Most people think of Foxconn as the company that assembles iPhones. But it's a lot more than that. In fact the company really got started by manufacturing all of the tiny components and connectors for the PC industry around the world, long before the iPhone ever existed. Now it wants to go back to its roots, but instead of making parts for PCs, it wants to make all the key components for electric vehicles. The potential is massive, and if they get it right, it could be wildly profitable. On this episode of the podcast, we speak to Bloomberg Opinion's Tim Culpan who has followed the company for a long time. He explains how EVs fit into Foxconn's strategy, and how it plans to win in the space. Transcripts have been lightly edited for clarity.
Points of interest in the pod:
What is Foxconn? — 05:56
How did Apple find Foxconn? — 13:48
Foxconn’s unhealthy relationship with Apple — 16:47
Why Foxconn is interested in electric vehicles — 19:19
On the PC model for making EVs — 21:37
On tensions with existing carmakers — 28:49
The biggest challenges to Foxconn assembling EVs — 36:10
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Joe Weisenthal: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:17)
Tracy, you know what I was thinking, there's so much attention to Elon Musk and all of his controversies and the things that he does in his personal life and Twitter and potentially buying Twitter and the tweets and everything. I think sometimes people forget what an extraordinary success, or what an extraordinary company, just like Tesla has been over the last decade.
Tracy: (00:40)
Oh boy, where to start? Well, first of all a cynic might say that Elon Musk courts that kind of controversy quite actively, and that maybe if he wanted the focus to be on what Tesla was doing, he could go about it a different way. But anyway, yes, Tesla, Tesla, I mean, just looking at the share price. It's down, obviously from its peak, but over its history, it's, you know, a very successful company from a purely financials basis, or just looking at the share price.
Joe: (01:15)
Yeah. And you know, when I think about the last decade, obviously it was about the rise of software. Software is eating the world, cryptocurrency, all these sort of things that just like exist in code. And here is a company that became the biggest car company in the world, at least by market cap, by actually manufacturing something that is actually built. And so this was a decade in which people weren't really into manufacturing and really weren't into capital intensive businesses. And yet during that decade, this one company sort of just did extraordinarily well at a time when that wasn't really that cool.
Tracy: (01:54)
Right. Okay. So this is possibly one of the few things that you cannot fault Elon Musk for it, but he certainly likes to make things, right? And you can debate whether or not those things are realistic, but everything from electric cars to flame throwers to, you know, tunnels underground.
Joe: (02:13)
Satellite launching equipment.
Tracy: (02:16)
Starlink. Yeah. He makes things at a time when the emphasis wasn't really on making things, it was on software, as you mentioned, and sort of the ephemeral stuff, big ideas and changing the world through technology, but not necessarily tangible technology.
Joe: (02:33)
Right. And of course, one of our themes and it's something that we hit on with a lot of our commodities episode and you know, some of our conversations with Jeff Currie and all kinds of things that we've been doing over the last year has been about this sort of the ‘revenge of the real’, the tangible economy, actually putting stuff together. It's really hard, but it feels like this sort of like physical engineering is going to be one of the huge themes of this next decade.
Tracy: (03:01)
Yeah. I think that's right. And again, I think maybe we're so used to thinking about technology as like a search engine or a software company, but it feels like that might be starting to change. And nowadays, when people think about technology, when they think about technological prowess it feels like a lot of people think about things like semiconductors and chips and the actual physical components that drive that kind of technological innovation.
Joe: (03:30)
Yeah. And so when you think about like manufacturing tech, right? Like, okay, we're talking about who's manufacturing, you might think of Taiwan Semiconductor, which of course we've done episodes on. Intel. And then another name that has to come up in all of that has to be Foxconn, which everybody knows as basically the company that makes the iPhones, the company that assembles the iPhones.
Tracy: (03:52)
Yeah. That's right. So I think, again, this is sort of one of the big themes that has come out of the past couple of years in the global pandemic, but also even the trade war before that, but we all are intensely aware now of how these tech supply chains actually work and where things are made and who is putting them together.
Joe: (04:14)
Yeah. And so did you know – well, I didn't know this up until recently -- but did you know that Foxconn itself wants to get into the electric vehicle game?
Tracy: (04:25)
I didn't know that either. I know that the head of Foxconn – Terry Guo -- I know he's, he's an ambitious guy. He has plans. But I didn't know about this specific space, so, yeah. I'm interested in learning more about it.
Joe: (04:41)
Yeah. And I think it's hard to understand the world over the last several decades without understanding the trajectory of Foxconn, and so the fact that they want to be a player in EVs is really interesting. So I think we should talk about it.
