Hon Hai – Diversification Beyond Apple into Semiconductor & EV Space Key to Long-Term Growth

We deep dive into the earnings performance of the world’s largest smartphone EMS and potentially the largest EMS player by revenue – Hon Hai (Foxconn Group).

Short-Term Performance & Outlook: Apple remains the foundation, Cloud & Components business bright spots

  • Hon Hai”s 2Q’21 revenue climbed to NT$1351 Billion ($48.55 Billion), was in line with the expectations from the group’s revenue perspective, growing 20% YoY compared to last year which was the break-out quarter for the pandemic.
  • The localized production strategy is helping Hon Hai to somewhat alleviate the pandemic effect which is going on in waves.
  • Smart Devices business remain strong growing 29% YoY in revenues, thanks to its biggest customer Apple whose iPhone shipments grew also coincidently 29% YoY during the June-ending quarter.
  • Cloud Networking & Computing segments saw a slow down in revenues compare to a stronger demand in last year’s quarter. However, Hon Hai expects the cloud & networking products demand to pick up in Q3 2021.
  • Overall the company’s Gross margin remains stable at a 6% level with Operating income and net income still hovering around the 2% mark each.
  • We estimate the revenue to grow around 5% levels in Q3 2021, driven by cloud and computing segments offsetting a slow quarter for smart devices business (re: Apple) and some headwinds from component supply crunch as well as pandemic peaking in some Asian markets, home to company’s operations.

Counterpoint Research - Honhai Margins Analysis - Q2 2021

Long-Term Strategy & Outlook: Boost Gross Margins

  • Looking at the new growth segments globally with AI, Robotics and Electric Vehicles, Hon Hai wants to cash in on these segments via its F3.0 strategy
  • For example, Hon Hai made  series of investments, partnerships, and new alliances over the last 12 months in the EV Space with huge ambitions to capture more value across the EV value chain from semiconductors to chassis design to software to assembling to services.
  • Hon Hai wants to capture atleast 10% of the $600 Billion EV market by 2025. This translates into 3-4 million EV units per year or $60 Billion in revenue.
  • Hon Hai with a vertical approach across the EV stack looks to lift its group Gross Margins up from 6% to 10% levels.

  • From a semiconductor perspective, Hon hai also wants to control the upstream supply chain for a more integrated offering, have invested in:
    • 8-inch wafer fab (DNex/ SilTerra, Malaysia) – focusing on mature nodes 110nm
    • 6-inch wafer fab from Macronix in Hsinchu to develop components such as SiC MOSFETs for EVs
    • KoreSemi in Qingdao
    • GigaSolar Materials to develop EV Battery materials
  • From software and services perspective, If Tesla is the iPhone of the EV market,  HonHai wants to become the “Android” of the EV market via its EV Open Market platform. So this is from a software perspective.
  • From a hardware perspective, Foxconn is also looking to set up additional factories in Thailand and the USA to produce EVs via contract manufacturing (e.g. Fisker, Byton, Geely, Stellantis) and for prospective new entrants relying on the company for the entire EV stack.

For more insights on Hon Hai’s EV Strategy, read – Will Foxconn Shake EV Industry?

So in summary, Hon Hai’s long-term strategy look solid as it looks to diversify beyond the smart devices business which is yielding very low margins to segments that can yield higher margins with more control over the entire stack. Though, execution would be the key to really become the Android of EV market.

Watch the full interview below: