Believing Foxconn Means Suspending Belief

The Foxconn makeover is in full swing, with the latest this piece from the New York Times that supposes that the world’s largest ODM is worried that Apple — yes, Apple — might be bringing it down.

When Apple was subsequently criticized for low wages and poor working conditions at his factories in China, it was Mr. Gou’s company, the Foxconn Technology Group, and not Apple, that caught the most heat.

What this conveniently ignores, of course, is that no matter how demanding and dictatorial Steve Jobs could be, those weren’t Apple employees jumping to their deaths from their Cupertino offices.

Such unpleasantries aside, what the story also reveals is that Foxconn does not intend to go head to head with its customers. There’s ample evidence to the contrary already, of course, not the least of which are the Foxconn retail stores popping up all over China, not to mention the litany of ODM phones and other consumer electronics it design and makes.

To paraphrase an old saw, believe what I say, not what I do.

 

 

 

 

 

Broken Signal

Lots of mainstream media hand-wringing over reports that Apple has returned a large number (5 million? 800 million? a gazillion?) iPhones to Foxconn for repairs.

Two things are on display here. One, that calling the companies involved for clarification or comment doesn’t appear to be part of the playbook. And two, the mainstream business press doesn’t totally grasp the Apple-Foxconn electronics manufacturing model, especially the part about repairs/returns.

 

 

Slowdown at Foxconn

Could PCs do what the rest of the EMS industry could not — derail the Foxconn train?

Over the past decade, Foxconn has been practically unstoppable. Not a backlash against China, outrage over dozens of worker suicides, at least two plant explosions, campus riots, or other pressures could stop the Taiwanese manufacturing titan.

But as Apple goes, so does Foxconn. And nowhere are the reverberations from the occasional Apple hiccup felt more than at Foxconn, where sales dropped nearly 20% both year-over-year and sequentially during the recent March quarter. While Apple also uses other big and small name suppliers, and is a 10% customer of Jabil, Foxconn’s sales to Apple could be in the range of $60 billion to $70 billion (although I tend to doubt they are quite that high, as Apple’s cost of goods sold for 2012, less depreciation and amortization expenses, were $84.5 billion, and Apple buys its own components).

Worse, however, is that the main market Foxconn plays in — PCs — continues to shrink, with no obvious signs in sight of turning around. So as HP, Dell and other key Foxconn accounts experience double-digit declines, the near-term outlook at the world’s largest electronics contract assembler has suddenly dulled.

Could the PC (as in personal computer) customers do what the PC (as in politically correct) crowd couldn’t? Finally fell Foxconn?

Apple Supply Chain Takes a Green Arrow

Interestingly, nearly half of Apple’s suppliers that underwent a focused environmental audit last year violated the company’s standards.

Those who violated standards were cited in China’s Institute of Public and Environmental Affairs (IPE) pollution database.

Apple inside

The IPE was founded by environmentalist Ma Jun, and has already gained renown for its China Water Pollution Map and China Air Pollution Map. These online maps, linked to databases of government-sourced information on pollution, give citizens, corporations, media, and other interested parties access to details related to water and air quality across the country.

The air and water pollution web site lists 80,000 records of violations by noncompliant enterprises.

The surprising thing is that the Chinese government is letting these things be tracked publicly. Perhaps Ma explains why with this statement:

“China’s environmental problem is so big that it can’t be resolved without engaging the public,” said Ma, “and access to information is the pre-condition for any meaningful public participation.”

Apple core suppliers

The report revealed other tidbits:

  • 147 facilities were not properly storing, moving or handling chemicals, e.g., some facilities did not provide anti-leakage protection or provide separate storage for incompatible chemicals.
  • Some 85 facilities failed to label hazardous waste storage locations and chemical containers, while 119 facilities lacked management procedures for labeling hazardous waste.
  • The report also outlined wastewater and stormwater management issues, and found that 96 facilities failed to adequately monitor and control air emissions.
  • Apple found only one breach it labelled as a “core violation”: a supplier intentionally dumping waste cutting oil into a restroom receptacle.

