Financial Crisis and Taiwan Tech Industry

So we all know by now the economy is in the worst shape its been in for a while. It seems the stock market is bouncing back but the news isn't all good. Digitimes reports the "jobless rate scores new high in March" and increased to 5.81% and the Taiwan News reports "Taiwan's export orders fell for a sixth month in March, extending the longest run of contractions since 2001, as global demand for electronics goods tumbled." Taiwan News continues "Orders, an indication of shipments in the next one to three months, declined 24.29 percent from a year earlier, easing from an average of 32.7 percent of the two first months of the year."

However, this has dampened some of the optimism. Digitimes reported "IC design house AAT expects 80% revenue growth in 2Q09." Sounds great right? However, read the report and you will see that it is an 80% sequential growth (quarter on quarter) and that right now year-to-date (YTD) revenues compared to the first three months of last year are down 66.7%. So a clever spin on the numbers can make things look a little more positive than what reality suggests.

EMS Now however reports Terry Guo Tai Ming (Hon Hai founder and head) is optimistic and that he "believes the global economy is not as bad as expected. " EMS Now also says "Hon Hai Precision Industry Co., one of the worlds' leading providers of electronic manufacturing services, is recruiting over 1,000 personnel in Taiwan ." Well at least he is putting his money where his mouth is and helping to cut that unemployment rate.

Another big firm is also hiring. Taiwan Semiconductor Manufacturing Corp. (TSMC) "CEO Rick Tsai has confirmed the semiconductor manufacturing giant will be increasing its R&D employee headcount by 30 per cent and manpower in its design service unit by 15 per cent to drive a quick transition to 32nm in 2010 and sub-32nm by 2011," says the inquirer. Well thats also good to see.

So although the news on unemployment, exports and revenue reporting is not good, the light at the end of the tunnel is increased opportunities at Hon Hai and TSMC. Are we edging out of the crisis? What long term impact will the crisis have in Taiwan's technology industry? Will orders pick up later in the year?

Look forward to your comments and thoughts on these issues.

Hon Hai and Foxconn Invest

Hon Hai and Foxconn have been busy with some foreign investment strategies. The first is what seems to be a US$60 million cooperative venture in Turkey with HP. According to CNN Money:

Taiwan's Hon Hai Precision Industry Co. (2317.TW) plans to invest up to US$60 million to build a personal computer manufacturing facility in Turkey together with Hewlett-Packard Co. (HPQ).

"H-P is our strategic partner and there is evidence of growth in the market for PCs" in Turkey, said Hon Hai spokesman Edmund Ding on Wednesday.

An article in Vietnam Investment Review suggests Foxconn will build a handset factory in North Vietnam. The article says.

With initial investment of $200 million, Foxconn’s new factory, which will be able to produce nearly 90 million units per year, will become the second foreign-invested facility in Vietnam to produce mobile phone handsets, after Korea’s Samsung.

The new facility will be built on the 485 hectare Binh Xuyen 2 Industrial Park, the developer of which is Fuchuan, a Foxconn subsidiary. Binh Xuyen 2 is designed to accommodate Foxconn and its suppliers to locate manufacturing facilities in Vinh Phuc province, about 50 kilometres north-west of Hanoi.

More Foxconn news is that according to Trading Markets, Foxconn intends to employ an addition 10,000 people in their Wuhan, China plant.

Taiwan-based electronics maker Foxconn Technology Group (Foxconn) is likely to recruit as many as 10,000 employees for its Wuhan plant this year in accordance with its production expansion plan, disclosed a person in the know recently.

In the current economic climate pounding the electronics sector and driving down sales, with rumored massive layoffs at Foxconn's Shenzhen plant and with Foxconn apparently laying off people in other parts of the world, it makes for interesting and surprising reading. It should be said though that Foxconn's strategic view of Vietnam has been a long term vision and they were intending to invest their for sometime, as apparently have many other Taiwanese companies.

The investment in Turkey is another interesting choice. My sister lives their and the PC enviornment in Turkey seems fairly primitive and unsophisticated and their probably is huge demand. Of course this will also help them gain more direct access into Middle Eastern and Mediterranean markets and in the long term penetrate central Asia although their 2008 investment in Russia may be able to penetrate those markets better.

CNN Money: Hon Hai Precision, H-P To Build US$60 Million PC Manufacturing Plant In Turkey
Vietnam Investment Review: Foxconn making good on its ambitious promises
Trading Markets: Foxconn Said to Recruit 10,000 Employees for Wuhan Plant

Chinese Economic Weakness

Here is a heads up on a great article on the Economist website on the flaws in the Chinese economy. A couple of things pertinent to the topic of this blog include their comments on Hon Hai:

In 1988 a small, secretive, Taiwanese plastics manufacturer named Hon Hai opened a factory in Shenzhen that has since grown to the size of a city, with more than a quarter of a million employees. Little of what its Chinese subsidiary, Foxconn, produces is directly disclosed by the company but it is broadly believed to include iPods, Nintendo and Microsoft games consoles and laptops, either in whole or part, for most leading brands.

Because of the sheer number of people it employs, Hon Hai’s every move generates huge interest in local newspapers, although the firm itself says little. In 2007, presumably for much the same reason that it moved to China 20 years ago, it opened a facility in Vietnam which is said to be undergoing a large expansion. Last summer the Taiwanese press was abuzz about production moving back home. Now reports from Taiwan say that the Shenzhen workforce will be cut from 260,000 to 100,000 and that there will be more jobs inland. Whatever the figure turns out to be, Hon Hai is a nimble transnational company, able to move production around as circumstances change. And it is not alone.

A common feature of Taiwanese tech companies is their entrepreneurial bent. This makes even big companies like Hon Hai surprisingly agile and mobile. There are of course some downsides to this type of thinking, but the ability to move fast is a big advantage in any industry.

