Foxconn founder Terry Gou might be regarded as Henry Ford reincarnated if only a dozen of his workers hadn't killed themselves this year. An exclusive look inside a postmodern industrial empire
On a crushingly hot mid-August day at Foxconn's Longhua factory campus in Shenzhen—where a dutiful army of 300,000 employees eats, sleeps, and churns out iPhones, Sony (SNE) PlayStations, and Dell (DELL) computers—workers indulged in a rare moment of celebration. First, there was a parade, an Alice in Wonderland spectacle of floats, blaring vuvuzelas, and workers dressed up as Victorian ladies, geishas, cheerleaders, and Spider-Men. This was followed by a two-hour rally inside a vast sports stadium featuring acrobats, musical performances, fireworks, and life-affirming testimonials punctuated by chants of "treasure your life" and "care for each other to build a wonderful future."
It was hardly a spontaneous outpouring. Rather, it was a joint production of employee unions and management at Hon Hai Precision Industry, the flagship of Foxconn Technology Group, as part of an effort to mend the collective psyche of a Chinese workforce that numbers more than 920,000 across more than 20 mainland factories. The need to do so became apparent after 11 Foxconn employees committed suicide earlier this year, most of them by leaping from company-owned high-rise dormitories. The publicity-averse Taipei-based company and its 59-year-old founder and chairman, Terry Gou, were thrown into the spotlight, subjected to unfamiliar scrutiny by customers, labor activists, reporters, academics, and the Chinese government.
The suicides introduced Foxconn to much of the world in the worst terms imaginable—as an industrial monster that treats its workers like machines, leveraging masses of cheap labor, mainly 18-to-25-year-olds from rural areas, to make products like the iPhone at seemingly impossible prices. For Western consumers, the lost lives were an invitation to consider the real cost of their electronic playthings. For the image-conscious companies with which Foxconn does business, including IBM (IBM), Cisco (CSCO), Microsoft (MSFT), Nokia (NOK), Sony, Hewlett-Packard (HPQ), and Apple (AAPL), the suicides were a public-relations nightmare and a challenge to offshoring strategies essential to their bottom lines.
Foxconn made matters worse with a slow and initially clumsy response. In an exclusive interview with Bloomberg Businessweek, Gou conceded that he didn't immediately grasp the significance of the suicides. "I should be honest with you," he says. "The first one, second one, and third one, I did not see this as a serious problem. We had around 800,000 employees, and here [in Longhua] we are about 2.1 square kilometers. At the moment, I'm feeling guilty. But at that moment, I didn't think I should be taking full responsibility." After the fifth suicide, in March, Gou says, "I decided to do something different."
It actually wasn't until late May, after the ninth Foxconn employee had leaped to his death, that Foxconn went into full crisis management mode, stringing more than 3 million square meters of yellow-mesh netting around its buildings to catch jumpers and setting up a 24-hour counseling center staffed by 100 trained workers. Management increased wages for factory workers in Shenzhen by 30 percent, to 1,200 renminbi ($176) per month, and promised a second raise in October. Finally, Gou's company hired the New York firm Burson-Marsteller to help devise a formal public-relations strategy, its first in more than 35 years of existence.
Part of Burson-Marsteller's plan was granting Bloomberg Businessweek's request for unprecedented access to Foxconn's factory floors, worker dorms, suicide-help-line operators, and Gou himself, who in the course of a three-hour interview riffed on everything from Warren Buffett ("He's too old") to the uselessness of business degrees ("You can't read a book to learn to swim") to Steve Jobs ("I forced him to give me his business card"). Gou also mocked New York bankers who "see the Hudson River and say, 'I'm a king of the world.'"
The interview took place at Longhua, the entrance to which looks like a border crossing, with seven toll-booth-like lanes and uniformed guards. Although drab and utilitarian, the campus is a fully functioning city, with fast-food joints, ATMs, Olympic-size swimming pools, huge LED screens that flash public-service announcements and cartoons, and a bookstore that sells, among other things, the Chinese-language translation of the Harvard Business Review. Prominent on display are biographies of Gou, one of which collects his many aphorisms, including "work itself is a type of joy," "a harsh environment is a good thing," "hungry people have especially clear minds," and "an army of one thousand is easy to get, one general is tough to find."
Foxconn is now the biggest exporter out of China, and its general is the richest man in Taiwan, estimated by Forbes to have a personal fortune of $5.9 billion. He says he cannot confirm that figure, however, as he does not keep track. "I have one guy in charge," Gou says in heavily accented English that he picked up while touring the U.S. in the 1980s. "Every year he gives me a piece of paper and says, 'Hey, this is how much.' I think for me, I am not interested in knowing how much I have. I don't care. I am working not for money at this moment, I am working for society, I am working for my employees."
