’s USD 93 billion tech fund (Kanematsu 2017).

Nevertheless, in recent years, several scandals have erupted because of labor rights violations at Foxconn fac­tories. In addition to miserable working conditions, including overtime issues, unpaid wages, and accidents, suicides of employees were revealed in the media. Finally, Foxconn and Apple Inc., the most important buyer of Foxconn products, were forced to implement reforms that included a reduction of non-paid working hours. The Fair Labor Association was hired to control working conditions (O’Toole 2013). In recent years, Foxconn announced several times that robots would be utilized in the production line in order to raise efficiency and decrease labor costs. This change could also be a chance to distance the company from accidents, suicides, and other conflicts at the factories (Mozur & Luk 2012). In its corporate social responsibility (CSR) program Foxconn announced to the public (Foxconn 2019b, 2019c):

In 2018, we integrated sustainability practices into the strategic areas of our business, namely the Internet of Things, Big Data, cloud computing, smart lives, Industry4.0, automation, and robotics engineering. Through these strategic alliances, we deepened our capacity to bring to life an AI 8K+5G ecosystem while strengthening our legacy of technology service ca­pabilities with our ‘time to market, time to volume, time to money’ strategy. At the same time, we actively took measures to protect the source of innovation – our intellectual property. To further secure customer privacy and intellectual property rights, we established an information security team, which contributed a great milestone in 2018 – an incident-free year for the protection of customer privacy (Foxconn 2019b, 2019c).

Further, our people-centric approach is central to our mission of social and environmental responsibility. As a fair and equal employer, we know we must continuously evolve and add to the value proposition we offer our employees, so we can pro­vide a rewarding working environment that is among the best in our industry. Our employees are our most important asset. In 2018, we had a new business insurance program (group captive insurance), which protects our employees when they encountering occupational injuries, medical treatments, accidents, and etc. Meanwhile, we also invest the future of our em­ployees by offering continuing education and training programs, including courses available at Foxconn University and other opportunities of professional and personal development. In addition, we take our obligation to provide a healthy and safe workplace for all of our employees very seriously (Foxconn 2019b).

However, in September 2019 another report was published in the media that Foxconn violated a Chinese labor rule by using too many temporary staff in the world’s largest Apple iPhone factory. The companies confirmed this, following a report that also alleged harsh working conditions. The claims came from China Labor Watch (CLW). The non-profit advocacy group investigates conditions in Chinese factories, and says it has uncovered other alleged labor rights violations by Apple’s partner in the past. CLW said undercover investigators worked in Foxconn’s Zhengzhou plant in China, including one who was employed there for

four years (Gurman 2019). One of the main findings: temporary staff, known as dispatch workers, made up about 50 percent the workforce in August 2019. Chinese labor law stipulates a maximum of 10 percent, CLW noted. Dispatch workers do not receive benefits that full-time employees get, such as paid sick leave, paid vacations and social insurance, which provides medical, unemployment and pension coverage, according to CLW. While base wages can be higher for dispatch workers, they are paid by third-party firms on a short-term basis and are not employed directly by Foxconn, CLW says. Apple said that, after conducting an investigation, it found the ‘percentage of dispatch workers exceeded our standards’ and that it is ‘working closely with Foxconn to resolve this issue’ (Gurman 2019).

Source: Glowik Mario (2020), Market entry strategies: Internationalization theories, concepts and cases, De Gruyter Oldenbourg; 3rd edition.

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