Chairman Terry Gou of key iPhone assembler Hon Hai Precision Industry, also known as Foxconn Technology Group, is no longer content with churning out gadgets for others, a business that is grappling with razor-thin margins. Now he wants to make chips, a potentially more lucrative venture.

In an exclusive interview with the Nikkei Asian Review on Saturday, the head of the world's largest contract electronics maker said that he is working with Sharp, Foxconn's recently acquired Japanese subsidiary, to build semiconductor capabilities.

"We are now integrating the two companies' semiconductor expertise as we use many (chips) ourselves," Gou said on the sidelines of a German business convention in Hong Kong.

"If Sharp can integrate with Foxconn, we can create a lot of room for growth by leveraging Sharp's know-how, Taiwan's own semiconductor manufacturing expertise, and young engineers in China," the Taiwanese tycoon told the Nikkei Asian Review.

Gou said he initially wants to build chips for televisions that can connect to the Internet, a major Sharp product, but he hinted at bigger aspirations, saying that emerging technologies such as cloud computing also will require the use of chips.

He acknowledged that Sharp currently has limited semiconductor technology because it had focused mainly on the panel business and neglected its chip unit before Foxconn completed its $3.5 billion takeover in August.

The Nikkei Asian Review has reported that Foxconn is also setting up a chip design center in the southern Chinese city of Shenzhen with help from British chip designer ARM, now controlled by Japanese tech giant SoftBank. Shenzhen also is home to Foxconn's Chinese headquarters.

While Gou did not offer details of the partnership, he appeared to confirm it by asking about the Shenzhen center: "How did you know all about this?"

Faced with weakening global demand for iPhones and other electronics products, Foxconn's sales took a hit in the January-September period, falling 3.22% to 2.95 trillion New Taiwan dollars ($93.75 billion) and are set to miss Gou's target of revenue growth of 10% this year.

Margins have been weak, too. Foxconn's net profit margin was 2% in the April to June period, compared with Apple's 18.4% in the same quarter. Apple accounts for more than 50% of Foxconn's sales.

Both chips and OLED panels offer better margins than Foxconn's core assembly business. OLED panels are expected to be adopted by Apple's premium iPhone handset next year.

Yet it remains to be seen whether Foxconn will be able to thrive in the chip sector amid a wave of consolidation in the global semiconductor industry, where major players are striving for growth and are tussling for turf in emerging fields.

Already over the past two weeks there have been two high-profile semiconductor deals.

Qualcomm announced in late October that it will acquire NXP Semiconductors for about $38.5 billion in cash to bolster its foothold in the automotive and connect-device markets, while Broadcom said this past week that it will acquire networking equipment maker Brocade Communications for $5.5 billion in cash.

In addition to expanding into the chip sector with the hope of generating new streams of income, Foxconn also hopes to improve its profitability by cutting labor costs in China with automation.

"Right now we use some 60,000 robots on our production lines. We plan to increase that number by 20% to 30% every year," Gou told the Nikkei Asian Review.

Foxconn's factory robots are actually robotic arms, known as "Foxbot," rather than humanoids.

Foxconn makes Foxbots itself.

"We've already had some lights-off facilities [due to large-scale deployment of robots] and we will have more of them in the future," Gou said.

By: DocMemory
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