Tracy: (04:53)
Let's do it.
Joe: (04:54)
All right. I'm very excited because in studio with us, this is a real treat, in studio with us, we have Tim Culpan. He is a Bloomberg Opinion columnist normally based in Taipei, but he is here in studio with us and he is going to talk, he knows all about Foxconn. We actually, I think we had him on last year to talk about Taiwan Semi. So he knows about the world of manufacturing, the real economy that most people forgot over the last decade. He knows a lot about it.
Tracy: (05:20)
Plus he brought us pineapple cakes. So, you know, he automatically gets an episode.
Joe: (05:24)
Thanks, Tim. Thanks for the pineapple cakes, Tim.
Tim Culpan: (05:27)
No worries. Apparently, listeners, if you do want to get onto the Odd Lots podcast, you just have to bribe Tracy and Joe with goodies.
Tracy: (05:31)
We just want pastries.
Joe: (05:35)
Tracy really likes sweets. Okay. I don't know Tracy's opinion on Elon Musk, but I know that Tracy likes sweets. So yes, if you want to get on Odd Lots, send Tracy a pineApple cake or some other pastry and you'll probably get invited on.
Tim: (05:48)
It's really that easy.
Joe: (05:50)
Tim. Great to have you, great to have you here. What is Foxconn?
Tim: (05:56)
Oh, I didn't expect you to give me such an open-end ended question. All right. So your producer, Carmen, is going to have to cut this after about three hours when you give me that question. What's interesting. I'm going to go back in time in history, if you'll indulge me, I think everyone first started to learn about Foxconn in 2010. That was when yes, the unfortunate suicides happened and the company became famous because of it. And there's about a dozen suicides that year. And even Foxconn Chairman and founder Terry Guo at first, there was a couple of suicides and he admitted to us when we interviewed him at that time, he didn't think it was a big deal. And to put it in context at the time they had about a million employees. So if you go to any town in America, in China and anywhere in the world, you know, with a million employees, it's unfortunate that you're going to have, you know, a couple of suicides. It's just an unfortunate reality.
So he didn't think it was a big deal. But after about the fifth, he was like, oh, we've really got an issue here. And of course, it got a lot of global attention from everybody, including us at Bloomberg and Bloomberg Businessweek. But that's really what put Foxconn on the radar, but they've been going since the mid seventies. Terry Guo, who was born in Taiwan, was one of the first people to embrace Shenzhen in China, you know, across the other side of the Taiwan Strait. He went there at a time when China had decided that Shenzhen would be this special economic zone. And China was just starting to open up to the world. And Terry Guo was very quick to embrace it. He saw a real potential, obviously, cheap labor was a real draw card, but he saw a potential for a very large labor pool. And also the fact that there could be a supply chain building there.
So he was one of the first people to say, you know what, this is the place to be. And so he went and set up shop there, and one of the kind of the craziest ways or simplest ways that he could hire employees because there was a lot of, you know, competition for labor at the time, was that he decided to just treat them a little bit better than, than other employers in China. Now people look at the Foxconn scandal and say, oh, you know, they're a sweat shop and they're terrible on staff and, you know, treat labor badly. Actually in context -- and I sound like a bit of a Foxconn apologist here -- but in context, they did actually treat their employees in the early days and right through their history, actually a lot better than a lot of employers do in China.
And so one of the first things Terry Guo did was he said, okay, I want all of my workers to eat well. So every single one of them would get an egg a day, so they could get a bit of protein. That was kind of a bit of a way out idea at the time. This was, just to be clear, this was in the eighties, seventies and eighties, seventies and eighties. And so Terry Guo is not an electronics guy. Most people in the tech industry have a tech background, they have an electronics background, maybe electronic engineering, Terry Guo studied at a maritime college in Northern Taiwan. So he really studied shipping and logistics, and then he moved into plastics. So his kind of opening business was plastic injection molding. And if you think of Taiwan in the seventies and eighties, it was known, as you know, ‘Made in Taiwan,’ cheap plastic toys, Barbie dolls, and everything else was made in Taiwan.
So that was his business. He was a plastics guy. One of his first things was to make the little plastic tuner knobs on RCA TVs. And over time he went more and more into plastics. And when the electronics boom happened from, you know, the eighties, he started getting into the business of making the connectors that would connect, say your printer to your PC or your Atari to the television. And if you remember, you know, those of us of age can remember there were flat cables with, you know, 24, 36 pins they were kind of difficult to make. And so if you could work out ways to make these connectors, you could get pretty fat margins. And so the name Foxconn -- the ‘conn’ in Foxconn is ‘connector.’ That's where the name comes from. And as an interesting aside, his brother runs a company called Foxlink, which does the cable part, the boring cable that goes between the two connectors.
