Transcription
This video was sponsored by CuriosityStream in partnership with Nebula, where I've just released my first ever Nebula Original.
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iPhone City? Surely there is a place somewhere in California where the milk and honey flows, luxurious Apple Stores adorn every street corner, series benevolent wisdom guides celebrities through their day, and Ted Lasso hosts perfectly wholesome training routines on Fitness Plus. Except it's not. iPhone City is the nickname of the Zhengzhou Xinjiang Comprehensive Bonded Zone in the Henan Province of China, where about 350,000 people assemble about half the iPhones in the world. And it is one of the crown jewels of the world's largest contract manufacturing company by far, Foxconn.
The Taiwanese giant also has 11 more facilities in mainland China alone, including the Shenzhen-based, completely walled-off Longhua facility, often referred to as Foxconn City, that operates with up to half a million people. As well as plants across Vietnam, India, Brazil, Mexico, the Czech Republic, and even the U.S., where its notorious Wisconsin plant drew so much attention over the last few years. Foxconn is involved with almost every consumer electronics item that you own. So, in the 80th episode of the Story Behind series, let's talk about how one man built a contract manufacturing empire, and why that company now wants to move on to do other things instead.
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The sheer scale of Foxconn is almost unimaginable. It is about as large as its 10 biggest contract manufacturing competitors combined. It is both the single largest private employer and the exporter of China. In peak manufacturing seasons, it rivals Amazon for the place of the world's largest tech company in terms of employee counts. A few years ago, it was reported to produce about 40% of all electronics worldwide. It is by far the biggest company of Taiwan by revenue, about four times as large as its nearest competitor, TSMC. And while it is a bit tricky to compare companies across industries and across countries like this, it slots roughly in between the largest American tech giants by revenue, comfortably surpassing the likes of Facebook and Microsoft.
Foxconn has 26 subsidiaries, of which just for scale, one has about 44,000 CNC machines alone. Plus, they are invested in many other companies too. And while they are most well known for basically assembling products on behalf of other tech companies, from iPhones to Xiaomi phones, Xbox, PlayStation, and Nintendo consoles, computers, TVs, etc., by now, they actually do far more than just that. Foxconn manufactures many of the individual components like printed circuit boards, connectors, touch modules, etc., that go into the products that they assemble for others. They often also develop and design entire products for their clients from the ground up, with many of the new Nokia phones under the HMD leadership, for example, being products of Foxconn's FIH subsidiary. And the company even owns multiple major consumer brands too, such as Sharp, Belkin, Linksys, and Wemo, where they have majority stakes, or the Nokia maker HMD, where they have a minority stake. In other words, they are basically involved with every type of consumer electronics manufacturing that exists, and they are absolutely gigantic.
And yet, neither management nor investors seem particularly excited about where the company is today. See, high revenues and huge scale don't mean much if you can't also turn that into lots and lots of profit. And this is where Foxconn has a particularly tough business. Despite having revenues four times as high as Taiwan's other darling tech company, the chipmaker TSMC, Foxconn makes just a quarter of the profits that TSMC does. They only got to keep four of the $186 billion of revenue that they generated last year, a mere 2% margin, compared to the insane almost 40% of TSMC and the 20% to 30% that the American tech giants typically make, leaving Foxconn as a significantly less lucrative business than basically any other tech company at its size.
Contract manufacturing is a particularly cutthroat business, and profitability isn't even the only concern of Foxconn. So let's take a look at how they managed to establish themselves as the king of this particular hill, and where they are trying to go to next.
The story of Foxconn starts with its legendary founder, Terry Gou. Originally called Guo Taiming, born in Taiwan to parents who fled from the mainland in 1949. Terry started his life as a factory worker. When he was 24, he got a loan of $500 from his mother that he started the Hon Hai Group with in Taipei, originally simply making plastic TV tuner knobs and radio buttons. The company employed 10 elderly Taiwanese people. And with time, Terry kept working his way up, moving on to making connectors, cables, and other plastic components for electronics, slowly but surely winning larger and larger customers like Atari.
