Foxconn's life after Apple depends on a bit of nostalgia (opinion)

  • TECH
  • Tuesday, 27 Mar 2018

FILE PHOTO: The logo of Foxconn, the trading name of Hon Hai Precision Industry, is seen at its headquarters in New Taipei City, Taiwan June 12, 2017. REUTERS/Eason Lam/File Photo GLOBAL BUSINESS WEEK AHEAD

Ah, nostalgia.

It keeps the Star Wars movie franchise ticking over and drives Bruce Springsteen concerts.

It's also a theme for Foxconn Technology Group's strategy to wean itself off Apple Inc.

First came the FIH Mobile Ltd decision two years ago to bankroll a revival in the Nokia name. This week, fellow Foxconn affiliate FIT Hon Teng Ltd announced it's dropping US$866mil (RM3.36bil) in cash to buy Belkin International Inc.

That purchase includes Belkin phone accessories; Linksys, a maker of networking products for consumers; Wemo, a smart-home brand; and Phyn, a supplier of water monitors.

Like its parent Hon Hai Precision Industry Co, FIT is heavily reliant on Apple. Almost half its sales last year came from the mobile and wireless devices division, which supplies connectors, earphones and lightning plugs.

Note the irony of Foxconn broadening its horizons by buying a company that made its name from iPhone and iPod accessories. Even now, both the Belkin and Wemo websites feature the Apple name prominently. If not for Apple, it's unlikely the world would have even come across the Belkin name.

To date, its venture with HMD Global Oyj to make Nokia smartphones and feature phones has been a major drain on Foxconn. The gamble, though, is that consumers will return to the brand out of nostalgia, distrust of Chinese brands, and boredom with Samsung. It's quite possible Foxconn will be right on this one, but it will burn a lot of money before we know for sure.

With Belkin, things don't seem much better. Revenue climbed just 4.6% last fiscal year to US$789mil (RM3.06bil), according to FIT's filing. What's worse, it had just US$4.7mil (RM18.21mil) in net income, for a profit margin of 0.6%, after a US$1.7mil (RM6.59mil) loss the year before.

At a purchase price of US$866mil, FIT's paying 185 times earnings, or 15 times Belkin's US$57.4mil (RM222.42mil) in assets. That's not only a steep price – it's beyond the cash FIT has on hand, meaning it will need to rustle up some funds for the deal. Discouragingly, FIT said that both debt and equity financing are among the options.

This gamble is based not just on the revival of a once-beloved name, but on its belief that the accessories ecosystem has continued growth ahead of it. Apple's smart-home strategy centres on its Homekit platform, while Inc is finding momentum with Alexa and Alphabet Inc is making attempts to leverage Google Assistant.

The smart-accessories market – speakers, doorlocks, cameras, rice cookers – is still nascent. Some providers have gone belly up, others were bought by bigger names.

For all that, Belkin will remain relatively brand-agnostic (Foxconn also supplies Amazon) and gets the backing of a rich parent that can provide manufacturing support and distribution. Foxconn gets an established name and the knowledge that even if consumers don't connect their doorbells to the Internet, they'll continue to spend money on cables, cases, battery packs, car accessories and speakers – products for which Belkin is famous.

Whatever profit Foxconn can squeeze out of these deals will depend largely on the value of nostalgia.— Bloomberg

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