Something else which caught my eye and has been something we have commented on before here:

In Taiwan many of the companies that once were leaders in anonymous production have slowly developed high-quality products under their own names, notably Acer, Asus and HTC. The most glaring impediment to creating the same kind of operation in China is the country’s weak intellectual-property protection. Why invest in design or innovation when the results can be knocked off by competitors? Aware of this barrier, the government has passed new laws and has been vocal in supporting greater protection, but settlements remain trivial and enforcement patchy. Most Chinese patents granted to domestic applicants are still of a type known as “utility model” patents, mainly awarded for incremental improvements, rather than for innovation or new designs (see chart 3).

China must learn to respect the IP of other companies and countries. Until they do that they will never be seen as credible. Unfortunately they don't see it that way. And as the above notes this has not helped stimulat their abiity to innovate.

Anyway, its a good article. Link is below.

The Economist: Time to change the act

Hon Hai Wins Apple Franchise in China

The China Economic News (CENS) reports:

Hon Hai Precision Industry Co., Ltd. has won the Apple franchise in China and will begin to expand distribution network this year.

The company, currently Taiwan`s No.1 manufacturing conglomerate by market revenue, will initially gain market share in China for Apple products via its established outlet Cybermart Digital Square and its consumer electronics business unit, which is led by H.L. Chiang, a former Apple executive.

Industry watchers point out that Hon Hai aims to become China`s No.1 distributor of information-technology products after becoming the world`s No.1 electronics manufacturing service provider, which it hopes to achieve by combining manufacturing with retail.

The dealership project is part of the company`s 2009 agenda. In the New Year, the company will raise rather than cut pay for crucial-technology specialists, boost profit by realizing projects, and expand its China deployment deep into the hinterland from coastal provinces.

So far, three Hon Hai executives, excluding Terry Gwo himself, have announced they will take the symbolic NT$1 as pay.

Gwo pointed out that China`s population of 1.3 billion is the major force behind its domestic demand, justifying the company to tap such market amid the global financial crisis. He believes the worst of the crisis would be over by the first quarter 2009 and, thus, his company still has chance to grow.

Couple of things to note here. First, Hon Hai is once again showing their incredibly flexibility by moving into a completely different business, that of selling electronics commercially. Interesting move. Also, did you see who heads up the division? A former executive at Apple! Maybe there was a little bit of guanxi there! Actually, Hon Hai probably are the best fit for Apple since Hon Hai and Foxconn are the contract manufacturers for Apple the relationship between the businesses is probably already very deep.

Second, did you note that some of the executives are taking NT$1 per year as a token salary! Its good the executives are doing this. They probably have enough money as it is and at least they are trying to create the impression that they are not in it for the money. I wonder if the salary is NT$1 excluding bonuses? Besides, they are probably already flush with money from their shares in the company. Still, I think its a good thing and appearance (face) in Chinese culture is very important.

Third, did you note that Terry Guo(Gwo)believes things will pick up again in Q2 2009? Maybe it will, maybe it won't only time will tell. There are a lot of challenges facing the world economy right now and one would expect the head of a large company to be optimistic about the future, at least publicly. But I do think Hon Hai will get through this crisis OK. Its the smaller EMS manufacturers that need to worry.

Fourth, did you note how Hon Hai intends to penetrate the Chinese market? They want to move inland! This sounds almost colonial in a sense. When the colonials were in China they were restricted to the treaty ports such as Ningpo and Shanghai. Hudson Taylor was the first missionary to go into the Chinese hinterland. Then as now the transportation systems were not as good and so inland China faces many more challenges in their development. The Chinese government is keen to develop the cities in the interior but it is good to see a company such as Hon Hai viewing these areas as a business opportunity.

CENS: Hon Hai Precision Wins Apple Franchise in Mainland China

Will Buffet invest in Hon Hai Rival

Earlier this year we reported on Hon Hai's struggle in Shenzhen (Hon Hai Fights in Shenzhen). The basic problem is a main competitor in China, BYD, has been sued by Hon Hai for stealing trade secrets. Delays in legal proceedings in the Chinese court system (which some speculate is aimed at protecting the Chinese company) has resulted in BYD gaining market traction.

BYD has now received a surprising vote of confidence from Warren Buffet who the Taiwan News reports is interested in 10% of BYD shares. According to Taiwan News:

Taiwanese entrepreneur Terry Gou might soon count U.S. investor Warren Buffett among his rivals, if the latter’s investment in a major Chinese company goes ahead, reports said.

Buffett, often mentioned in the past as the world’s wealthiest man behind former Microsoft chairman Bill Gates, is reportedly looking to buy 10 percent of shares in China’s BYD Co., Ltd., a major electronics and auto-parts manufacturer.

The Chinese company is currently involved in a court case pitting it against Foxconn, the brand name of Hon Hai Precision Industries. Foxconn sued BYD in 2006 for violation of trade secrets.

Chairman Terry Gou’s Hon Hai manufactures computers and cell phones for prominent brands such as Apple, Sony, Dell, Nokia and Motorola.

Hong Kong-listed BYD also counts Nokia and Motorola among its customers, and is believed to be those companies’ second biggest supplier behind Foxconn, reports said. The Chinese company is also the world’s second largest producer of rechargeable batteries. Engineer Wang Chuanfu founded BYD in Shenzhen 13 years ago.

Buffett’s reported investment in BYD is seen as a vote of confidence in the Chinese group and in China’s burgeoning technology sector, media reported.

Mr. Buffet is an admirable person. The little I know of him suggests he is a man of integrity and someone who can be admired for the way he conducts business. If he is interested in BYD and will indeed gain a 10% hold in the company, I certainly hope he will be able to have a positive influence on BYD management and urge them to consider fair competitive practices. Chinese tech companies do have a lot of potential but they will only succeed if they can learn to innovate on their own and not by copying.

