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Vertical Integration and Foxconn: Watch the Details

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Foxconn has used all sorts of corporate spin-off companies to put various endeavors each in their own basket- hence, the contract with the State of Wisconsin is not Foxconn, nor Hon Hai the original company started by Terry Gou in the seventies.  The Wisconsin agreement is with a company formed in the Cayman Islands entitled SIO International.

There are the obvious jurisdictional, tax and legal reasons for forming a company in the Cayman islands, but this strategy gives one insight into the web weaved by corporations as part of their larger strategy.

To that end, Terry Gou has been known as the father of a concept called Vertical Integration– In Longhua City, the largest conglomeration of facilities ever put together by Foxconn exists. Within the company are soccer fields, coffee shops, shopping centers, movie theaters, chicken farms, hospitals, apartment complexes… Everything that the employees of Foxconn could ever need are housed within the same complex.  Some may have psychological issues with just the concept that their entire lives are spent never leaving the grounds where they work- but, Mr. Gou has shown that such multifarious control of all aspects related to his company and its employees has enabled him to control a very fragile bottom line.

You see, the Foxconn financial model is based purely on volume. That is why there is a goal to make 300 iPhones a minute- the Foxconn share of an Apple phone can be measured in cents- and employees make around $2.00 an hour. Around-the-Clock production of hand assembled units at 300 per minute can easily get thrown out of momentum by a slight deviation.

So, the answer on the work floor is the operate with a military authority with no room for deviation. Given the need for such micromanagement, the Gou philosophy then is to provide all of the tools for every facet of an employees life.  As oppressive as it seems, most workers in China come from very destitute rural surroundings- where anything is a step up.

Obviously, in Wisconsin, the lifestyle and culture is different than in China. Americans are founded upon individualism, and therefore the Foxconn lifestyle in Chinawill not be plausible in Mt. Pleasant.

However, don’t be surprised if numerous suppliers locate right next to the new Foxconn site. And, don’t be surprised if many new corporate partnerships and Wisconsin corporations of which Terry Gou is a primary stockholder emerge in this process. The commitment of 1.3 billion in annual spending with Wisconsin corporations does not have a requirement that said corporations preexisted- they could be newly formed corporations with Mr. Gou’s signature on the incorporation documents.  One thing is for certain: the economic formula for turning a profit in the manufacture and sales of LCD screens relies on a very tight grip of costs and a very powerful drive for production volume.

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