Analysis of Foxconn

Introduction
Foxconn, or Hon Hai Precision Industry Co, was founded 37 years ago in Taiwan by Terry Gou. The company initially started as a local computer component manufacturer. Over the past decades, Foxconn had been continuously growing to become the world’s largest electronic components manufacturers with the consolidated revenue of 59.32 billion US dollars in 2010.
As the largest electronic manufactures, Foxconn provides electronic components to major electronic devices manufacturers across the world. Its clients include Apple, Amazon, Sony, Nintendo, Microsoft, Dell and HP.
Broad Environment

Sociocultural: In the past year, Foxconn’s image has been tarnished by reports of labor protests and employee suicides. These were the result of harsh working conditions, unfair wages and a lack of communication with the media. The sociocultural trend has driven Foxconn to improve its working surroundings and its impeccable image in society. In addition, Foxconn has remained highly confidential on its internal information. Today’s society has required the company to communicate frequently with external stakeholders. This foreseeable trend will require Foxconn to become a more transparent company in the future.

Political:
Foxconn’s manufacture sites are located in developing countries. These countries have the trend to change in laws and regulations frequently. For example, China has changed its labor regulations in recent years. In addition, Foxconn has obtained valuable contracts with the local governments to create competitive advantages, such as establishing tax exemptions while initiating capital investments. There is also a trend that developing countries will provide economic incentives to attract more investments.

Economic: Inflation, interest rate, and foreign exchange rates will contribute to a business’s outlook. For instance, foreign exchange rates can become another source of uncertainty since Foxconn has worldwide operations and uses different currencies to seal business deals. From recent economic trends, economy will remain at a low interest rate and fluctuate rapidly in the near future. High Inflation rate is highly possible because developing countries have more purchasing power than ever.

Technology: Technology is constantly evolving in the electronic manufacturing services industry. Over the past decades, technology advancement has helped the industry to produce higher quality products at the lower costs. It also requires manufacturers to update production equipments frequently in order to meet market demand. These trends are expected to be continued in the future.

Task Environment Power of Customers: High * A small number of customers * Customers make high volume purchase * The product customers are buying are undifferentiated * The company earns low profit * The customers can easily integrate backward and become their own suppliers | Power of Suppliers: Medium * Suppliers are dependent on the buying industry for a large percentage of their total sales * The cost of switching suppliers is not high * Few substitutes exits * Suppliers have differentiated products * The suppliers can integrate forward and become competitors | Entry Barriers: High * High economies of scale * Large capital investments * Existing firm possession of resources that are difficult to duplicate in the short term such as favorable locations and political contracts * A past history of aggressive retaliation | Rivalry: High * Slow industry growth * High fixed cost * Lack of product differentiation * A large number of competitors * High exit barrier | Indirect Competitors/Substitutes: Low |