The colossus that Gou (pronounced "Gwo") runs today started with a $7,500 loan from his mother. His first world headquarters was a shed he rented in 1974 in a gritty Taipei suburb called Tucheng, which means Dirt City in Mandarin. Gou, then 23, had done three years of vocational training and served in the military. He then worked for two years as a shipping clerk, where he got a firsthand view of Taiwan's booming export economy and figured he ought to stop pushing paper and get into the game. With the cash from his mother, he bought a couple of plastic molding machines and started making channel-changing knobs for black-and-white televisions. His first customer was Chicago-based Admiral TV, and he soon got deals to supply RCA, Zenith, and Philips (PHG).
Imagining his future success, he practiced signing his name in English over and over until he had perfected it. He remains proud of it today, walking over to a whiteboard during the interview and signing with a schoolboy flourish. It looked like the perfect cursive script from the credits of I Love Lucy.
Gou's first break came in 1980 when he started supplying Atari with connectors that linked the joystick cable to its 2600 video-game console. At the height of the Atari craze, Hon Hai was producing connectors for the 15,000 video-game consoles that Atari's Taiwanese plant made daily. Gou wasn't content to be a mere supplier of dumb parts. He applied for patents on the technology his company developed, and he kept pressing into new areas such as cable manufacturing.
In the early '80s, Gou made his first big push into the U.S., visiting 32 states over the course of an 11-month tour. He dropped in on companies unannounced, like a door-to-door salesman, arriving in a "big and safe" Lincoln Town Car he rented in every city. Once, to keep costs low, Gou slept in the backseat. In Raleigh, N.C., he booked himself into a motel close to an IBM facility. After three days of hanging around, he got an appointment and came away with a firm order for connectors. "He is really one of the top sales guys in the world," says Max Fang, the former head of procurement for Dell in Asia who did business with Gou and was his regular golf partner. "He is very aggressive and always on your tail."
As the Taiwanese labor market tightened throughout the '80s and wages rose, manufacturers started moving to Malaysia, the Philippines, and Thailand. Although China was nearby and offered a virtually limitless supply of cheap labor, few companies dared to go there; the primitive infrastructure and inscrutable Communist government scared them off. Gou was undeterred, setting up shop in a dusty suburb of Shenzhen across the border from Hong Kong, where factories producing cheap garments, shoes, and children's toys were springing up. The political situation was tricky. Beijing still regards Taiwan as a one of its provinces that should be integrated back into the motherland, by force if necessary.
In 1991, Gou listed Hon Hai Precision on the Taiwan Stock Exchange to fund expansion, mostly into China. By 1996, he says, it was clear to him that China would become a manufacturing juggernaut, and he started investing heavily in his facilities at Longhua.
Gou's role in revolutionizing manufacturing at the turn of a new century has an obvious precedent. Henry Ford also understood the importance of vertical integration, of producing his own materials, and tweaking his assembly lines for maximum efficiency. Ford dreamed of a corporate empire so large that it would require the population of an entire American state to fuel it. Where Ford had Michigan, Gou had Shenzhen.
To sustain an efficient Chinese workforce, Gou quickly discovered that he had to provide housing, food, and health care, additional costs that kept most of his competitors out of the country. He had to do everything himself. Michael Marks, then chief executive officer of contract-manufacturing giant Flextronics (FLEX), saw Foxconn's Shenzhen operations taking shape in the late 1990s. "They were making wire out of ingots of copper," says Marks. "They had chicken farms to lay the eggs for the cafeteria. One building had 2,000 toolmakers. We had none at the time. But we did after that."
In 1996, Gou offered to build the chassis for Compaq's desktop computers at a fraction of what it would cost Compaq to do the job itself. (Compaq is now part of HP.) "He had this vision and the guts to do anything in a big way," says Fang. "When I first visited the factory, I saw the whole value chain nicely and effectively designed, starting from a big coil of sheet metal at one end that was cut, formed, welded, and stamped to make the top and bottom of the chassis. Then they did the in-line subassembly, adding a floppy drive, the power supply, and cables. It was all shipped to customers who only had to install the motherboard, CPU, memory, and hard drive. After this revolution by Terry, final computer assembly was easy."
Soon, Foxconn was shipping bare-bones computers to IBM, HP, and Apple as well, transforming the industry. In 1998, when Gou won his first order from Dell to make the chassis for its desktops, Dell insisted he do it in the U.S., close to the final market. Gou obliged. "I bought a company in Kansas City. We quickly needed tooling shops and stamping," Gou says.
"That factory was a money loser, but Terry had to build it to accommodate Dell against his own will," recalls Fang. "For Foxconn, it bought a ticket into the Dell business." (Dell executives declined to comment for this story.)