His big break came from relentless optimizations and manufacturing innovations, like figuring out how to automate the making of parallel cables, which got him entry to Dell's supply chain. And from his legendary salesmanship, which saw him go on an 11-month tour across the U.S. in the 1980s to gain some customers. He reportedly barely spoke English at first, but he rented a Cadillac to get around and quickly got nicknamed "Terry the Talker," as he was apparently so determined he could still convince anyone to work with him. By then, his company picked up the name Foxconn, which apparently stands for "fox" as the animal, as it's smart, and "connectors," which was their main product back then.
And on his tour, he relentlessly chased down prospective customers, cold-calling countless factories in 32 states, getting interviews by sometimes sweet-talking his way through receptionists and sometimes even getting thrown out by building security. These were the days when you couldn't just hop onto Alibaba or something and find the suppliers that you needed, and Terry put the legwork in to make sure that his company had the clients. After collecting customers, he returned and built up manufacturing capabilities, for example, by opening up their first Zhengzhou plant. And by 1996, he was ready to move past the just making components when he took the jump off a cliff and figured out how to build an airplane while you are falling approach.
Despite only ever having made connectors and knobs at that point, Terry the Talker apparently talked Compaq into buying complete computer cases from Foxconn. He then subcontracted that job to other manufacturers, copied their processes, and improved it, ending up making full Compaq computer chassis instead. And when a then-budding supply chain manager called Tim Cook left Compaq to help Apple figure out their contract manufacturing business, Terry Gou followed too, helping Apple figure out how to make the aluminum alloy cases of the Apple Power Mac G5 that many others have struggled with. And he was first in line to offer manufacturing the iPhone at a loss as well, in hopes that that business would expand in the future and would eventually lead Foxconn to profits.
Terry was not only a terrific salesman, he also made lots of really risky bets, most of which paid off, which means he was probably very smart and also really lucky. And at the same time, he also relentlessly helped his customers in three key ways. First, of course, Foxconn was great at solving hard technical problems around manufacturing. But second, they were also masters of navigating governments. And third, they were ready to do the dirty work of relentlessly squeezing the workers on behalf of their clients as well.
According to a fantastic article from the New York Times, which I've linked to down in the description, the fabled iPhone City was basically built from scratch by the Zhengzhou city governments. The roads, the power plants, the airport, basically all provided billions of dollars worth of grants and subsidies. The government even recruited, trained, and housed many of the 350,000 employees of Foxconn in the city, and they created a whole special economic zone just for Apple, with its own customs controls and everything, so it could avoid taxes of all forms, both in China and outside.
Foxconn famously also got Wisconsin's governor to hand him almost $3 billion in tax subsidies and rip up a huge part of the state with the full endorsement of President Trump, just to eventually bail on the project. And they also made deals with governments in Pennsylvania, Indonesia, India, and various other Chinese cities, adding up to $27.5 billion in commitments. State subsidies are a common thing across the manufacturing industry, but Terry the Talker was also particularly good at creating outrageously good deals for both Foxconn and for their clients.
And his last major source of success, if we can call it that, is the one that Foxconn sadly became the most well-known for by the public: as the worker suicide cases. The various reports and investigations from labor watch organizations and quotes from business partners have repeatedly highlighted Foxconn under Terry was a ruthless and highly hierarchical machine. While manufacturing is a tough industry for workers overall, Foxconn is particularly well-known for their workers often having to complete long hours, living and eating inside tight, walled-off communities on campus, failing to report accidents, Terry making managers stand in corners if they didn't meet their targets, and referring to himself as a warlord, not unlike his apparently favorite character, Genghis Khan.
