Two weeks ago, when summarizing the state of the US vs China escalating patent war (for now manifesting itself in the courtroom brawl between Apple and Samsung, but soon to drag many more comparable companies down in drawn out litigation), we observed that while AAPL may have the upper hand, iPhone 5 map fiasco notwithstanding, that "the Chinese politburo can one day decide to pull FoxConn's operational license, in the process bankrupting AAPL overnight" if China really wanted to turn the tables. Obviously, this was the "thought experimental" MAD outcome which leads to loses for everyone involved: both Apple and China (where Apple's contract manufacturer FoxConn employs over 1 million workers). There is one other alternative: that FoxConn, by now having reverse engineered the peak of Apple's brilliance (whose latest evolutionary step was "lighter" and "longer", which anyone could have come up with), decides to brave it alone, and instead of being a contract manufacturer, to simply slap on a FoxConn sticker, a la Acer and ASUS, and sell all Apple-equivalent products at 50% off while collecting all the revenue. Impossible, you say, Apple would never allow it? It is already happening, first in high-growth Brazil, where FoxConn is now launching its own stores.
From Valor International:
Chinese contract manufacturer Foxconn, which produces Apple's Iphone, will create a direct to consumer store at its new R$1 billion factory in Itu, in the state of São Paulo, offering several of the brands manufactured by the company. The plant's project was presented Thursday in the São Paulo's state government headquarters. It will be the 9th Foxconn factory in Brazil, but the first not to be created in leased land, representing a more permanent home for the Chinese giant. The new factory will employ between 5,000 to 10,000 people up to 2016.
As to what products will FoxConn will sell, it is for now unclear but will likely focus initially on merely being a reseller of Apple and other beneficiaries of its OEM supremacy. If this is the route Hon Hai's factories decide to go, it means that the "magic" of the Apple retail experience will soon be rapidly commoditized, once the inventory of the Apple store is replicated down the street at another retail location, one which has its own selling culture.
One thing is certain: if and when it so chooses, FoxConn having reverse engineered a stunning half of the world's entire OEM electronic device product flow, will have its choice of what it wants to bring direct to retail. As a reminder:
Apple’s position as the world’s leading computing device company has driven manufacturing partner, Foxconn, to seize an astonishing 50 per cent of the world’s electronic manufacturing services market, said iSuppli today. Half of the world’s production of consumer electronics devices come from a Foxconn factory, with Apple’s production demand driving this record, iSuppli explains. This is now an Apple world.
“Foxconn’s customers are some of the hottest companies in the electronics business today, most notably Apple,” said Thomas Dinges, iSuppli associate. “As Apple and others have gained share, so has Foxconn.”
With revenue of $17.1 billion, Taiwan’s Foxconn, aka Hon Hai Precision Industries, was the dominant EMS provider in the first quarter of 2010, dwarfing No. 2 player Flextronics International, which posted revenue of $5.9 billion during the same period. Apple represents the fastest-growing customer for Foxconn, which manufactures products including the iPad and the iPhone 4.
In simple terms it's called "economy of scale", or in this case "monopoly", and soaring leverage to do whatever FoxConn chooses. Even if that means taking on some of its core OEM customers: after all where are they going to go?
Which begs the question: what happens to Apple margins and future innovation cycle if it ever were to lose its primary OEM channel should the infighting between the US, Korea (Samsung) and China (HTC), aka West vs East, continue escalating? Not to mention its $600 billion market cap.
And even if FoxConn merely becomes a reseller of Apple and other brands, how long until people realize that at the end of the day absent the creative genius that took Apple to the pinnacle of electronic device innovation under Steve Jobs, all it really is, is a sticker of a fruit affixed to a bunch of products made and packaged by a company operating out of China, which also is the beneficiary of the GDP boost courtesy of iPhone 5 sales, not the US - all the US consumer gets is the credit card bill to fund Chinese economic growth.