Last week, one of the largest global contract manufacturers, Foxconn, held its annual meeting of shareholders. The meeting was reported to have endured for eight hours and included an unusual gesture.  Terry Gau, the iron-classic and outspoken founder and CEO of the company bowed in public apology to all shareholders. This apology was a response to the nearly 20 percent declines in company shares over the past six months.

In actuality, Foxconn’s chairmen need not have to have made such as a gesture, at least from a westerner’s lens.  The contract manufacturing industry as a whole has encountered many challenges along with declining margins.  Having Apple as one of your prime customers is probably both a blessing and a curse, because the Apple way requires maximum flexibility with a magnification of the principle that the customer is always right, even when that customer abuses planning norms.

Foxconn is also in the middle of a transition occurring in consumer electronics sector.  Consumers for the most part are ditching traditional PC products in favor of electronic tablets and smartphone devices.  Smaller devices equate to lower product margins, and intense competition among global brands for market share dominance adds additional pressures to increase volume at lower cost. In its reporting The Financial Times astutely pointed out that brands Lenovo and Samsung are aggressively taking market share and both favor a model of internal manufacturing. A posting on PC World indicates that efforts to offset labor costs and improve its manufacturing have led to a three year effort focused on developing robots. The company reported that it is on track with its goal to create a “million robot army”, and already has 20,000 robotic machines in its factories. In addition, CEO Gau indicated that the company is prepared to expand its manufacturing in the U.S., but the move will depend on “economic factors.” The company is additionally exploring building factories in Indonesia, a country with significantly lower labor costs than the U.S. or China. One possible plan is for Foxconn to build electronics for the local market, which is home to 240 million people.

This global contract manufacturer is also affected by Apple’s ongoing decisions to second source key supply capabilities in order to exercise its own risk management strategy.

As Supply Chain Matters has observed in past commentary, Foxconn is in the process of diversifying its revenue stream by moving downstream in the electronics supply chain.  The company is investing in additional 5000 software and design engineering resources to add value in product services and component design. There is speculation that the company will develop a line of mobile devices built around the newly released Mozilla mobile operating system. CEO Gau unveiled a wristband device that can monitor a user’s health and sync with a smartphone. When worn, this wristband can monitor a user’s blood pressure, heart rate, and diagnose the person’s mood.

We would not be at all surprised that one day, there will be a number of consumer electronics devices branded by Foxconn, since revenue growth, product diversification and expanded profitability are at the top of the company’s strategic agenda.

Bob Ferrari