A man referred to as being worth about $2 billion dollars in nickels and dimes, Terry was such a penny-pincher that he didn't even allow people to have carpets in his facilities, as those were apparently a waste of money. In other words, Terry was ready to do the dirty work on behalf of their customers, whether it was basically exploiting their workers or sweet-talking governments out of their subsidies. And those, I guess, capabilities combined with the incredible salesmanship of Terry eventually made Foxconn into the contract manufacturing behemoth that it is today.
But contract manufacturing, as we have discussed earlier, is a low-margin business where even giants like Foxconn are ultimately replaceable. Apple, for example, constantly brings on smaller competitors just to basically remind Foxconn of that, so they keep their prices low. And with geopolitical tensions and trade wars on the rise, this business is only going to get more complicated in the future. It is no surprise, then, that Foxconn has been trying to move on from this position for a couple of years now, and they've basically come up with two different potential solutions.
First, the classic path for any manufacturer, which is just to move up the value chain from OEM to ODM and finally OBM, which is when a company goes from just assembling a product on behalf of another company based on their external plans, to the manufacturer then starting to design and develop products in-house, and finally just skipping the client altogether and selling their own products directly under their own brands. And like many of its competitors, Foxconn did try this approach with investments in companies like Sharp, Belkin, and the new Nokia revival. Foxconn basically became a company behind real consumer brands, except none of it really worked out particularly well. So they have essentially de-prioritized this business for now.
Instead, since Terry resigned and the new CEO, Young Liu, came to power, Foxconn has tried to embrace new businesses that offer higher margins, with electric vehicles emerging as their biggest focus area so far. Foxconn claims that they want to be the Android of EVs, developing both the core hardware and software that both new car startups and some existing giants will build their electric cars on top of. Foxconn is developing an EV platform from the ground up that they will let others license. They are developing a ton of the software to drive smart, connected cars, which apparently, at least, Hon Hai, the giant behind Fiat Chrysler and many other brands, has already signed up to use. They are setting up whole vehicle manufacturing plants so they can start making finished cars for others, and they are also investing into key individual components from batteries to motors, and even special automotive semiconductors, which they recently acquired a Taiwanese manufacturer for.
And while some of their initial projects have stumbled so far, such as their partnership with the Chinese EV maker Byton, many more are underway. The company thinks that it is on track to supply at least 5% of all EVs globally by 2025, at least in some capacity, and it has plans to take over much more of the market after that. In other words, they've looked at the next big product category, which according to them will be electric vehicles, and they've decided that they not only want to be a part of that, but they also want to actually develop and own many of the core technologies in the stack. And this time, they want to be in control.
Okay, and to wrap things up, here's a little bit of a teaser for my next big project that I've been working on with my team. Here's the intro to my first ever Nebula Original.
"Technorama is a brand new series. It is a love letter to the weird and wonderful ways technology gets portrayed in movies. And we apply my kind of analysis to find the deeper meanings behind the killer robots, iconic aliens, etc., on screen. The first episode that just went live on Nebula not long ago takes a look at the technophobia in the early days of cinema, all the way up to the '50s. We have many more episodes planned for the future."
And Nebula is a wonderful platform that lets us make big experiments like this, where we get to hire people and dare to work on stuff outside of just our usual topics without having to worry about upsetting the algorithms around their main YouTube channels or anything else. If you want to support my work, signing up for Nebula is a fantastic way to do it, and it gets you ad-free access to content from some of YouTube's smartest creators, often even before stuff goes live on YouTube. Plus, of course, it lets us make better content for you as well.
Best of all, you can get access to Nebula for free with a subscription to my sponsor, CuriosityStream, which itself is just $15 for an entire year. That's like barely more than a dollar a month. CuriosityStream is, of course, the premiere place on the internet for high-quality, professional documentaries from the founder of the Discovery Channel, and they have a huge library of science, nature, and history content to binge while you are stuck at home. I have recently finished watching an episode of Catalyst on CuriosityStream, which took a closer look at the potential of quantum computing, and there's tons of other content from hosts like David Attenborough, Jane Goodall, Stephen Hawking, and more. So check them out at the link in the description, and I'll see you next week.