Now of course that's not as exciting anymore because pretty much everybody's on USB and firewire and everything else. But back then there was like 60 different types of connectors. And since then they have basically been a component company. And so we think of them as being a company that hires a million workers, you know, at peak time to assemble iPhones. But if you look at the numbers, you know, back in the mid nineties, when the PC boom was happening and people like Michael Dell and others decided that they want to be in the PC business, Foxconn got into the business of just creating the components. They weren't really assembling that much. They were doing the components that went inside. And if you ever open up a desktop PC, you'll see the motherboard inside. And there's just all sorts of componentry welded to the motherboard.
That's the business that Foxconn was in and that's to this day kind of the business they're in right now. We just don't really think of it because it's not as sexy, but I'll tell you one thing, guys, the margins are really, really, really good. So in 1996 their gross margins were over 30%. And if anyone really kind of dives into, you know, the margins business, I know you've had Stacy Rasgon, who covers semis. 30% is a really nice gross margin. And at the time, Apple, which was kind of at its worst period in 96, was doing 10% gross margins. So they did very, very well now in context. Margins at Foxconn dropped off over the next decade as they went more and more into assembly, which is not a margin business.
Tracy: (11:54)
I was going to ask, can you talk a little bit more about the difference between making components versus assembly? And why what Foxconn is doing, you know, was somewhat unusual at the time (at least, that’s my understanding).
Tim: (12:08)
Yeah, I think that's a good question. So components, I mean the most high level components are chips, right? Taiwan Semiconductor, we talked about before and that's the sexy part of the industry. But going down the supply chain, you get these chips and you put them onto a module, you weld them together. There's so many chips inside a computer or inside an iPhone, they get kind of boring, you know, capacitors and things that control the voltage within, inside a computing system. Now, the thing about these is they sell for a dollar or two. They don't sell for a lot of money, but they're huge, huge volume. And because they're very, very, very specialized, it's not easy to swap out one component from another. So if you're a company like Foxconn, as they were in the nineties and you work out exactly how to do exactly the right component with all the right specs and your clients, all the PC makers, electronics, makers go, ‘that's just the component I need. It's only a dollar, but I need it and it's gotta work. It can't, you know, it can't mess up.’ They will put in orders for millions of them. They buy them by the bucket.
And if you're someone like Foxconn, who can do that really well and set up a production system that makes them really well, you've got fat margins. So it's very high volume, but low price. Like the price point is very low, but with fat margins, you can be a very, very profitable company. And you've almost got the market to yourself in some of these components because the barriers to entry are quite high and that's really the bread and butter of Foxconn. Even to this day, they make a lot of money from an iPhone, from the components that go inside an iPhone rather than actually assembling an iPhone.
Joe: (13:44)
How did Apple find Foxconn?
Tim: (13:48)
Well when Steve Jobs came back, as we all know, the company was in trouble, they, Apple was actually making their computers -- like physically making them in California, but over a period of time, many companies, you know, Michael Dell and Hewlett Packard, Compaq, and others were starting to outsource to Asia. And at some point during that period of time, Tim Cook, who was operating officer at the time, he'd not yet become CEO, would've discovered Foxconn and realize that, you know, these guys make the components. We should probably get to know them. And they really jumped into bed deeply when the iPod came out in the early 2000s. And that was one of really the first high, high, high volume electronics product after maybe, you know, the Sony Walkman. And no one else really had the kind of scale in Shenzhen to do it. So it really started with the iPod era and it was only the iPhone that came what almost a decade later or less than a decade later. And when, you know, Tim Cook needed someone to assemble this new gadget that nobody had ever heard of but heard rumors of, Foxconn was the place to go.
Joe: (14:56)
Wait, on this question of like assembly. So, you know, I'm sort of thinking about like, actually our Taiwan Semi conversation and, you know, Taiwan Semi, just like over time builds up an expertise to be able to manufacture chips at scale while making very few errors and they just become really good at it. Is it similar with Foxconn where it's just over time, they just sort of build up this internal muscle where, you know, you can come up with a new design, here's the design of an iPhone, or here's the design of an iPod. And because they've just like built up this sort of like internal tacit knowledge of how to assemble things, it's just, no one else can really do something like that at scale and be consistently good
Tim: (15:45)
Precisely. That's really, really it. It's not that difficult to make one pizza. Try and make 50 pizzas an hour or, you know, a thousand pizzas an hour. That's difficult because quality yield, right. The amount of products that you put through the production line that are usable at the end, that is very, very difficult. Scale is really what it's all about in pretty much any industry, even in cars, you know, Tesla's struggles over the years have been about scaling. And so, yeah, you're right. They had built up this knowledge base from making components so that when it came to things that were a bit more labor intensive, and they had used a lot of labor, even for their components, this was the company that you would turn to. And, you know, what is it? A dozen years after the first iPhone came out, 70% of iPhones are still made by Foxconn. Apple can't replace them. They're addicted to Foxconn.
