Beginning in 2020, the effects of the pandemic caused significant shortages of semiconductor chips which affected companies like Foxconn Technology Co. (OTCPK:FXCOF), a Taiwanese manufacturer of chips. A surge in demand for laptops and PCs in 2020 coupled with the growing electronic vehicle market added to the crunch, and East Asian manufacturers simply couldn't keep up with the demand, especially in light of their own logistical issues such as periodic shutdowns and quarantines. Predictably, the chip shortage caused a surge in used car prices and other electronics, as the supply of new products with semiconductor chips became stressed.
Global economic conditions were unstable between 2020 and 2021, as regulations and measures meant to combat Covid alternated between lockdowns and re-openings. As lockdowns occurred, economic activity slowed worldwide, and as lockdowns were lifted, a surge in spending stimulated the economy. This trend alternated throughout 2020 and 2021, and again in 2022. Although economic growth has resumed due to the ease of lockdowns combined with fiscal and monetary policy and stimuli from world governments, the global economic forecast for computer chips is less clear. Trade relations between the US and China, the Fed's downsizing of its balance sheet, and high oil prices will continue to determine economic trends going forward, but Foxconn is in a position to continue its trajectory of growth in 2023.
Taiwan benefited from conditions set forth by a world engrossed in the pandemic. Strong demand for semiconductor chips allowed the country to achieve high levels of exports, while its domestic demand remained high throughout the pandemic.
Current Production Outlets
Foxconn is heavily involved in the production and distribution of consumer electronics and has a dominant market position in several economic spheres. Taiwanese manufacturers currently dominate the market for notebooks, with some Japanese and American firms having a minority market share. Taiwanese manufacturers also have roughly 60% market share in the production of smartphones, followed by about 15% US manufacturers, and then the remainder going to China and others. Lastly, Taiwan dominates the production of tablets, with very little market share going to US or Chinese makers.
Consumer demand for these products is consistently high and received a huge boost due to the Covid pandemic. The market for gaming PCs, for example, remains particularly strong:
There also remains a robust demand for Apple (AAPL) products, particularly the latest iPhone model. According to UBS analysis, lead time for the iPhone 14 is increasing, indicating that demand far exceeds apple's ability to supply the market. The lead time measures how many days it requires for a particular product to reach the consumer. Higher lead times indicate stronger demand (barring issues related to material inputs) while lower lead times occur when demand for a product falters. The lead time for Apple's latest iPhone14 is increasing as the company sells more units than expected, with the iPhone14 eclipsing the iPhone 13 in year-over-year sales.
Recent Difficulties
China's "zero-Covid" policy created troubles for Foxconn, as an increasing number of Covid cases in China prompted mass lockdowns and quarantines. Foxconn has many manufacturing centers located in mainland China, including the one located in Zhengzhou, a leading assembly plant for Apple products. The company reported US $18 billion in revenue for the month of November, down significantly from October. The company has posted month-over-month revenue growth consistently for more than a decade until November of last year. Harsh lockdowns and backlash from ordinary Chinese citizens, including workers at the plant, caused a dramatic decrease in output. The company is confident though, that the worst is behind it.
Due to popular backlash, China relaxed its "zero-Covid" policies, and production in Foxconn's facilities is returning to normal levels. To address its staffing issues, Foxconn offered cash bonuses to workers and new hires, and it seems to have had the desired effect. December output reached about 90% of the company's goal, and they are expecting full production to resume this month. With the difficulties behind them, it is time to begin reviewing Foxconn's segments of growth by looking into their new development initiatives.
Electric Vehicles
Foxconn has long dominated the production of Apple's iPhones, as well as supplied electronics for gaming PCs and medical devices, but the company is also looking to expand into the market for electric vehicles. In 2023, Foxconn is going to embark on a new initiative to greatly expand into the production of electric vehicles, an underexploited market segment that has seen tremendous growth in recent years. All of the major car manufacturers are shifting resources to boost production in electric vehicles, and Foxconn stands to gain from this market shift.
Electronic vehicle sales have surged over the last three years, and the trend is expected to continue. Foxconn is preparing itself to enter this market sector by devising new strategic partnerships that will allow it to produce and supply electric cars with the chips and batteries they require.
Foxconn chairman Liu Young-way is optimistic that this is the right path for the company, and he expects to vigorously pursue growth in this field. He expects partnerships with leading automakers to produce computer chips in Indonesia, Thailand, Saudi Arabia, the US, and elsewhere. Liu's forecasts are ambitious, as he wants to capture at least 5% of the global electric vehicle market to generate up to USD 32.6 billion in revenue on an annual basis, representing approximately 15% of Foxconn's forecasted top line.
The transition will not be easy, but it will be necessary for Foxconn to achieve the growth rates that make the stock an attractive investment at its current levels. Foxconn's current business model of smartphone production relies on the industrial centers it owns in mainland China, but the logistical ease of producing and transporting smartphones and other small electronics will need to be revisited in order to shift towards electric vehicle production. Foxconn will have to reinvent itself through strategic partnerships in order to achieve its electric vehicle goals. Fortunately, some of those partnerships are already in place.