I personally think Hon Hai has a sufficient competitive advantage to stay ahead of the pack and I do not think BYD will challenge their dominant position for a while yet. That said, BYD should still be willing to develop their own technologies and their own intellectual property and should not steal from others. As for Hon Hai, they must continue to innovate and lead by example. The further ahead they get, the stronger their position will be.

Taiwan News: U.S. W. Buffet and Taiwan Terry Gou likely to turn into rivals in China

Taiwanese Firms Investing in China

Here at Hi Tech Taipei I have long argued Taiwanese companies should be careful about migrating their latest technologies to China. President Ma Ying Jeou believes enabling companies to invest in China and specifically migrate their latest technologies to China will enable those companies to remain competitive. I am not so sure.

We noted objections to moving 45 nm fabs to China in Mr. Ma please don't move the fabs to China. We also argued in China Strategy for Fabless Chip Designers that design companies should be careful about partnering with Chinese companies because their intellectual property may be at risk. In Hon Hai Fights in Shenzhen we observed how Taiwan's largest contract manufacturer is struggling to maintain its intellectual property rights from marauding Chinese pirates. In the article quoted we observed how the Chinese legal system may be complicit in the piracy by not accelerating the case and enabling Hon Hai's competitor to gain traction in the market.

However, in No 10G AUO Plant in China we conceded any investment decision into China will be a business decision and not a political one and were also pleased to note both AU Optronics (AUO) and (in Fabs to Stay in Taiwan) the big Taiwanese foundries UMC and TSMC were going to stay invested in Taiwan.

To follow up Digitimes has posted an excellent commentary on the issue of Taiwanese firms investing in China. The beginning of the commentary is quoted below.

Since Taiwan's new president took office in May this year, the government has promised to relax various restrictions on its ties and exchanges with China. Taiwan's semiconductor and flat panel industries are now eagerly awaiting changes to the investment rules that have prevented companies from setting up operations involving advanced technologies in China.

President Ma Ying-jeou has on several occasions spelled out the principles for lifting the China-bound investment restrictions. First, after the restrictions are eased, Taiwan's IT industry can remain competitive globally, and its share of global market for IC and semiconductor will not be affected. Second, the advanced technologies developed by Taiwan players and their intellectual property must be well protected in China.

Signs in the market have indicated that an announcement from the government is expected in September.

The article is well worth the read. Follow the link below.

Digitimes: Taiwan and restrictions on China-bound investments

Hon Hai Denies Interest in Pegatron

Reports out of Taiwan suggest Hon Hai is interested in purchasing ASUSTek spin-off Pegatron. Digitimes wrote:

Foxconn Electronics (Hon Hai Precision Industry) is reportedly considering acquiring the operations of Pegatron Technology through a stock exchange, according to a Chinese-language Economic Daily News (EDN) report.

Asustek acknowledged that releasing Pegatron stock is one of the strategies adopted after the spin-off of its OEM arm, while Foxconn declined to comment regarding the speculation, according to the paper.

Several first-tier OEMs have been in negotiations with Asustek seeking to cooperate or acquire Pegatron since last year. Some market watchers believe Foxconn and Pegatron would be an excellent complement for each other, added the paper.

However, currently Hon Hai, the Foxconn parent company have denied the rumors.

Digitimes: Foxconn considering Pegatron acquisition, says paper

NY Times: Taiwanese electronics giants deny reported tie-up

Hon Hai Q2 Net Income Declines

Bloomberg reports that Hon Hai has posted its first quarterly earnings drop in seven years. According to Bloomberg Q2 net income dropped 24% from NT$15.6 billion in Q2 2007 to NT$11.9 billion Q2 2008.The net income declined despite an 18% increase in sales to NT313.6 billion. However, Bloomberg notes this is the slowest growth for Hon Hai in three years. Bloomberg notes the causes of the slowing growth and income decline to be:

• Slowing shipments

• Decreased profit at Foxconn

• New labor laws and minimum wage in China

Bloomberg notes:

Sales rose about 18 percent to NT$313.6 billion, the slowest growth in more than three years, as shipments to some clients eased and profit at Hon Hai's Foxconn International Holdings Ltd. unit slumped. New rules introduced this year increased labor expenses, curbing profit.

Bloomberg continued saying:

Hon Hai faces higher costs this year as staff expenses at its Chinese factories rise following the Jan. 1 introduction of new labor laws, which mandate minimum wages and severance pay. New accounting rules in Taiwan that require expensing of employee share bonuses also added to costs.

Bloomberg also notes that Foxconn International was also exposed to increasing costs. Bloomberg wrote:

Higher tax expenses, spending on research, and increased production costs led Hong Kong-listed Foxconn International, which is 72 percent owned by Hon Hai, to post a 56 percent decline in first-half profit to $142.2 million.

The increased costs are unavoidable for Hon Hai and Foxconn. Hon Hai's massive factory in Shenzhen employs a couple of hundred thousand people and a required increase in wages would certainly increase the labor costs significantly. Hon Hai have been actively investing in manufacturing facilities elsewhere e.g. Vietnam but even there they are being exposed to labor unrest and a very high inflation rate.

Bloomberg: Hon Hai Reports First Profit Decline in Seven Years

EMS Giant Hon Hai

Hon Hai Precision Technologies (2330.TW) (Hon Hai) is one of Taiwans signature companies. Most Taiwanese people know about Hon Hai and its founder, Terry Guo. The Hon Hai factory in Shenzhen is, being probably the biggest factory in the world, legendary. Hon Hai is the largest EMS (electronic manufacturing services) company in the world but, outside of analyst circles or the tech sector, not widely known.