Tracy: (16:34)
I was going to ask, what is the relationship like between those two entities because on the one hand, okay. Foxconn is providing a valuable service for Apple clearly, but it feels like Apple is basically reliant on one supplier here.
Tim: (16:47)
Yeah. I mean, it's possibly unhealthy, I've argued for a long time. It's a very unhealthy codependence. You know, there is really, if you look at the tech industry globally or of the world in general, you know, if, if Apple was to disappear overnight, you know, we wouldn't get our phones and you know, maybe that wouldn't be a very nice thing or if Facebook disappeared, that would be terrible. Or some people might argue the opposite but if Foxconn or TSMC were to disappear from the face of the earth overnight, we'd be in a lot of trouble because nobody can do what these two companies can do. And they, even if they tried and so many companies have been trying to replace Foxconn. Apple doesn't want to be addicted to Foxconn, right? It's just not healthy.
It's not about them being a good or a bad company. It's just not healthy to have one supplier. So over the years, Apple has diversified away, ironically to mostly Taiwanese companies like Wistron and Pegatron and some Chinese companies too. And of course they've diversified away from China to an extent in India, in Brazil and other places, but really, they can't help it. And Foxconn is also unhealthily addicted to Apple. 50% of their revenue comes from Apple. And it's been that way for more than a decade. They bought in about 215 billion of revenue last year Foxconn. And half of that came from Apple. So they can't do without Apple, unless they get into the EV business.
Joe: (18:29)
The hottest gadget, or one of the hottest gadgets in the world right now is the electric vehicle. And Tesla is the leader, but we know that every car company wants to get into EVs and they're spending a lot of money and actually rolling out cars. And some of them seem to be decent. Before we get into Foxconnn's ambitions in the space, how is manufacturing a car historically different than manufacturing electronics? I mean, my guess is like GM and Ford and all, they have their own plants, they're in the United States. They don't just like make a design and send it to some other company to build. They actually build it themselves. But how would you compare and contrast the sort of existing legacy approach to building a car versus the existing approach to building a phone or a computer?
Tim: (19:19)
Well, at the end of the day, I mean, car companies don't want to admit it, but all cars are kind of similar. Now where there is a difference is in engines, right? So companies like Toyota and Ford and the Europeans as well have worked a lot on engine design and car buffs will say, well, this engine, this, you know, V6 or this straight-four, whatever, is a better engine. And a new car comes out with a new engine and people love it or hate it. But the other part, kind of the IP, is in how you make it. And Toyota, I guess, is most famous for their production system, the just in time and all of that.
And again, it comes back to the issue of scale and quality and yields and so forth. So the very process of producing a car is in some ways that secret sauce. And so if Toyota, for example, or Ford was to work out exactly the right way to make a car over say a 10-year production run, it's kind of a thing that they wouldn't necessarily want to hand out to somebody else. But the other thing is with safety standards, you have to be very meticulous and the way you produce a car is so connected to things like safety standards. And the final thing is the product cycle of a car is much, much, much longer. We're talking like a decade. Whereas, you know, the product cycle of a phone iPhone, Apple has the longest product cycle, which is about a year, but, you know, Samsung and Xiomi or whatever, they come out with a new product, like every three to six months or even less. So it's a very quick turnaround. And so they kind of need the external help to help put these devices together. I think that's really the big difference.
Tracy: (21:01)
So walk us through Foxconnn's thinking here and what they see exactly as their competitive advantage, because on the one hand, yes, EV is very hot right now. Everyone is probably going to end up having one in the future. But on the other hand, especially in places like Asia, the market is incredibly crowded. It feels like a new EV manufacturer springs up , you know, every week or every month and then probably has problems soon after. But what exactly is the opportunity here and what does Foxconn think it can do better than other EV manufacturers?
Tim: (21:37)
Well, what's interesting, I think is that you think of Foxconn as being the iPhone assemblor and you think, well, if they're going to do EVs, they're going to be all about the, you know, EV assembling with big factories like you'd see in Detroit. That's actually not quite their thinking. They're more thinking in the 1990s model, which is in the 1990s when desktop PCs were, you know, the biggest thing out there, it was very modular. You open up a PC and it's very, very modular and you've got standard reference designs for what it would look like. And, you know, at that time you have AMD and Intel, were doing the CPUs, and Foxconn can make a lot of those component parts and get more good margins on it. They see EVs more similar to PCs than iPhones. And so they have reference designs, right?