The three-decade expansion from television-knob maker to the world's dominant consumer electronics manufacturer passed with little notice from the Western press. That changed in June 2006 when the London Daily Mail published a story about harsh conditions for 30,000 workers at Foxconn's iPod factory in Longhua. When two reporters at China Business News did their own version of the story, Gou's first reaction was to counterattack. Foxconn sued them personally for libel and secured a court order freezing their assets, backing off only at the behest of Apple and HP.
The incident prompted Apple executives to dispatch an audit team to investigate conditions at the Longhua plant. The report, still available on Apple's company website, uncovered several violations of Apple's code of conduct, including excessive overtime, an overly complicated wage structure, and unacceptable living conditions such as triple-decker bunk beds. Foxconn made changes that included an overhaul of its overtime practices.
Although Apple pressured Foxconn, Steve Jobs wasn't about to sever ties with Hon Hai, not with preparations under way for the production of Apple's next big product, the iPhone, which came out the following year. "Steve Jobs' achievements wouldn't be possible without Terry," says Chang Tien-wen, author of the 2005 book The Tiger and The Fox: Terry Gou's Global Competitive Strategy.
The crisis passed, and Gou, hungry for growth, set his sights on the 200 million-unit-a-year notebook market. Three Taiwanese companies—Quanta, Compal, and Wistron—then dominated the market and were valuable customers for Foxconn, buying billions of dollars' worth of components. Deciding to compete against your own customers is a dicey move. But Gou calculated that in the time it would take them to find new suppliers he could swipe enough of their business to come out ahead. Today, Foxconn controls 4 percent of the notebook market and expects to grab 11 percent next year, according to Yuanta Securities in Taipei.
Therein lies the beauty of the Foxconn model. The margins on the parts it provides for its customers' machines are extremely high, so when it comes to the final assembly work for the likes of Dell, Nokia, or Sony, Foxconn is willing to sacrifice profits—or even do the job at a loss—because it makes so much money from the parts. Analysts expect Hon Hai Precision's sales to grow 40 percent this year, to $85 billion.
Foxconn's business has evolved to the point where it's not just relying on cheap, unskilled labor. It now employs 50,000 toolmakers, including a team of 2,000-plus workers who focus on the design and fabrication of molds and dies. This enables the company to boost production faster than anyone else, especially important in the handset market where new models are constantly introduced. "If you want to look under the hood at Foxconn and understand why they have a high market share, it's because of these things," says Jason Dedrick, associate professor at the School of Information Studies at Syracuse University.
To understand how diversified Foxconn's supply chain is, pry the back off a Nokia 1209 handset. The plastic casing is molded by Foxconn Technology. The speaker is made by Hon Hai Precision, as are the keypad and printed circuit-board connector. The printed circuit board is made by Foxconn Advanced Technology. The TFT LCD screen is made at Chimei Innolux, an affiliate 2.7 percent-owned by Gou. In all, about 70 percent of the phone's components are made by a Foxconn- related company.
As he squeezes costs throughout his empire, Gou also takes huge risks on behalf of his major clients. In Chongqing, in central China, Foxconn is spending $1 billion on a factory that will produce 30 million machines a year just for Hewlett-Packard. When Apple's iPhone4 was nearing production, Foxconn and Apple discovered that the metal frame was so specialized that it could be made only by an expensive, low-volume machine usually reserved for prototypes. Apple's designers wouldn't budge on their specs, so Gou ordered more than 1,000 of the $20,000 machines from Tokyo-based Fanuc. Most companies have just one. "Terry is a strong leader with a passion for excellence," says Tim Cook, Apple's chief operating officer. "He's a trusted partner and we are fortunate to work with him." The Longhua plant now produces 137,000 iPhones a day, or about 90 a minute.
Since the end of May, Gou, who normally divides his time between Hon Hai headquarters in Taipei and China, has been living at Longhua in a room behind his office, dealing with the aftermath of the suicides. He says he works 16 hours a day and eats three meals at his desk. There is scarcely time for indulgences. "I was getting my hair dyed at 11 p.m. last night for this interview," he says, introducing himself with a firm handshake. He hasn't played a round of golf in months and stays fit by doing pushups in the morning and using the time to reflect on "the five-year plan. That's the most important."
Gou's family came from Shanxi province in north-central China. His father fought with the Kuomintang army in the civil war and fled along with Chiang Kai-shek after his defeat in 1949 by the Communists led by Mao Zedong. He eventually became a mid-rank police officer in Taipei. Terry is the oldest of his three boys.
Gou's personal life is the object of much fascination in the Taiwanese press, and in recent years it has been marked by tragedy. Serena, his wife of nearly 3