Tech-ON recently ran a three-part translation of an article about Hon Hai from the July 31, 2006 issue of "Nikkei Electronics." The article starts:

In the town were a number of brand-new factories with exterior walls painted off-white, residential buildings for the factory workers and commercial facilities. There were more than 70 huge buildings as far as I could see. Loaded trucks were continuously coming and going on the three-lane roads among the buildings.

The number of employees working at the site reportedly surpasses 100,000. Given the size of the expansive site, some travel from a building to another in electric golf carts. This is the Shenzhen plant of Hon Hai Precision Industry Co Ltd (commonly known as Foxconn) of Taiwan.

Anyone would be surprised by what end-products they are producing at this plant, which never stops operating, day and night. The products manufactured there include the "iPod nano," the "Nintendo DS," the "PSP" and Motorola Inc's "RAZR" slim mobile phone. Mobile phones from Finland's Nokia Corp and Dell Inc's PCs are also manufactured here. It sounds like a global list of hit products.

The three part article is a good one and well worth the read. You can read the article by following the links below:

EMS Giant Hon Hai [Part 1]

EMS Giant Hon Hai [Part 2]

EMS Giant Hon Hai [Part 3]

Taiwan Moving into Robotics

EE Times reports Taiwan is aiming to grab a significant slice of the international robotics market. Recent trends have shown increased investment in robotics in Taiwan and some of the bigger players including VIA, MSI and Hon-Hai have moved into the sector. EETimes writes:

At the Taipei International Robot Show (TIROS), which was held in Taiwan from August 21-24, Via Technologies Inc. showed several ''entertainment robots'' based on its boards and chips.

Hon Hai, MSI and other Taiwan concerns are jumped in the arena, which is generating interest on the island. Taiwan's private sector increased its investment of robotics to $192 million in the first half of 2008, up 17 percent from the like period a year ago, according to the Robotics Association Taiwan (ROBOAT).

Taiwan's robot manufacturers are aiming for a share of the global market, which is worth a total of $17 billion annually, according to the International Federation of Robotics (IFR).

Industrial robots are expected to increase from about 951,000 units by the end of 2006 to 1,173,300 by the end of 2010, representing an average annual growth rate of 5.5 percent, the IFR said.

Robots for entertainment and leisure are poised for even faster growth with projected installations between 2007 and 2010, more than doubling the installed base in 2006 of about 1 million units, according to the IFR. These robots can perform a variety of functions for their human owners including security, maintenance and entertainment. The market data was provided by the Taiwan External Trade Development Council.

This is another example of how Taiwan's tech sector are always on the look out for the next best thing. They are always searching for new opportunities where they can leverage their core strengths in computing product design and development. They did this with the silicon industry, computers and they are now doing this in the solar industry and other sectors. It would not surprise me if in a few years they were the dominant players in this sector.

EETimes: Taiwan glides into robot market

Contract Manufacturing Growth Slows

Forbes has an excellent piece on the slow down in the contract manufacturing sector and speculates this will lead to consolidation in the industry. Forbes writes:

A shake-out is brewing among the world's top manufacturers that toil anonymously to make the latest cellphones, iPods and other gadgets for big names such as Nokia and Apple.

The end game could see some of the unsung contract manufacturing industry's biggest names, such as Singapore's Flextronics and Taiwan's Hon Hai, driving a wave of consolidation that will boost their top customers while squeezing some of the smaller ones.

Contract manufacturers produce much of the world's electronics, with collective revenue of $306 billion last year, making everything from PlayStations for Sony to notebook PCs for Dell, according to research firm iSuppli.

But growth is expected to dip into single-digits this year, and companies such as Celestica, Sanmina and Elcoteq saw revenues contract last year as margins erode all around.

"The competition is becoming more intense," said Calvin Huang of the Daiwa Institute. "We will see another round of consolidation among these (contract) providers."

Forbes continues noting the slowdown in the industry is exemplified by Hon Hai. Forbes observes:

The company's revenue is forecast to grow 20 percent this year to T$2.05 trillion ($65 billion), according to Reuters Estimates, down from 75 percent growth three years ago. Margins have dropped to 9.7 percent last year from 25.2 percent in 1999.

While Hon Hai has been quiet on the M&A front, Flextronics has been more active, making a number of purchases including its landmark $3.6 billion acquisition of Solectron last year. That deal helped Flextronics, whose revenue actually shrank in 2006, notch 46 percent growth last year.

Hon Hai and Flextronics shares are both down more than 20 percent this year as their growth slows, though many mid-tier players are up on hopes they could become acquisition targets.

Perhaps this slowdown is a reflection of the economy as a whole. Declining demand for computer products and reduced average selling prices accross the broad spectrum of devices will inevitably impact these companies. Many smaller manufacturers are unable to compete on scope or scale with Hon Hai and Flextronics and will therefore have few alternatives but to get bought out if the offer arrives. Of course this consolidation will meant entry barriers will increase and reduce the attractiveness of the market as a whole. This means there is less likely to be any new competitors entering the market.

Hon Hai and Felxtronics will still be around in a few years but, if the above is true, the contract manufacturing landscape is about to change. Anyway, enjoy the article.

Forbes: ANALYSIS-Shake-out looms for world's unsung gadget makers

Japanese Companies Outsource LCD Production

Trading Markets reports Sony and Toshiba will both outsource some of the production of their LCD screens to Taiwanese elecronic manufacturing services (EMS) companies. Sony will outsource to Hon Hai and Toshiba to Compal. Trading Markets writes:

While both firms will continue making LCD TVs at their own factories, they intend to meet the growing demand by using EMS (electronics manufacturing services) firms in Taiwan, the business daily said.

