The following posting can also be read and commented upon on the Kinaxis Supply Chain Expert Community web site.

There is somewhat notable supply chain related news when the largest contract manufacturer on the planet hires a public relations firm to enhance its image, and that is the current evolving saga of Foxconn Technology Group, or its known parent, Hon Hai Precision Industry Co.. Beyond the stories however, lie the tenets of a disruptive strategy that will change the landscape of high tech and consumer electronics competitive strategy.

This contract manufacturing giant which is quickly approaching more than one million workers, hired PR firm Burson-Marsteller to improve its image, and the investment is generating lots of visibility.  For those who may not be aware, Burson handles many well known information technology and industry related clients, including SAP. The recent incidents of worker suicides that occurred at Foxconn’s Longhua facility in China were a PR nightmare and cause for much concern.  Foxconn Group chairmen Terry Gou, who founded Foxconn in 1974 and has been spending the last twelve weeks in crisis management in a small office located in Foxconn’s Longhua facility, is now lowering the company’s former 30 percent annual growth targets to 15 percent growth to ease some pressures on existing operational management. Foxconn posted a net loss of $142.6 million for the six months ended June 30, and warned that it expected net loss to widen because of wage increases granted to employees as a response to ongoing worker unrest.

Bloomberg Busineessweek magazine featured its article, Inside Foxconn as the prime cover story for its September 13-19 2010 edition, and I would place this article on your ‘must read’ listing.

The Businessweek article comes on the heel of a Wall Street Journal article where reporters were also granted a three hour interview.

Businessweek reporters Frederick Balfour and Tim Culpan note in their article that they were “granted unprecedented access to Foxconn’s factory floors, worker dorms, suicide-help-line operators, and to (Chairmen and CEO Terry) Gou himself.”  They astutely note how Foxconn has become one of the largest exporters out of China, with large military scale campuses and vast influence on the overall contract manufacturing strategies for consumer electronics and the high tech industry itself.  The article also notes how Foxconn’s business model has evolved to one of full-scale vertical integration of the design and manufacturing value-chain.  The article notes: “Foxconn’s business has evolved where it’s not just relying on cheap unskilled labor.  It now employs 50,000 toolmakers, including a team of 2,000 plus workers who focus on the design and fabrication of molds and dies  This enables  the company to boost production faster than anyone else, especially important in the (mobile) handset market where new models are constantly introduced.”

The Bloomberg Businessweek and other media articles focusing on Foxconn are all about how this contract manufacturer will now de-emphasize large manufacturing campuses as production is shifted to more interior regions of mainland China over the coming months.  They are not only placing a more personal face to Terry Gou as an industry strategist and fierce competitor, but also how powerful and influential this manufacturer will remain in influencing industry strategy. Mr. Gou has noted that within two years, 50% of the existing workforce will located in inland regions, where existing wage rates are typically two-thirds lower, compared with 20% today. Foxconn also seeks to pass the burden of social responsibility on to Chinese and other governmental agencies. Foxconn will invest billions over the next five years to build component manufacturing and assembly plants within inland China in cities such as Chengdu, in Sichhuan province, Zhengzhou, the capital of Henan province, and Wuhan, the capital of Hubei province.  The strategy is twofold. First, move manufacturing to the very sources of China’s migrant workforce, where there already exists family and social support groups, and where wages are lower than the existing coastal manufacturing region. Second, Foxconn understands the huge market potential for China’s emerging middle class, and more and more, is making strides on leveraging its vast electronics value-chain capabilities to be an eventual OEM brand owner as well.  The Businessweek article mentions that many of Foxconn’s young factory workers have desire to eventually become white-collar business people in the course of a few years. Foxconn is investing in a longer-term channels business strategy which targets 10,000 retail outlets managed by past Foxconn factory workers as the fuel of growth.

In mid July, our Supply Chain Matters and Kinaxis Community posting, Should Contract Manufacturers be Included in Anyone’s Top 25 Supply Chains?, made the observation that if and when a CM makes any Top 25 listing, it will likely be at the displacement of an existing brand owner, and when that happens, it may be a a huge wake-up call to the existing industry. After reading Businessweek ‘s featured story on Foxconn, that occurrence is closer than perhaps we all imagined.

If you accept the notion that high tech and consumer electronics supply chains can be a bellwether of what is to come, vertical integration of the value-chain has significant implications to long-term industry survivors.

Bob Ferrari