If you want to go out, like literally, if you had the money, you could call up Foxcom tomorrow and say, ‘Hey, we want to make an EV. We don't have a clue. We've just got money.’ And Foxconn is going to be like, all right, we've got a reference design. Literally it is a design, it's a chassis with four wheels and they can basically walk you through the process and for the right amount of money, you could have an EV, you know, in six months. And that's why you've got companies like Lordstown and Rivian and all these other startups are actually turning to Foxconn and saying ‘Oh, yeah, we, we want to get into the EV business. Maybe we should, you know, get into bed with each other.’
Joe: (23:02)
Well, so when I think about PCs in the nineties and there were just so many of these brands, and they basically just all sold the exact same boxes. So there was Compaq and HP. Gateway was another one. And then of course, Dell, more or less won that space, but it was like not a great victory because the actual boxes, you know, they won, but it wasn't like the most amazing victory. Do the car companies like, okay, if Foxconnn's vision that EVs will sort of be this modular thing and there's a few standard parts that they could all plug and play, do car companies want that future
Tim: (23:46)
No, of course car companies don't want that future any more than PC companies want to have PCs to be modular because there's no competitive advantage. And that's why Apple went, you know, in another direction.
Joe: (23:56)
Remember Zeos, the PCs? That's what we had, we had a PC in my family. I think it was from a company called Zeos.
Tim: (24:04)
I remember Tandy. We had Tandy. So no PC company, no company wants to be standardized, right? They want to have everything to themselves. In fact, you know, if you look inside an iPhone, one of the funny things about an iPhone is of course they have their own chips. A lot of their own things are very, very specific to Apple. But in fact, there's quite a few components that go in an iPhone that are no different to a component that go into something else. But Apple is very insistent with their suppliers that they have their own stock coding unit and it's labeled differently. But it's basically the same part. , it's just kind of the Apple version of that part.
So I think absolutely. I don't think, you know, Elon Musk, Tesla or Toyota or Ford or any company that's going into the EV era wants to have it standardized, but then again, they've got to make decisions. Where is our value add? Where is our competitive advantage? Is it to have, you know, all our unique components and in the car era, having your own unique engine, you know, was a standout, right? And, and that was a unique selling point. I think so far in the EV era, I don't think anyone's going up to an EV and going well, this is, you know, the electronic version of, you know, a V8, right? Of course they want range. They want power. They want what is a ridiculous mode and stuff like that. But if that can all be done in a standardized modular way, then that would free up the EV makers to focus on, you know, the front end, which is the design, make it look cool, feature set. And then the back end, which is sales and marketing.
And essentially that's what the PC industry is now. PC makers basically don't make anything. In fact, Apple doesn't really manufacture anything. They do the front end, which is the design. They outsource all of the middle, which is, you know, putting it all together. And in the back end, they worry about, you know, sales and marketing. And that's probably going to be the future of EV, certainly the way Foxconn thinks it'll be. And so there were all these PC makers in the nineties, and most of them have disappeared. Foxconn is still around and they just supplied to all of them. That's the way they survive. Foxconn doesn't do their own branding. They just supply to the brands and the new vision of Foxconn. And they've got a new chairman now, a guy called Liu Young-way who is an electronic engineer by training. He sees that future as being Foxconn is not going back to the mid two thousands, but Foxconn’s going back to the mid-nineties. Guess what? That's when the margins were really, really good.
Tracy: (26:34)
That’s convenient. But it feels like to some extent the EV manufacturers might not have a choice here, right. Because chips have been an issue. And if one of the largest suppliers of chip says, we wanna go in this direction, we're going to standardize, do modular component building, that sort of thing., it feels like they might just have to go along with it, right?
Tim: (26:57)
Yeah, I think so. I think that's a good way to put it Tracy. If the EV industry, it is very, very electronic, right. You know, every wheel has multiple chips just controlling it. Cars, there are more chips in your garage than there are in your lounge room, right? There are so many chips inside cars, which is why with the chip shortage of the last couple of years, cars couldn't roll off the production line. But we still manage to get our iPhones. And so the EV era is definitely more and more electronic. And that's why in so many ways, an EV is more like a PC on wheels than a Toyota or Ford with an electronic engine. That's the way you need to think about it. Certainly that's the way a lot of companies think about, and that's the way Foxconn thinks about it.