Their strategy stands in sharp contrast to that of Sharp Corp and Matsushita Electric Industrial Co, which are focusing on maintaining their technological superiority by making LCD panels and TVs themselves.

Sony farmed out production of some 500,000 LCD TVs to Taiwanese firms in the year to March 2008, but it now aims to boost the figure to more than 3 million in the year to March 2009.

Tokyo-based Sony has signed a contract with the Hon Hai Precision Industry group, the world's top EMS provider, the report said.

Toshiba has contracted out LCD TV production to Compal Electronics Inc, which will make slightly more than 20 percent of Toshiba's estimated 7 million planned LCD TV shipments in the year to March 2009.

While both firms will continue making LCD TVs at their own factories, they intend to meet the growing demand by using EMS (electronics manufacturing services) firms in Taiwan, the business daily said.

Their strategy stands in sharp contrast to that of Sharp Corp and Matsushita Electric Industrial Co, which are focusing on maintaining their technological superiority by making LCD panels and TVs themselves.

Sony farmed out production of some 500,000 LCD TVs to Taiwanese firms in the year to March 2008, but it now aims to boost the figure to more than 3 million in the year to March 2009.

Tokyo-based Sony has signed a contract with the Hon Hai Precision Industry group, the world's top EMS provider, the report said.

Toshiba has contracted out LCD TV production to Compal Electronics Inc, which will make slightly more than 20 percent of Toshiba's estimated 7 million planned LCD TV shipments in the year to March 2009.

The price competition for these products is becoming more intense and the companies will have to find ways to cut their costs. Outsourcing may be their only option.

Trading Markets: Japan's Sony, Toshiba to farm out more LCD TV output - report

Hon Hai's Talent Retention Package

Recently in Taiwan a new law was passed saying companies will be taxed for any stock bonuses given out to employees. Before they could charge this against their earnings and then only get taxed on their profit (after the stock bonuses were deducted). This has led to a major crisis in Taiwan tech firms where most of the annual wages are earned through stock bonuses. To avoid losing talent and to dodge the tax charge many companies have increased salaries by more than 50% to substitute for the stock bonuses that will not be issued in the future.

It seems however Hon Hai will be issuing massive amounts of stock to retain their employees. According to the China Post:

TAIPEI, Taiwan -- Senior executives of Hon Hai Precision Industry Co. will give out up to NT$16 billion worth of the company's stocks to mid-level employees to retain talent, the local United Evening News reported yesterday. According to the report, over 100 senior executives at the different units of Hon Hai, the world's largest contract electronics manufacturer, will take part in the program, dubbed "Passing Down the Torch" and billed as the world's first such program.

Under the program, senior executives will give out their Hon Hai stocks to employees below the manager level deemed by the company as "critically important."

As many as 100 million Hon Hai shares will be given out, translating into some NT$16 billion based on yesterday's closing price of NT$163.

Taiwan's TAIEX index yesterday climbed 184.46 points, or 2.6 percent, to 7,209.04 at the close of trade, posting a 3 percent advance this week.

The givers, however, will need to pay a gift tax.

According to Taiwan's gift tax law, each giver has an annual exemption of NT$1.11 million, after which he or she will be subject to a tax with rates from four to 50 percent, the United Evening News reported, citing officials from Mega Securities.

The program is in line with Hon Hai chairman Terry Gou's management philosophy: "To keep talent is to reward them."

Gou has outlined his talent retention principles in various occasions. First, the company needs to train talent. Second, the company must develop a positive, goal-oriented corporate culture. And third, the company must offer employees a stable, healthy and merit-based working environment.

Gou's philosophy is perhaps best manifested in a NT$100 billion project Hon Hai announced earlier this week -- the building of a "digital technology city," a living space big enough to accommodate 240,000 Hon Hai employees and their families. The city will be equipped with wireless Internet access, intelligent transportation systems and digitized medical provision, all encompassed in a land that stresses environmental sustainability.

Gou is a fairly impressive man. This program equally so. I wonder how many other tech giants will follow suit or if this will be an isolated case?

China Post: Hon Hai execs to give out stocks to retain talent

Taiwan's Future -- More Deregulation

The China Post reports Premier Liu Chao-shiuan has said more deregulation will occur over the coming year. Premier Liu apparently argues this deregulation will make Taiwan more competitive. According to the China Post:

On deregulation, Liu said it is the only way to enhance Taiwan's international competitiveness.

To this end, Liu said the government has already implemented several measures. The Cabinet decided last month to allow foreign companies, including those with Chinese shareholders, to list shares on the domestic exchange.

Further, the government has raised the cap for Taiwanese firms investing in China from 40 percent of the firm's net worth to 60 percent.

These measures, Liu said, have made Taiwan more attractive to foreign capital.

He cited as an example a plan by Hon Hai Precision Industry Co., the Tucheng, Taipei County-based contract electronics manufacturer largest in the world, to have its overseas units list in Taiwan.

Hon Hai officials said Wednesday that Foxconn International, a subsidiary which makes phones for Nokia Corp. and Motorola Inc., is planning to list in Taiwan. Foxconn International went public in Hong Kong in February 2005.

To create an even more deregulatory environment in Taiwan, the government will announce further measures, Minister-Without-Portfolio Chu said.

Among the more than 50 measures to be implemented by the end of the year are: relaxing the types of local industries that can invest in mainland China; simplifying the procedure by which mainland Chinese apply for business visas to Taiwan; and making it easier for mainland Chinese technical professionals to visit Taiwan for exchange purposes.

As for next year, the government will announce the following: making it easier for Taiwan banks to set up branches or subsidiaries in China or invest in Chinese banks, and opening Taiwan banks to investment from foreign capital, including those from mainland China.

