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Breakingviews

Breakingviews - Foxconn hitches bumpy ride with electric vehicles

FILE PHOTO: Foxconn Chairman Liu Young-way speaks at an event presenting the company's new technologies in Taipei, Taiwan October 16, 2020. REUTERS/Yimou Lee/File Photo - RC23QJ90N3KX

HONG KONG (Reuters Breakingviews) - Foxconn is hitching a bumpy ride with electric vehicles. The $39 billion iPhone-assembler, formally known as Hon Hai Precision Industry, wants to diversify by supplying parts for 10% of the world’s green cars by 2027. It’s an ambitious and risky goal, but the Taiwanese technology giant’s electronics expertise and deep pockets put it in a strong starting position.

A recent emphasis on autos is Foxconn’s latest attempt to reduce dependence on Apple, which accounts for about half its revenue. Broadly speaking, contract-manufacturing for electronics is a low-value business: Foxconn’s net profit margin has been shrinking for years, to nearly 2%. Moreover, the situation has become more precarious as rivals such as China’s Luxshare vie for Apple’s attention.

In a presentation last month, Foxconn’s chief technology officer unveiled a plan to be the “Android of EVs”, referring to Google’s mobile operating software that runs the majority of the world’s handsets. The idea would be for billionaire Terry Gou’s company to provide fundamental designs for carmakers, from batteries to the chassis, as well as technology that can connect vehicles and apps with one another. That looks a stretch, though: Samsung Electronics and others have long tried and failed to make the leap into software.

Still, Foxconn can play to its manufacturing prowess. Churning out auto parts, like touch screens, plays to its strengths. Existing facilities can easily be reconfigured for little extra cost, according to analysts at Taiwan’s KGI. Over the longer term, the company may even be able to pivot to higher-value components, including batteries. For now, a strong balance sheet with $6.7 billion of net cash means experiments and expansion are affordable. Profitability might improve too: Aptiv, which provides electronics and components for connected cars, generates a net margin almost triple Foxconn’s.

And while it is notoriously difficult to break into the “Tier 1” of suppliers that sell directly to carmakers, Foxconn is making inroads. It is working with Fiat Chrysler and Taiwan’s local leader Yulon Motor, as well as selling small parts to U.S. and European manufacturers. Foxconn’s electric vehicles push should pick up speed soon.

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