Internal Stakeholders
Physical: Foxconn has been making efforts to switch from labor-based manufacturing to robot-focused manufacturing process. With the majority of its facilities located in China, Foxconn has taken advantage of the resources available near the manufacturing areas. The company integrates supplier, manufacturer, distributor, and logistics processes in those areas to reduce time, redundant efforts, and inventory costs. Additionally, Foxconn ranks the seventh in patents in America and have accumulated over 25,000 patents granted worldwide by 2010. Foxconn’s leading position of innovation in the industry is a competitive advantage that will not be imitated for a few years.
Human: Foxconn’s human resources management is a major weakness to the company. The company has seen its reputation suffer following a string of suicides that began occurring at Foxconn's factories in China. During 2010, there were a total of 18 suicide attempts, with 14 deaths. Nearly all the deaths were from workers jumping off from the company buildings. Poor working conditions and long hours at Foxconn's factories have been blamed for the suicides. Foxconn has made changes by creating a 24-hour support hotline for workers and installing nets at the company's buildings. Foxconn has also said that it now allows for a 60-hour workweek including overtime, and that it pays the highest wages in the industry. Also, the company is increasing the amount of automation in its facility sites to improve overall working environment.
General Organization: Foxconn has developed a strong relationship with its external stakeholders by incorporating its stakeholder management process into its daily operations at various levels and in different business functions. Stakeholders | Focused issues | Effort and Outcomes | Customers | EICC Code of Conduct implementation, green products, energy saving and carbon footprint | The goal is to provide customers with speed, quality, technology, flexibility, innovation, and cost efficiency. | Suppliers | Suppliers code of conduct standards, legal compliance | The goal is to demand that suppliers achieve Foxconn’s standards by conducting an annual suppliers meeting and unscheduled audits, and by setting up the website so that suppliers may learn EICC requirements and Foxconn’s standards. | Community | Environmental protectionHealthy lifeJuvenile educationAssistance for the needy | Each site is devoted to the environmental mission of “energy saving, emission reduction, going green, and recycling”. | Investors | Regular financial statement,investor meeting, and annual stockholder meeting | Foxconn has in place a spokesperson system, investor conferences, and road show activities. It publishes an SER report annually for investors’ review. |
Financial: Foxconn is in a very good financial situation compared to its industry competitors. It’s efficient operating cycle has ability to turn its product into cash. In addition, its debt to equity ratios is very high, which means that Foxconn has been aggressive in financing its growth with debt.
Knowledge and learning resource: Foxconn has an effective research and development program, as well as a climate that encourages discovery. Foxconn ranks the seventh in patents in America and have accumulated over 25,000 patents granted worldwide by 2010. This tactic knowledge is hard to imitate by its competitor and it is closely connected to other resource areas thus creating a competitive advantage for Foxconn in the industry.
SWOT Analysis Strengths
1. Strong financials2. Largest electronic component manufacturer3. Advanced production process4. Vertical integration 5. R&D technology6. Patent | Threats1. Economic Recession2. Labor regulations3. Environmental regulations4. Large competitors5. Increased labor costs 6. Decreased demand from customers such as Dell | Opportunities1. To gain design skills2. To create a transparent corporate culture3. To improve work environment 4. To strengthen the management team | Weaknesses1. Lack of design skills2. Lack of corporate transparency3. Poor corporate reputation4. Poor work environment (improving ) |
Recommendation
Based on the analysis above, Foxconn has been able to utilize its resources and technology advancement to maximize its profits and expansion. However, by staying at the status quo will be not help the company sustain its competitive positions. The company should keep up with market trends to minimize threats and to foresee potential opportunity. In order to do so, the company should consider following suggestions:
Maintain a Good Reputation
It is top priority for Foxconn to fix their reputation! Public image is not the most critical factor in deciding a company’s future; however the severe damage to image of Foxconn is deadly and will directly affecting company’s performance. Some of Foxconn’s most valued customers, such as Apple, are being very selective on the people they are conducting business with, and could potentially choose to drop Foxconn as a supplier if the problem remains. In addition, all the suicide cases happened before will scare current and prospective employees away, thus loosing valuable human resource. Even though steps have been taken to prevent similar events from happening in the future, such as improving working condition, raising compensation level and opening employee consultation program, the perceived image by the public has not really been improved.
Improve Transparency
There has been an increased regulatory focus on improving corporate transparency especially after the corporate scandals and 2008 financial crisis. Today’s society has required the company to communicate frequently with external stakeholders. Theoretically, greater transparency is good for shareholders because it leads to more informative stock prices and good for management because better and relevant information leads to better decision making. On the other hand, company with greater transparency obtains more attention from the public, and it will indirectly help improve Foxconn’s working condition.
Improve Working Environment
The leading cause to all the suicide cases is poor working environment, which includes lower pay, extremely high hours/overtime, poor living condition and lack of communication among people. The mental health of employees is especially important, not only to themselves but also to the organization as a whole. When an employee perceives injustices at work, it may potentially lead to damaged psychological wellbeing and extreme emotional exhaustion. According to a management research, these individuals are likely to feel singled out within their work environment and may start to feel unhappy about their jobs, leading to a change in job-related attitudes and behavior. As a result, their sense of commitment to the organization weakened, and an increased risk of voluntary termination and high turnover within organizations.

Product Differentiation The rivalry is very high within the industry due to reasons mentioned above. Profit margin is very low and it will become even lower especially after Foxconn decided to improve employee compensation. The most effective way is to differentiate their product. Even though most of the products are made according to industry standard, Foxconn can fully take advantage of its strong in house R&D ability and provide value thorough producing better quality/ functionality products at a slightly higher price.