The effect of these deregulations on the investments in China and Taiwan are going to be very interesting to watch. As we reported earlier in the year in Taiwanese Investment in China: Now and the Future, companies are already returning to Taiwan or looking to invest in other markets due to a declining investment environment in China. Both tax and minimum wage increases have made investing in China less attractive.

Premier Liu uses the Hon Hai example of how the deregulations are having a positive affect on attracting Taiwanese companues back to Taiwan. Hon Hai are investing large sums of money into Taiwan and how Foxconn are going to list on Taiwan's stock exchange (see Hon Hai Invests in Taiwan). Only time will tell if other companies are prepared to follow and if the deregulation will have a positive impact on the economy as a whole.

China Post: Gov't to unveil more deregulatory measures

Hon Hai Invests in Taiwan

In Hon Hai Plans to Set Up Shipping Center in Kaohsiung and Hon Hai Continues to Invest we noted Hon Hai's active commitment to investing in Taiwan. Most of these investment plans have apparently come about due to a relaxation in cross-straits relations and investment legislation as it pertains to China. The India Times Info Tech has more details on the proposed investments.

Hon Hai Precision Industry Co, the world's largest contract electronics manufacturer, will sell shares in its overseas units in Taiwan and create 30,000 new jobs on the island.

Hon Hai will also develop a new town to house 240,000 residents and set up an Asian logistics centre in Kaohsiung in southern Taiwan, Terry Gou, the company's chairman and founder, told a press conference.

Hon Hai, with sales of NT$1.7 trillion ($52 billion) last year, makes Apple Inc iPods and Dell Inc computers at plants in China. Gou signed an agreement in June to invest in Kaohsiung, including hiring 3,000 software engineers over five years.

The investment in the new town will total NT$100 billion ($3.3 billion), Gou said today. He declined to name which units may list in Taiwan or give a timeframe for the plans.

Foxconn International Holdings Ltd, Hon Hai's 72 per cent owned mobile phone-making unit, has plunged more 70 per cent from its high of HK$23.25 on October 3 last year to HK$6.80 in Hong Kong yesterday.

Taiwan's Cabinet said on July 31 stated that it will scrap a rule banning companies with Chinese investors from selling shares on the island's stock exchanges as part of President Ma Ying-jeou's pledge to ease restrictions on cross-strait trade and investment.

Although Mr. Gou has not said explicitly that Foxconn will relist in Taiwan, Reuters quotes the on-island Commercial Times saying:

One of the initiatives would see the company's cellphone unit, Hong Kong-listed Foxconn International (2038.HK: Quote, Profile, Research, Stock Buzz), return to Taiwan to make a listing on the local stock exchange, the Commercial Times reported.

Foxconn previously confirmed it was planning such a move, but said details were still being worked out.

This investment is not small change. It is significant! One wonders where Mr. Gou was during the past eight years and if this move is driven by political relationships (this is mere speculation). My main problem with this is that businessman should make business decisions, not political ones. If the Kuomingtang and Mr. Gou really cared about the well-being of Taiwan, they would have worked to invest in Taiwan over the past eight years.

At any rate I am pleased to see Hon-Hai investing in Taiwan. It will be good for the economy and help sustain the continued development of the tech industry here. Employing software engineers will also give the software industry in Taiwan a kick in the pants and help to establish them in this field. Although we should admit, ULead and Trend Micro aside, Taiwan's software development is much weaker than their hardware sector. This news will also come as a shot in the arm to Kaohsiung's port which recently lost a significant amount of business from Maersk (as noted in Hon Hai Plans to Set Up Shipping Center in Kaohsiung).

India Times Info Tech: Hon Hai to create 30,000 jobs
Reuters: Taiwan's Hon Hai to announce 3 major initiatives -report

Hon Hai Continues to Invest

Hon Hai Precision Technologies will continue to invest in Taiwan, China and other global centers. Trading Markets says:

Hon Hai Precision Industry Co Ltd (2317.TW) said it will continue expanding in Taiwan, China and other places worldwide despite recent minor adjustments to its production lines.

"We will continue expansion globally to meet client demand and the location of production lines will facilitate serving clients," said an official from the company, the world's leading contract manufacturing group for information communications technology devices.

It has moved three production lines for connectors back to Taiwan from China.

"The measure coupled with previous announcement of investment in Kaohsiung signal our commitment to home production," he said.

The company recently announced plans to hire 2,000-3,000 software engineers to develop digital content and other software segments in the southern Taiwan city of Kaohsiung.

The company and group members own 20-30 manufacturing plants in China, while the three connector production lines account only to a marginal part of the group's operations on the mainland.

Meanwhile, its Hong Kong-listed unit, Foxconn International Holdings (HK 2038), is due to kick off operations at a new mobile handset new site in Langfang in China's Hebei province.

"The Langfang site has been under construction for 1-2 years," he said, noting the plant is located there to be near the leading cellular phone brands' operations.

The Hon Hai group, also known as Foxconn, has also a presence in Europe, India, Central and Latin America, among others.

To further reiterate the scope of Hon Hai and Foxconns global investment, it was reported a few weeks ago Foxconn would be developing a huge factory in Mexico that will employ 20,000 and 30,000 people. The El Paso Times reported:

A Taiwan-based company will open a massive maquiladora across the border from Santa Teresa that will employ anywhere from 20,000 to 30,000 people in the next four years and create an economic boost on both sides of the border, officials said Monday.

The plant, which may be the largest in Mexico, will be in San Jeronimo, according to an announcement by New Mexico Gov. Bill Richardson's office

Taiwan-based Foxconn broke ground a few days ago, officials said.

The plant will produce computers, laptops and servers. Motorola, Nokia, Dell, Compaq, Hewlett Packard and Apple are among its clients.

"This is one of many mutually beneficial projects that I and my economic development people have worked with Chihuahua officials to carry out," Richardson said. "This is the kind of economic development that is going to bring the New Mexico-Mexico border to the forefront of international trade and development."

