Foxconn faces tough competition from online, offline rivals

Foxconn, an original equipment manufacture (OEM) front-runner in the communication, computer and consumer (3C) product area, formulated a blueprint in September aimed at establishing its own distribution network in mainland China by setting up 10,000 chain stores.

Within the next three years, Foxconn intends to invest 10 billion Taiwanese dollars to set up as many as 10,000 3C chain stores in China, as part of its efforts to transform itself from an OEM producer into a retail distribution giant.

Foxconn's "processing export" business model faced a major challenge during the global financial crisis.

Foxconn, the world's largest 3C product OEM producer, has been going all-out to promote the overseas sales of products produced in China.

Of China's top 200 foreign trade companies in 2008, compiled by the Chinese Customs Office, nine subsidiaries of the Foxconn Group were included, with their combined exports estimated at $44.48 billion.

The aggregate exports of Foxconn subsidiaries amounted to $55.6 billion, accounting for about 3.9 percent of China's total exports - the largest single group in China in terms of export totals.

Among Foxconn's subsidiaries is Hongfujin Precision Industry Co, which reported $26.2 billion in exports, ranking No 1 for the seventh straight year in the top 200 foreign trade company rankings.

The global financial crisis dealt a blow to Foxconn, which relied heavily on foreign markets. Although Foxconn maintained a relatively sound export performance in 2008, its shipments of computers, one of its flagship areas, registered a negative year-on-year growth of 10 percent, chalking up a 22 percent growth in sales.

This was the first time in 10 years that Foxconn failed to meet its annual growth target of 30 percent set by its chairman Terry Gou.

With its sales and profits both plunging by 30 percent in the first half of 2009, compared with the same period in 2008, Foxconn is now facing an unprecedented crisis.

Plagued by a decline in profitability, Foxconn, founded 35 years ago, is now looking for a new leap forward through its launch into China's distribution market.

Within the next 20 years, China is expected to emerge as the world's fastest-growing distribution market on the back of the expansion of domestic demand.

Chinese consumers

China is expected to leapfrog into the world's No 2 slot in the consumer spending market by 2030, up from its current No 6 position.

The Chinese government is easing regulations on the inflow of foreign capital into the Chinese retail market, opening its door wider for foreign companies to make bigger forays into the distribution business in China.

Foxconn is also exploring ways to shift its business model from an "OEM-centric" model towards an "OEM + distribution" model to create, more opportunities in the Chinese market. With its entry into the Chinese distribution market, Foxconn could make both production and distribution available in China, which would contribute to saving logistics costs and an increase in OEM orders.

It remains to be seen if Foxconn's launch into the Chinese distribution market will yield successful results or not, considering the fierce competition in the Chinese 3C distribution market.

Amid stiffer competition in the 3C product distribution market, the number of franchise retail stores run by major players totals more than 10,000 in China today.

To realize its plan of establishing 10,000 stores within the next three years, Foxconn will have to set up 278 shops per month on average, much higher than the previous record of 52 (among 3C retailers) set by Suning.

Another factor that makes the future of Foxconn uncertain is that Internet retail distribution companies, which are growing faster than their offline-based rivals, are also expected to expand their business coverage to include offline operations.

According to 51mdq.com, China's largest online business-to-consumer (B2C) consumer electronics retailer, the market size of 3C online shopping malls will likely account for more than 20 percent of the total 3C retail market within the next three years.

Plus, there is a gap between Foxconn's investment plan and market situations. It would be difficult for Foxconn to establish and operate 10,000 3C stores with the planned 10 billion Taiwanese dollar investment.

Considering that 10 billion Taiwanese dollars is worth about 2.1 billion yuan, the average per-store investment stands at a mere 210,000 yuan.

This is much lower than those of Gome and Suning, for which the average per shop installation cost was more than 2 million yuan.

To realize its "10,000-store" plan, Foxconn also needs to straighten out numerous legal and procedural hurdles, as well as strict screening by the Chinese Ministry of Commerce and local municipal governments.

Even if Foxconn succeeds in realizing its plan, its lack of expertise and experience in the retail distribution business would make it difficult for Foxconn to achieve rapid growth.

The author is a researcher with Samsung Economic Research Institute (China). The views expressed here are his own.

(China Daily 11/30/2009 page2)