Foxconn Technology Co. Ltd is giving a new meaning to the term “full-service-provider.” It is a contract manufacturer, a supplier of a wide range of parts and services to electronics OEMs and, since last year, a provider of critical financing support to suppliers. By setting up a business unit to fund suppliers, Foxconn has cracked open the last barrier to contractors in the industry supply chain but the move is not without jeopardies for the Taiwan-based company, competitors and OEMs.
Some observers have termed the new service Foxconn Bank. The company itself prefers the term Foxconn Financial Service Platform. The nomenclature is irrelevant. What’s more important is the fact that the EMS company is moving deeper into the electronics supply chain and helping to address the problem of supplier financial stability, one of the more intractable challenges companies in the industry face.
In order to understand the implications and significance of Foxconn’s decision last year to begin offering loans, lines of credit and other financial support instruments to component suppliers and other providers of third-party services to the industry it is necessary to review the factors that created the need for such a set of offerings in the first place. The electronics supply chain is convoluted and difficult to support and navigate. In addition to multiple market challenges companies must deal with problems related to the financial fitness of critical suppliers and support services providers.
Numerous cottage industries exist to support many parts of the supply chain, including companies that help suppliers deal with regulatory obligations related to labor and environmental laws. There are also companies that help assure and secure the raw materials suppliers need for the production of critical components. In fact, OEMs such as Apple, Cisco and other large enterprises have been known to pre-pay for supplies months ahead of delivery to put themselves in preferential positions in the event of shortages.
At the financial level investment firms and brokerages who track public companies help OEMs and EMS companies gain necessary insights into the financial status of their suppliers. The data generated is often limited, however. They are also typically available to only the enterprises that are rich enough to pay for the service. In fact, to gain enough intelligence about a supplier an OEM or EMS provider may have to tap multiple sources for information. The analysts are also not always independent and the information generated can become corrupt as a result of management interference.
A financial investment (whether in the form of a loan or an outright capital outlay) makes it obligatory for an enterprise to disclose important information to the investor. In addition, Foxconn is certain to conduct due diligence before giving financial support facilities to its suppliers, making it a direct beneficiary of intelligence about a supplier. There are other benefits to Foxconn and the larger industry. First, a loan from Foxconn to a supplier is a green light to other EMS providers and OEMs that the company had probably been thoroughly vetted and therefore could be a viable longer-term partner. While this doesn’t absolve an OEM or EMS provider of the responsibility to conduct its own financial investigations it still represents a starting point for the vetting process.
Furthermore, any investment in a supplier and the related endorsement from Foxconn can only help to strengthen the entire supply chain as a whole. For sure, Foxconn is taking this move only in furtherance of its own interest but there will be some associated benefits for the rest of the industry as a result. Foxconn’s move can also spur some of its rivals and many of the bigger OEMs to engage in similar financing actions.
There are dangers inherent in Foxconn’s financial support for suppliers. A financial investment in a supplier will heavily tilt the relationship towards the financier and influence the bidding process for components. It’s difficult to imagine a supplier that is heavily depending upon Foxconn rejecting the company outright in favor of another EMS provider or OEM in the event of component shortages. Also, a little investment can be built into a bigger investment and eventually an outright acquisition, taking the supplier off the market and folding it into Foxconn’s growing empire of in-house suppliers, a group the company has been adding to in order to improve its operating margins.
For Foxconn, the risks involved in financing a supplier include the possibility of getting manipulated or even stretching itself too thin and getting into relationships that could become legally tricky. Those downsides must be carefully weighed and the risks hedged carefully. Overall, though, Foxconn Financial Services is a positive addition to the EMS provider’s group of businesses. It is hopefully a positive for the suppliers involved and the industry supply chain.
Bolaji Ojo is editor-in-chief and publisher of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at email@example.com.