The global impact of Taiwanese tech firms is not in doubt. They will continue to develop and grow in many different countries around the world. This type of investment is good for both the local economy and the firm. However, I am personally pleased to see Hon Hai is still committed to its home base Taiwan and will continue to invest in operations here. It will be good for the economy and Taiwan as a whole.

El Paso Times: Maquila bordering New Mexico to employ up to 30,000
Trading Markets: Hon Hai to continue expansion in Taiwan, China

Terry Gou Tai Ming Donates....!

We were stunned to see Terry Gou Tai Ming, founder and Chairman of Hon Hai Precision Technologies, will be donating 90% of his NT$173 billion (US$5.7 billion) fortune to charity after he gets married on Saturday! The Straits Times wrote:

Terry Gou, Taiwanese high-tech tycoon and one-time suitor of Carina Lau, has pledged to donate 90 per cent of his NT$173-billion (S$7.7-billion) fortune to charity after he marries a dancer tomorrow.

The 57-year-old widower made the promise at his engagement banquet on Wednesday sitting beside his bride-to-be, 33-year-old dancer Delia Tseng, said reports.

His Hon Hai Group's flagship company, Hon Hai Precision Industry, is the world's largest contract manufacturer in the electronics sector for brand-name companies such as Dell, Nokia and Sony.

Mr Gou said he had signed papers to pledge away his fortune before he decided to marry his fiancee, said reports quoting a lawmaker at the banquet.

But with Mr Gou's remarriage, she had to sign the documents too for his pledge to take effect.

He said he was moved when she signed the papers without hesitation.

Mr Gou made the decision to donate 90 per cent of his personal assets to charities in the future and his bride-to-be supports the decision without any hesitation,' lawmaker Wu Den-yih told TVBS news channel.

Mr Wu, who is also secretary-general of the ruling Kuomintang, was a guest at the banquet at the Grand Hyatt hotel. So were President Ma Ying-jeou and his wife.

Mr Gou's first wife died of breast cancer in 2005. They have two children.

Absolutely amazing! Mr. Gou is following in the footsteps of Bill Gates and Warrent Buffet and the precedent they are setting is an excellent example to all of us! Mr. Gou, however, has long been a philanthropist. In 2007 he donated NT15 billion dollars to the Taiwan University to develop a cancer hospital. Da Hsuan Feng, Senior Executive Vice President of the National Cheng Kung University wrote:

The news stated that Taiwan’s multibillionaire Terry Guo Taiming donated a whopping NT15 billion (around $455 million US,) lock-stock-and-barrel, to National Taiwan University to develop a cancer hospital and advanced medical facilities such as a proton therapy center and other biomedical engineering projects. To this point in time, this donation is the largest single gift made to a single university anywhere on earth. It even topped the $300 million gift of Joan and Sanford Weill's to Cornell University’s School of Medicine which was just announced as recent as June 13 of 2007. The claim then was that it was by far the largest single gift to a single university. This claim certainly did not withstand the test of time!

Da Hsuan Feng continued, saying:

Guo’s gift is sweeping the media almost on a daily basis in Taiwan and other regions of Asia, and is the intense discussions in coffee shops and restaurants all over East Asia. It is interesting that the intensity has not dropped off even though the event is by now well over a week ago. The “Terry Guo Effect,” as I would call it, seems to be here to stay.

Mr. Guo has indeed been a leader in both business and philanthropy. Perhaps other Tycoons will follow his example in the future. After all, who really needs billions of dollars?

Straits Times: Billionaire's act of love
Cimat: A Tale of Two “Typhoons”: The “Terry Guo Effect” (Opens PDF file)

Hon Hai Plans to Set Up Shipping Center in Kaohsiung

I know this is old news already but its worth a mention. Earlier this week a number of news sources said Hon Hai planned to invest in an international shipping hub in the Southern Taiwanese city of Kaohsiung. According to the China Economic News (CENS):

Following its plan to set up operations in the Kaohsiung Software Park, Hon Hai Group has planned to establish a transshipment center for its Asian operation in Kaohsiung Harbor, which may further develop into the group`s global logistics and operation center in the future.

The projected transshipment center will handle finished and semi-finished products from its factories in Vietnam and China`s Guangdong province, in addition to undertaking some simple processing works before transporting those goods to final destinations. Currently, Hon Hai transships those goods mainly via Hong Kong or Singapore.

Kaohsiung harbor officials revealed that Hon Hai has requested to lease a new plot of 38.8 hectares entirely, originally the site of a factory of Tang Erng Iron Works, being acquired by the harbor authorities for use as the free-trade harbor area.

The plan follows the group`s previous pledge with the Ministry of Economic Affairs for establishing an R&D center staffed with 520 engineers inside the Kaohsiung Software Park by mid-2009.

This is good news for the Kaohsiung port and comes hot on the heels of Maersk announcing they would slash their shipping capacity from the port by half. According to a Reuters report earlier this month:

A.P. Moller-Maersk plans to slash about half its container handling capacity in Taiwan's Kaohsiung, Asia's No. 6 port, the latest blow to a harbour that has been losing ground steadily to South Korea and China.

The Kaohsiung Harbour Bureau confirmed on Wednesday a newspaper report that Maersk (MAERSKb.CO: Quote, Profile, Research), Kaohsiung's largest foreign operator, intends to give up berths 118 and 119, two of the four it operates in the harbour, when their leases expire in October.

The move by the operator of the world's largest container shipping fleet is expected to further hurt Kaohsiung's declining position as one of Asia's top ports.

The 143-year-old harbour has been losing ground to fast growing rivals across the Strait in China, with the global container shipping industry under pressure from a slowing world economy and rising fuel prices.