Apple’s “responsibility policy” is online, here.

Smoke and Mirrors?

Apple has cut ties with Guangdong Real Faith PZ Electron on the grounds that it was using scores of underage workers.

So while noting that this is a step in the right direction, is it cynical to suggest that Apple’s decision to fire a fairly run-of-the-mill supplier for using underage workers while basically ignoring its much larger (but harder) problem of Foxconn was promotional in nature?

 

Onshoring

Onshoring has become the word of the moment, the expression of hope, the exposure of wishful thinking to those who try to intepret relatively small onshoring activities as major moves for job and economic recovery.

Flextronics CEO Mike McNamara pointed out in an interview with Larry Dignan of ZDNet, “As you see things that get pushed back into the US, “a la” the (recent) Apple comment it is more than just having the right cost structure. You also have to design for more automation and more different kinds of productivity. So, it is an evolution; it is not just flipping a switch. You actually have to spend a lot of work in the design, all the way through to the manufacturing process, knowing where you are going to manufacture. I think it is going to take time.”

It will not only take time, it will take incentives from the government. If Taiwan can do it, why can’t America do it? A major lure could be the lowering of one of the world’s highest corporate tax rates. Another would be to remove or simplify many of the “make-do” reporting procedures and requirements that seem to do nothing but tie a company’s hands, increase costs, and create more public sector jobs.

Taiwan’s new reinvestment incentives began last month, with an aggressive goal of more than doubling the returning investment from overseas Taiwanese businesses to $6.89 billion over the next two years. Companies need to meet certain requirements, such as producing critical components or marketing products under their own brand. Taiwan’s government announced on Dec. 6 that Catcher Technology and Largan Precision will invest in new factories in Taiwan that will create some 3,800 jobs over the next few years.

Foxconn Moves Intriguing

There is a lot of speculation regarding Apple’s stated intent to build a manufacturing site in the US. This is not a major move. Only 200 jobs will be created. I cannot help but wonder if this is related to Foxconn’s (Apple’s major supply-chain device manufacturer) recent offer to help train Americans in manufacturing technologies. Is there a greater strategy about to be implemented? Is it the precursor to a potentially much larger move as costs continue to rise in China? America is still the major market for Apple where new products are introduced. Do Tim Cook and Terry Gou have a larger strategic plan? As Sherlock might say to Watson, “Methinks a new game is afoot.”

The November contraction of the US manufacturing sector does not bode well for the domestic electronics industry. According to the Institute for Supply Management (ISM), the index declined to the lowest level in three years, as national factory activity fell to 49.5% in November from 51.7% in October. Expectations had been for a level of 51.3%. Levels below 50% indicate a contraction. These figures are reflected in recent IPC book-to-bill ratios. The news in Japan is also discouraging for that nation’s interconnect industries. The Japanese Ministry of Economy, Trade and Industry showed negative growth for the country’s electronic industry in September. Not only is board production dropping, but so are board prices. Panasonic and Sharp have lost market share and are experiencing heavy losses, according to DKN Research. JX Nippon Oil & Energy (a major metal and oil supplier) has decided to close its PV silicon wafer business due to extreme global price competition. Uncertainty seems to reign everywhere. Many strategists are now working on improving efficiencies, finding new markets, and a resumption of growth in 2013.

For Americans, too? More cooperative activities reducing redundancy is needed between the IPC and the EIPC.

The EIPC made following announcement on Dec. 3: The EIPC has made an effort to provide the latest information on Standards for PCBs from Japan. The 4th edition was released at the JPCA Show in June 2011. The EIPC is encouraging the specialists in the European Electronic Industry to learn the knowledge that has been accumulated by the Japan Electronics Packaging and Circuits Association (JPCA) and documented in the Standard on Device Embedded Substrate Terminology Reliability Test/Design Guide Edition 4.0- JPCA-EB01 (2011) The English version of the document is on stock at the EIPC office in Maastricht, The Netherlands.