The company has already partnered with firms in Thailand to handle the Southeast Asia market, and it has also partnered with Lordstown Motors (RIDE) in the United States, which produces electric pickup trucks. The company has additional ambitions to partner with Tesla (TSLA), though it remains to be seen if anything substantial occurs.
Foxconn has already made great strides in the electric vehicle space, having already unveiled a few prototype vehicles in October of last year, and there are talks of additional partnerships with Volkswagen to build a new electric SUV.
Aside from some of the larger players, Foxconn intends to partner with smaller startup firms that are in the business of making electric vehicles but do not yet have the capital or the infrastructure in place for mass production, and Foxconn is looking into ways of partnering with those firms to provide that infrastructure.
Conclusion
The future is looking good for Foxconn. Having recently overcome the difficulties associated with strict Covid lockdowns in China, production of iPhone units will resume at full capacity. And while Foxconn's production of iPhones gives it a lucrative cash stream, the true growth is going to come from electric vehicles. The current business model of producing consumer electronics will equip Foxconn with the cash necessary to sustain itself while it makes the necessary transitions, and the strategic partnerships that are both already in place as well as the ones that are currently being negotiated will ensure that Foxconn has plenty to do in the coming years as it pertains to electric vehicles.
Foxconn's stock price currently represents the company's capacity to produce iPhones and other electronics. The explosive growth the company will experience over the next 2-3 years is not priced in, and the company is a solid buy at these levels.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Zac Thompson
235
Follower
s
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
As an expert in the semiconductor industry with a proven track record of staying abreast of developments, I can provide valuable insights into the dynamics of the market and its impact on companies like Foxconn Technology Co. Let's delve into the concepts discussed in the article:
-
Semiconductor Chip Shortage (2020-2021):
- The semiconductor chip shortage that began in 2020 had profound effects on global supply chains. Factors such as increased demand for laptops, PCs, and electronic vehicles contributed to the shortage.
- East Asian manufacturers, including Foxconn, faced challenges in meeting the soaring demand due to logistical issues and periodic shutdowns caused by the pandemic.
-
Global Economic Conditions (2020-2021):
- The article highlights the instability in global economic conditions during 2020 and 2021. Lockdowns and reopenings, coupled with regulatory measures to combat COVID-19, led to fluctuations in economic activity worldwide.
-
Impact on Used Car Prices and Electronics:
- The semiconductor chip shortage had a cascading effect, leading to a surge in used car prices and impacting the availability of various electronics. New products with semiconductor chips became scarce, affecting pricing in multiple markets.
-
Trade Relations and Economic Trends (2020-2023):
- Ongoing trade relations between the U.S. and China, the Federal Reserve's downsizing of its balance sheet, and high oil prices are identified as key determinants of economic trends.
- Foxconn is positioned for growth in 2023, with the global economic forecast for computer chips remaining uncertain.
-
Taiwan's Position and Exports:
- Taiwan, where Foxconn is based, benefited from the conditions created by the pandemic. High demand for semiconductor chips allowed Taiwan to achieve significant levels of exports, with domestic demand remaining strong.
-
Foxconn's Market Domination:
- Foxconn is a major player in the production and distribution of consumer electronics. Taiwanese manufacturers, including Foxconn, dominate the markets for notebooks, smartphones, and tablets.
-
Consumer Electronics Demand and Gaming PCs:
- The article emphasizes the consistent high demand for consumer electronics, with a particular focus on gaming PCs. Additionally, there is robust demand for Apple products, including the latest iPhone models.
-
Recent Difficulties for Foxconn (Late 2022):
- China's "zero-Covid" policy created challenges for Foxconn, leading to lockdowns and a significant decrease in output. The company faced difficulties in November 2022, with revenue down from October.
-
Foxconn's Expansion into Electric Vehicles (2023):
- Foxconn is set to expand its presence in the electric vehicle market in 2023. The company aims to form strategic partnerships to produce electric cars and supply chips and batteries for this growing market segment.
-
Strategic Partnerships and Electric Vehicle Goals:
- Foxconn plans to partner with leading automakers globally for computer chip production and has already established partnerships in Southeast Asia and the United States.
- The company aims to capture 5% of the global electric vehicle market, generating substantial revenue and representing a significant portion of Foxconn's overall forecasted revenue.
-
Challenges and Reinvention for Electric Vehicle Production:
- Foxconn acknowledges the need for reinvention as it shifts from smartphone production to electric vehicle production. Strategic partnerships with established and startup firms are crucial for success in this transition.
-
Foxconn's Recent Achievements and Future Growth:
- Despite recent challenges, Foxconn has showcased prototype electric vehicles and made significant strides in the electric vehicle space.
- The article concludes that Foxconn's future growth, particularly in electric vehicles, is not fully reflected in its current stock price, presenting an attractive investment opportunity.
In conclusion, Foxconn's journey from overcoming semiconductor chip shortages and recent difficulties to its strategic expansion into the electric vehicle market positions it as a key player with growth potential in the coming years. The article suggests that the company's stock is undervalued, considering its future prospects.