But the bureau hopes to convince Maersk to at least move some of its capacity to a berth adjacent to the two berths that will remain following Maersk's departure, arguing that will help the company cut costs.

"We are in talks to have them move to berth 75 and relocate the existing operator, South Korea's Hyundai, to 118 and 119," said Huang Kuo Ying, deputy director general of the Kaohsiung Harbour Bureau.

Kaohsiung will definitely benefit from Hon Hai's investment in both the science park and the port. One wonders however how politically motivated the move was? While I am glad to see investment in Taiwan and glad to see tech companies making an effort to keep Taiwan competitive in all areas of economic activity, I am saddened to think this decision may not entirely be based on good business principles but more political motivation. Yesterday Terry Gou Tai Ming, the chairman of Hon Hai, got engaged in Taipei and his guests included the new president Ma Ying Jeou and many KMT legislators. Honorary Chairman Lien Chan of the ruling Kuomintang will also be the host at the wedding (see China Post article).

One wonders if the Democratic People's Party (DPP) won the election, if Hon Hai would have pledged the same level of investment! Once again, this is not a political blog so we stop here! At least Kaohsiung will reap some benefits.

China Economic News: Hon Hai Plans to Set UP a Transshipment Center in Kaohsiung
Reuters: Maersk to slash Taiwan port ops, focus on China

Hon Hai Fights in Shenzhen

As if on cue!

A few days ago in China Strategy for Fabless Chip Designers I argued against Lung Chu, President of Asia field operations at Cadence, that Taiwan chip designers should partner with Chinese competitors. Also, yesterday in Mr. Ma please don't move the fabs to China I argued it would not be such a great idea for Taiwan to move stategic technologies to China. My main concern and the concern of many is the lack of protection against property rights.

In cases like this I hate to be right!

Today we read in the International Herald Tribune (IHT), Hon Hai Precision Technology (Hon Hai) is taking their Chinese competitor to court for stealing trade secrets. We also read the courts are delaying the proceedings enabling Hon Hai's competitor to become stronger. The IHT says (emphasis added):

Taiwan's giant electronics manufacturer Hon Hai Precision Industry Co. appears to have a big advantage in the China market — its principals all speak Chinese and have an intuitive sense for the country's often bewildering business culture.

But last week the company took out half-page ads in major Taiwanese newspapers to complain about delays in a mainland court over the prosecution of a Chinese competitor.

Spokesman Edmund Ding said Hon Hai suspects that BYD Company Limited, a Chinese electronics maker based in the southern city of Shenzhen, is systematically looting its trade secrets.

The purpose of BYD's alleged actions, Taiwanese media have reported, is to give the Chinese company a leg up against Hon Hai in winning big parts orders from international mobile phone powerhouse Nokia.

The row is a stark reminder that even for the most sophisticated Taiwanese companies — in this case one employing 500,000 Chinese workers — doing business in China is not as simple as it seems.

Later we read (emphasis added):

Cheng Jung-wen, a senior official at the Taiwan Merchant Association in Shenzhen said the Hon Hai case reflected a tendency among some Chinese officials to favor local companies over outsiders in intellectual property rights disputes.

Cheng said intellectual property theft is a common problem suffered by Taiwanese businesses, but that provincial Chinese officials seemed unwilling to
help them address it.

"We have long given up the thought of asking Chinese authorities for help," Cheng said. "The only way we can avoid damages is to develop new products all the time."

The context of this is clearly given in the IHT. Hon Hai, as the IHT points out, is a huge company. They are the world's largest contract manufacturer producing everything from mobile phones to computers. Their leader Terry Gou Tai Ming is a legend in Taiwan and one of the richest men on the planet. There are not many companies in Taiwan bigger than Hon Hai. If Hon Hai can get hammered by the theft of trade secrets, what can the smaller competitors do? What realistic chance do they have?

In China Strategy for Fabless Chip Designers I said:

So there is potentially a huge downside for Taiwan design firms establishing partnerships with Chinese competitors. They might steal their stuff and blow them out of the water! Don't get me wrong! Partnerships and joint ventures can and do work, but for them to work there must be trust and a record of behaviour that speaks for itself. Chinese firms must realize that business is not about getting ahead at all costs and at the cost of those you work with. Only then will people be more willing to partner with them.

I stand by those comments today! Do you?

International Herald Tribune: Taiwan electronics maker Hon Hai wages judicial battle against Chinese competitor

Taiwanese Firms Moving to Vietnam

China Economic News (CENS) continues to update on Taiwanese firms moving to Northern Vietnam. (See Vietnam the new Promised Land) In an article posted Friday (April 18) CENS says:

To ease the impact of skyrocketed production costs in mainland China, Taiwanese firms operating there, including those form the electronics and conventional industries, are rushing to move operations to northern Vietnam.

The relocation move such leading electronics as Hon Hai Precision Industry Co. and Compal Electronics Corp. is expected to encourage more Taiwanese firms to do so in the second half of this year. Taiwan`s top-five electronics firms have all set up production facilities in the northern part of Vietnam.

However, all this movement is pushing up property price in Vietnam, especially in Hanoi. The article says:

...the average land price for some industrial zones in northern Vietnam is set at 200,000 renminbi per acre, quite the same as those located in eastern and southern parts of mainland China.

I am sure we will hear more about this as time goes by. However, one should imagine that rising costs in Vietname will eventually force many companies to return to Taiwan or to expand elsewhere. I personally believe this is good for Vietnam. Much of the success of Guangdong Province in South China can be attributed to the massive investment from Taiwanese firms there. Perhaps Vietnam can reap the same benefits and their people can have an improved quality of life.

Article: Taiwanese Firms Switch Operations to Northern Vietnam From Mainland China
Previous Coverage: Vietnam the new Promised Land