Online Extra: Q&A with Hon Hai's Terry Gou

The founder of Taiwan's growing IT manufacturer talks about a new business model for Greater China

Terry T.M. Gou is the founder and chairman of Hon Hai Precision Industry Co., an outsourcing powerhouse that's the largest Taiwanese investor in China. Hon Hai makes just about every kind of info-tech product you can think of, from unglamorous cables and connectors to desktop PCs and servers to cellular phones.

Now, Hon Hai is diversifying into even more products, such as auto parts and semiconductor-manufacturing equipment. At the same time, Gou is also expanding his company's commitment to doing its own research and development. Gou rarely speaks to the media, but he recently talked to BusinessWeek's Bruce Einhorn from his cluttered office on the third floor of the Hon Hai headquarters, a drab factory in suburban Taipei's Tucheng industrial park. Here are edited excerpts of their conversation:

Q: What explains Hon Hai's recent success?

A: We have a new business model for Greater China, using both Taiwan and China resources. We don't want to say we are a Taiwanese company or a Chinese company. We are an international company. First we were in Taiwan, then China, and then international -- Ireland, Scotland, the Czech Republic, and Japan. Now we can say that we are an international company.

Q: So you don't identify as a Taiwanese?

A: My parents both came to Taiwan from China, from Shanxi province. We have Greater China thinking, not just Taiwanese thinking. Taiwan and China [businesses] should be put together. They make a good combination.

Q: Why do Taiwanese seem to do better in China than others?

A: We run the company not by the numbers -- we run by the heart. In 1988, when I first invested in China, we paid our workers $30 a month. But we gave them a good living environment. We gave them breakfast each day -- including one egg per person. Back then, very few people in China ate eggs. We gave them a Taiwanese-standard meal.

Q: Is low-cost production in China the key to Hon Hai's success?

A: It's not all about costs. It's about quality. Take [Hon Hai's] socket for Pentium 4 central processing units [or microprocessors]. It's not as important, maybe, as the CPU. But each CPU needs a socket. To ship 5 million units -- with no quality problems -- that's not an easy job. Quality is easy to talk but hard to make. If you want to make your quality good, this comes from the culture. We took 20 years to build this culture.

Q: A lot of people have expressed concern about Taiwan's future, as companies like Hon Hai shift their manufacturing away from the island and toward China. Do you agree that there's reason to worry?

A: Taiwan must go international, because the domestic market is too small. It's like Holland -- is there hollowing out there? We are in the process of change, a transition when you move something from one hand to the other. When that happens, the first hand will be empty. But it's temporary. The transition is natural.

Q: In that case, what's the greatest strength that Taiwanese have?

A: Taiwanese businessmen are well trained, not by school but by business opportunities. The 40- to 55-year-olds from Taiwan are still the best. In China, too many are government officials, politicians, [military] officers. Very few are well-trained, experienced businessmen.

Taiwan's best assets are here, this group of talented people. You can get a PhD in a few years from school, but to get a degree [from business] takes 20 to 30 years. In China, because of the Cultural Revolution, they lost this generation. China has become a manufacturing center, but they still have gaps, and Taiwan can fill those gaps.

Q: Hon Hai is now moving more into R&D. Why?

A: Between innovation and manufacturing, there is an in-between [space]. We have 25 years experience in manufacturing. Twenty years ago, we just made tooling. Now, we use software and simulators. Before we manufacture something, we design everything in the computer. It's like training a pilot: You don't need an airplane, you use a simulator.

We can leverage our manufacturing experience to upgrade our knowledge content. We should join with our customers to develop new products, providing not only quality and low-cost but also efficiency and reliability.

Q: You've also said that Hon Hai wants to diversify into auto parts. Why?

A: China will become a huge market for cars. In the future, the car will use navigators, telephones, and other IT products.

Q: Lots of investors compare Hon Hai to Western outsourcing giants like Flextronics and Celestica. What do you think about those companies?

A: It's a different business model. We never buy [factory capacity] with mergers and acquisitions. Buying companies is not the way. We have very organic growth. We know each other, like a baseball or basketball team. But to go through organic growth is difficult, because it takes time.

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