And that's why, yeah. Componentry, semiconductors, non-semiconductor components. , there'll be standardization in theory. That's where the industry is moving and that's what Foxconn wants to do. They have a platform called MIH. They want to bring all of the companies together. They want to bring in the chip makers, not just the car makers, the chip makers, the electronic makers. They want to bring them all together and set the standards and say, we've got these standards. You can buy some of the components from us and some from somewhere else, not a problem. You can buy all the components from us, whatever you like, but Foxconn wants to be a part of it. So that as today, apart from iPhone, pretty much every device you've got, whether it's a Dell PC or a Cisco router or some webcam, there's probably some Foxconn in there somewhere. That's what Foxconn wants to be for EVs.
Joe: (28:35)
So I'm guessing this is well, I'm guessing Elon, they're not part of Elon's vision. Like how does the Foxconn vision of how the EV industry evolves, contrast with Elon's vision of how the EV industry will evolve?
Tim: (28:49)
Well, interestingly enough Foxconn does supply to Tesla, but it's just componentry, not the final car. Now, Elon said famously a few years ago, you know, EVs are tough. This is not the kind of thing you can outsource to Foxconn. I actually disagree. Foxconn obviously disagrees. I think it is the kind of thing you can outsource to Foxconn, it's exactly the kind of thing you can outsource to Foxconn. Now of course, Tesla makes their own cars. They're building multiple factories around the world and they believe that building cars is part of, you know, the Tesla DNA and their competitive advantage. But if you're Foxconn or any of these other startups, then you probably think maybe not, and certainly to build your own car factory is very, very expensive. And there's no guarantee of payoff.
Now what's interesting is how about the existing legacy carmakers, like the Europeans and the Japanese, the Koreans, and of the Americans? Do they still want to make their own cars, or will they, at some point say, you know what, we're going to outsource a couple of models of our cars to somebody else, like a Foxconn. So one of Foxconnn's partners is Stellantis, which is the merged group of PSA and Renault and all, you know, the European carmakers, they are actually doing deals with Foxconn. So we may see, you know, a European car come off a Foxconn production line in future, or certainly some of the components in these European cars may be made by Foxconn. So I think the interesting question is not the startups who kind of need to have a Foxconn, it's the legacy makers. Are they willing to embrace the Foxconn model?
Tracy: (30:39)
This might be an obvious point, but part of the thing that is sort of surprising me here, or I guess I should say the irony here is that it seems like we've had these discussions over the past few years about supply chain resiliency. We’ve had discussions about the semiconductor shortage and it feels like the response to all of that might be to concentrate semiconductor production and assembly even more in a single entity because they're sort of demanding market power or the ability to assemble cars in order to control the components that are going into them. Is that the direction that we're heading, like rather than see multiple competitors spring up in this space, people start to retool their supply chains so that they don't rely on a single company. It feels like we're going in the other direction.
Tim: (31:36)
Well, if you look at TSMC, I mean, they have like 95% of the leading edge, you know, capacity. But interestingly enough, that is not the type of chips that have been in shortage. It's the old stuff, the technology that's, you know, 10 or 15 years old, that's been in shortage. And one of the reasons why it's in shortage is because people have been moving forward. You know, the chip industry, as you guys have spoken about quite a few times, it's a very fast moving industry. You know, Moore's Law means that every couple of years you upgrade your technology, but a lot of the chip designers didn't really wanna move up the supply chain or, you know, the technology stack because they didn't need to. So that's where we are with the shortage, but going forward, I think there's going to be a lot of government involvement.
Obviously the US government, Congress is kind of duking it out over the chips package. That Chips Act, right, Europeans are doing a similar one. They would like to have control of the chip industry in more companies or at least in companies from their domicile. So obviously Intel wants to get in on the game, , there's European makers, but at the same time, they all, everybody wants a TSMC factory in their backyard. TSMC is the most popular company in the world for economy ministers, because they all want to get TSMC over there. But if you look at Foxconn, what's interesting with cars is, you know, it's just not as easy to. You can't, you know, pack up 60 cars in a box and put 'em on a FedEx slide.
So this is a really smart way for Foxconn to diversify geographically. Now, no matter what you think of the tech cold war, is it overblown? Is it unfair? Will it blow over? It's really not smart to have all of your supply chain in one area in the same way. It's not supply smart to have so much of your supply from one or two companies like Foxconn and TSMC. It just doesn't make sense to have all of the supply chain in, you know, the Shenzhen area or Guangzhou area of China. Foxconn knows that, but by moving into EVs as they are, they've, you know, they've got a plant in Ohio, they've got this factory in Wisconsin, which may or may not make EVs. They're looking at India and Indonesia. And I will probably see something in, I would guess Mexico, Eastern Europe. Great way to diversify your geographical locations because it makes sense to have your car production closer to where your market will be.