Market Penetration
As the leader of EMS industry, Foxconn captures more than 50% percent of the global sales, and it is time for them to take on more aggressive actions to obtain more market shares. Given the fact that Foxconn has a strong cash flow, I believe they could potentially further lower the price and squeeze their competitors out of the business. In the worst case, Foxconn could set their price at breakeven point or at a loss, depending on how long their cash flow can sustain. As a result of aggressive market penetration, hopefully Foxconn can capture more than 80% of global sales. At that point, Foxconn will have more supplier power over their customers and be able to improve price. In addition, Foxconn would be able to lower their cost as a function of increase in production until reaches its limit.
Related Diversification Foxconn should fully take advantage of its in house R&D infrastructure and focus more on its ability in product design as opposed to product manufacturing. In addition, Foxconn could use their own raw material supplier and in house manufacture the product they designed, and distribute them using their own distributing channel. For example, since they are in the EMS industry, with a little bit of R&D on design, it is not for Foxconn to come up with their own cell phone product. Because of the vertical integration of all most the whole value chain (except retail), Foxconn is able to provide customer with a cell phone product at a much lower cost and maybe can directly compete with Apple’s iPhone.

Implementation Steps
1. Foxconn need to reset its direction, and instead solely focus on profitability, emphasize the importance on social responsibility
2. Establish a Public Relationship team that actively manage firm’s image: The founder Terry Guo admitted that it wasn’t until the fifth suicide that he decided to do something different and until the ninth one that the company sought the help of a public relationship agency adept at handling crisis. If steps had been taken earlier, Foxconn would have been in a much better scenario.
3. Communicate more with outside on a regular basis: In the 37 years of Foxconn’s history, they never talked to the press, and Most of the time their customers don’t even want them to write about anything. The scandal is the first time Foxconn exposes itself to the public in high-pitch. Boards can improve transparency by becoming more proactive in shareholder communications, making greater use of technology in communications such as annual shareholder meetings and by use of EBRL, and by disclosing more about board processes.
4. Improve workers compensation and reduce overtime
5. Create a private employee mental health consulting program: The company have established an employee mental consulting program to help solve mental issues. However the program is not very effective as the consulting experience is not private at all and only limited number of employees have participated. In addition, mental consulting is not generally accepted by the general public in China. Foxconn should focuses on creating an atmosphere where patients feel comfortable and encouraged.
6. Take on additional debt/ issue more shares to acquire its major competitors: Acquisition requires large capital, and Foxconn should obtain the capital through taking on additional debt or issue more shares. With more capital, Foxconn will be able to expend through acquisition of its competitors.
7. Use in house R&D and focus on new product design
8. Consider licensing patterns from outside sources
8. If cannot come up with own design, should consider joint venture or strategic alliance with firms with design experience
9. Fully take advantage of its integrated value chain: suppliers, manufactures and distribution channel.

Potential Risks * The company might rely too much on the PR team managing public relationship and the public might have the perception that they are doing this solely to fool the public. * Too much transparency might not be good for a company. An improvement in transparency may increase or decrease the sensitivity of stock price to earnings, and thus may either strengthen or weaken managerial incentives. In addition, too much transparency may inevitably reveal too much of our information to competitors thus decreasing our completive edge. * As the compensation package improves, the cost will inevitably increase and Foxconn may lose its market share as a result. Even though Apple might be indifferent to the increase in price as its profit margin is incredibly high, other company such as Dell or HP may drop Foxconn as their supplier as their profit margin are much lower and more sensitive to price change. * The better product offered by Foxconn at slightly higher price might not be perceived as value added, and customers would rather pay less for the standard product. * They might not be able to raise enough capital through taking on more debt and issue equities. Foxconn’s negative public image may prevent them from attracting investors. * The aggressive market penetration scheme might not be successful. The only condition for Foxconn to win this battle is their cash flow is stronger and can sustain Foxconn longer than their competitors. If for some reason its cash flow breaks down, the whole plan will fail for sure. * Product design and product manufacturing requires different expertise. Foxconn do not have any prior experience in designing electronics, their product might not be able to compete with their competitors’. * Licensing is expensive and they might not be able to find the right technology to license from * With joint venture or strategic alliance, Foxconn will lose some of the control and the partner they are doing business may not be a right fit.