The Unsung IBM

As CEO Tim Cook shakes up the Apple management team and struggles to keep Apple at the top of the hyper-competitive electronics heap, I am reminded of the last time Apple saw such a fundamental challenge to its mojo.

It was the John Sculley era, when the former Pepsi exec was tapped to add some juice to the lagging MacIntosh maker. Sales rose tenfold during his five-year reign, but the tension rose between the Apple board, Sculley  and ex CEO Steve Jobs, and both ultimately were given their walking papers.

That was some 20 years ago, and while the PC wars on the Left Coast were taking their toll on Apple, a similar story was emerging in upstate New York. There, IBM, long the king of the DOS-based computer equipment world, was being overrun by competitors like HP, Compaq, Dell and Digital Equipment and had seen its stock slide more than $100 to the low $40s. Some were going so far as to predict the end was near.

About that time, the editor of the magazine I worked for visited IBM and came back with this warning: “IBM remains a manufacturer of the top rank,” a firm response to those who believed that Big Blue was about to fade to black. And sure enough, IBM overcame its own product hurdles and regained its crown.

Not that many notice. While others make news for either their stunning profits (Apple, Samsung) or stunning slides (Dell, HP), IBM has gone about its business in the professional, button-down way that its founder Thomas Watson would both recognize and approve of. While others may grab the headlines, IBM is still the bluest of the blue chips, a company that others should spend more time understanding and emulating. Through management changes and computer fads (mainframe to PC to the cloud), IBM has shown an unprecedented ability to adjust and stay relevant.

I’m not sure whether Apple under Tim Cook can duplicate the success of Steve Jobs. That’s like following Babe Ruth, the quintessential game changer, and no person should have to do that. But I do know that no matter where Apple is in 20 years, IBM will still be at the top of the computing pile.

US Commitments

When I heard early this month that Foxconn (Hon Hai) chief Terry Gou offered to train Americans in electronic manufacturing I recalled one of Apple’s excuses for putting its production in Asia, much of which went to Foxconn which now has over a million workers. Apple stated that America just did not have a sufficient number of qualified and trained technicians and engineers (tens of thousands Apple said) available to build its products here.

Then I thought, why would Gou make this offer? He certainly has not shown himself to be a good Samaritan in the past. The only conclusion I could reach was that he was planning to establish assembly operations in the US and would need a qualified work force to achieve this. Note that production of iPad minis are behind schedule and market demand. Labor costs have risen rapidly and continually in the PRC over the past five years. Hon Hai has been plagued with labor problems and a high factory worker suicide rate in China during the past few years. Gou reportedly is reported to be conducting evaluations in cities such as Detroit and Los Angeles where there is a large available labor pool. It should be noted that Foxconn has debunked the stories associated with the possible establishment of a US manufacturing base. But then, is it possible that Mr. Gou has become a good Samaritan when it comes to helping the US’s manufacturing capabilities?

Meanwhile, Gou, at a recent public event, noted that the company is planning a training program for US-based engineers, bringing them to Taiwan or China to gain first hand experience in the processes of learning product design and manufacturing. He has already been in touch with MIT regarding the program. They will also be in an environment to learn Chinese.

All this begs the question: Where are the American companies, government agencies, and elected officials that claim that they want to bring manufacturing jobs back to the US? Where is the commitment? Where is the investment? What steps are being taken to entice American manufacturers to the table? What motivation is being offered? If a foreign company can find it attractive to do so, why can’t an American company find it so, too? Even more interesting is the question, “What is the U.S. government doing to keep its current manufacturing base viable and growing?”

Is Japan’s interconnect future on shaky ground? Third-quarter results from Taiwan’s leading board makers (suppliers to Apple, automotive companies, and tablet makers) indicate that the center of HDI manufacturing has already undergone a major shift from Japan toward Taiwan and China. Taiwan’s government has been extremely supportive of this and other high-tech activities and investment by its “native” electronic (and other) companies.

“Rumors” persist that Taiyo is attempting to buy Goo Chemical in Japan. Goo owns 51% of OTC, Taiyo’s leading solder mask competitor in greater China.