Joe: (34:10)
Yeah. I want to expand on this further, because like, right. If you think about, as you mentioned, the era where they're selling millions of dollars worth of capacitors by the bucket and that's very easy to manufacture in Shenzhen and then put on a boat, clearly the geography of automobile manufacturing is already much more localized and you don't see GM or Ford manufacturer a car in China for the purpose of shipping it to the United States. They set up factories in Georgia or Tennessee and still in Michigan or elsewhere. And so it does seem as though this would, yeah. I mean, the weight of car components, just the sheer size, the cost of them, it seems like it has to be much more geographically dispersed.
Tim: (35:01)
Yeah, absolutely. And that's just a really nice segway for Foxconn to have less of their production capacity in one geography. And they don't have to be announcing that they're picking up and leaving China. They just, you know, all of their extra, every extra dollar of capex that they put in to something over the next few years just happens to not be in China for solid economic reasons. And so I would predict that say 10 years from now a lot less of its balance sheet in terms of factory and equipment will be in China. And it won't be a case of them upping and leaving. China will just be a natural kind of evolution away from China. And I think that's exactly what Foxconn and its clients would want.
Tracy: (35:47)
So I know you talked about, sort of the historical experience that lends itself to Foxconn moving into this area of EV assembly, sort of doing a similar thing to what they did with PCs in the nineties, but are there any stumbling blocks here? Like what is the biggest challenge in moving to that production model?
Tim: (36:10)
I think one of them -- that's a really good point and that's the kind of thing that probably even catch out Foxconn -- and I think one of them is regulation. Cars are very, very regulated, right, in terms of safety standards, well, you know, there was emission standards, but obviously that doesn't quite apply to EVs, but there's various types of standards. And if you are going through the process of setting up a reference design, and you know, slotting in different components, even like what kind of seats and, you know, the seat's going to buckle up electronically or braking, and all of the other things. For example, Tesla had a minor problem recently where the chip inside that center console was kind of overheating and that made it difficult because everything is controlled by the center console of a Tesla, you basically kind of had to reboot the car to make it work.
Now there was no safety issue involved in that, but it highlights the issue that as we get more and more electronic, the electronics are very important. I think we'll see safety regulators in the US and Europe and elsewhere want to be much more cognizant of that. And so this could be a real problem for Foxconn or maybe it's an opportunity for Foxconn because if they can get into the process of getting the parts or components or half assembled cars go through that safety standard check and licensing themselves with the Europeans or the Americans or Japanese or whomever are, then they could possibly sell that to the client and say, Hey, this part of the process, the chassis with the seats and the engine have already gone through compliance, it's been ticked and signed off. You should buy from us.
Or alternatively the carmakers may find that's not working for them because, you know, Foxconn doesn't do that or doesn't provide that and that's the car maker specialty. They may decide actually it's still better for us to do this ourselves because the design process is very much focused around, you know, safety -- building in the safety at the start of that process. Now comparing that to the PC area of the nineties, as you point out Tracy, there really wasn't that issue. You know, if Michael Dell wants to cobble together a computer, you know, in his garage, in Round Rock, Texas, he doesn't have to go off to some regulator who gets signed off for safety. And so anyone could put together a PC from kind of standard parts. So I think regulation and safety standards will probably be the biggest kind of challenge that Foxconn or anyone who wants to get into the EV space will face.
Joe: (38:51)
So I just have two more questions. One is sort of quick. How big is Foxconn? I guess, I don't know, from a revenue standpoint these days, and how big does it see or how big could this market get or how important could it get for Foxconn?
Tim: (39:04)
So their revenue last year was around 215 billion US dollars. By comparison, you know, Apple’s was $360, $370 [billion]. So about two thirds of what Apple’s was. Interestingly by comparison, TSMC's revenue last year was only $56 billion. So it was like less than, you know, around a quarter of what Foxconn’s was, but of course, TSMC's margins are exponentially higher. So that's putting into perspective of where we are today, but going forward Foxconn just recently put out some of their own targets and they're targeting to ship 500 to 750,000 EVs annually by 2025. And they see that translating to 34 billion US dollars of revenue by 2025. So, you know, back of the envelope numbers, that means they would expect revenue of around $45,000 per car.
Joe: (40:06)
So that's already a pretty significant chunk of their business then.
Tim: (40:09)
Huge. That's huge. Right. And even if they got really bad margins out of that, you know, 1% margins on $45,000 is a lot better than 10% margins on a $1,000 iPhone.
Joe: (40:20)
Yeah, that's it. So then I guess the other question I have too is like, you know, the other thing, the big, the key component in electric cars is obviously the battery. A) is that an area that they could ever get into, try to get into the battery itself, which is a really, seems like a very tough business, but B) battery aside, what are the components that they have the best shot at building?
Tim: (40:46)
They are actually in the battery business. They're not a huge player. They've developed their own battery technology in Taiwan. I didn't even know this until I just stumbled upon it at a conference one day. And there's this booth with Foxconn batteries. I'm like, you guys do batteries? ‘Yeah, we developed our own, you know, technology. It's all chemistry right at the end of the day?’ I don't know if there'll be a big player in it, but they certainly have that option. And I guess it comes down to who can get the lithium supply. You know, but in terms of the rest of it, I think interestingly enough, you go back to their roots – connectors. Like inside a car, there is a lot of connections. There's a lot of wiring. I think if, you know, we look inside a Boeing or an Airbus jet there's like miles and miles and miles of cables and connectors and stuff. A car is kind of similar.
So the connectors is definitely a great business for them to be in. And then a lot of the components like a windscreen wiper, the lights, all of those things just have a little motherboard with some components sold onto it. And so they don't necessarily need to get the big ticket items. They could just tick off a lot of the kind of the smaller items and just get a lot of them inside a car and just be that company that does, you know, these 10 things really, really well that no one else can do and enjoy the margins from there.
Joe: (42:02)
Tim Culpan -- real treat to have you here in the studio, and this is totally new for me. I had no idea that Foxconn was aiming for this space, but it seems like an important part of the story. So appreciate you coming back on Odd Lots.
Tim: (42:14)
Thank you for having me. It's been fun.
Tracy: (42:16)
Yeah. Thank you, Tim. And thank you for the pineapple cakes. I love talking about semiconductors while eating.
Joe: (42:21)
The real reason we had Tim on. But no, that was great. Thank you so much. Tracy, I really thought that was interesting. I didn't realize the history of Foxconn. I mean, basically sort of only -- as Tim said -- more or less ever heard of the company around 2010 when the sort of infamy of their iPhone production was in the news, but it's interesting that the like real margin heyday was in the nineties. I had no idea that those were like super boom times,
Tracy: (43:05)
Right. Because everyone thinks, oh, assembling iPhones. You probably make loads of money off of that. But actually it's building the sort of modular components for boxed PCs…
Joe: (43:12)
Yeah. I didn't realize that they were like the ones building all those modules.
Tracy: (43:17)
Yeah. The other thing that stuck out for me from that conversation was just the idea of a company like Foxconn becoming more of a force in the EV space by virtue of building those components. And in some respects demanding standardization. And I wish I could remember who exactly said this, but you know, there was a school of thought that in the future insurers were going to be these massive influencers on society and the economy because they're the ones that are ultimately pricing and sort of dealing in risks. So they were the ones setting safety standards. And I kind of, I think about that with relation to something like Foxconn. If they're the ones building the components and setting the standards for some of the things going into EVs and to Tim's point, obviously they have to comply with government standards as well, but there are other things they can influence. It feels like they just become a really big force in the space.
Joe: (44:14)
Absolutely. It feels like the existing automakers, obviously Tesla, but Tesla aside, it seems like the existing automakers definitely do not want to become Dell and Hewlett Packard and Compaq and Zeos and Tandy and Gateway. And just be like pure boxes on a bunch of components that are all identical and no margin. But on the other hand, like, you know, it's like I cars all kind of look the same, but of course car people would hate it.’ They're like, no, like what? But they're like wildly different.’
Tracy: (44:50)
You’re going to get a bunch of angry emails.
Joe: (44:51)
There’s a lot of similarities between cars, especially these days they'll kind of look the same.
Tracy: (44:55)
Well, I mean, it does feel like there is this massive tension between Foxconn and its potential customers in the form of EV manufacturers. And it's not, again, dissimilar to maybe the relationship between Apple and Foxconn, but it's going to be really interesting to see how it shakes out. And it does feel like a bit of a power struggle potentially.
Joe: (45:17)
Yeah. And either way it is going to be different than PCs or the iPhone because of this. It’s almost certainly going to be. The US car market is served by US manufacturing, whether it's a Foxconn factory, whether it's a Rivian factory, whether it's a GM factory, it's going to be domestic. So it's not going to be this sort of like, oh, let's build a bunch of cheap stuff in Asia for shipping over. There'll probably be some component shipping, but it will still be something of a new model that's different than Foxonn’s past.
Tracy: (45:49)
It seems like it. All right. Shall we leave it there?
Joe: (45:52)
Let’s leave it there.
You can follow Tim Culpan on Twitter at @tculpan.