Foxconn Electronics Inc. is taking vertical integration to a new level. The Taiwan-based EMS company is about to break ground on a retail mall that Foxconn will own under the brand Cybermart.
According to Asian trade journal DigiTimes:
Foxconn Electronics (Hon Hai Precision Industry) will start establishing buildings for the Taipei IT mall project on July 11 with company chairman Terry Guo to attend the groundbreaking ceremony and to announce Foxconn's entrance in Taiwan's retail channel market. Foxconn's retail channel subsidiary Cybermart will also start expanding its IT malls throughout Taiwan with the total number of stores to reach 20.
Cybermart has already been operating in China's retail market for more than 10 years and has over 35 stores throughout China. The company is set to establish 7-8 more stores later in 2011. As for Taiwan, Cybermart's first store will be located in Taipei and will expand to other cities such as Kaohsiung, Taichung and Chiayi.
In addition to hardware products, Foxconn is also in contact with Taiwan-based book chain store Eslite for cooperation.
In the past, Cybermart mostly rented buildings to open up new IT malls, but starting in 2011, Foxconn turned to establishing its own buildings for new malls and the company is currently evaluating about 50 properties for possible mall locations in the future.
Foxconn is set to invest $131.83 million over three years to establish a 12-floor building for the Taipei IT Mall project, DigiTimes reports. The article does not specifically say whether Foxconn will sell electronics products through the retail chain. But it would make sense if it does.
The closest comparison that comes to mind is Foxconn customer Apple Inc. (Nasdaq: AAPL). Apple has retained a certain level of vertical integration as it develops chips and the display technology used in its products. For manufacturing, Apple relies on companies such as Foxconn, but then Apple sells its products through popular retail outlets such as BestBuy and through the Apple Store. The Apple Store model, with its superior customer service, has been so successful that JC Penney recently tapped Apple Senior Vice President Retail Ron Johnson as its CEO.
At the same time, Apple presumably does not own most of the facilities its retail fronts are located in -- most stores are in already-established mall properties, and in Massachusetts, at least, most of the malls are built and owned by property development and management companies.
So think about this for a moment: Foxconn is manufacturing everything from components to finished systems, is able to provide the lowest possible cost model to companies that outsource their manufacturing, and is now entering the retail market. If Foxconn also builds and owns the storefronts through which it sells products, can anyone possibly beat that cost model? I doubt it. Even if Foxconn sells brands from other companies it manufactures for, the savings are considerable.
Retail is a challenge for most electronics companies. The inventory demands are rigorous: Consumers are notoriously fickle, and it's hard to predict what they are going to like. Most stores, such as BestBuy, will only take many products back if consumers pay a restocking fee. This covers the cost of sending products back to the manufacturer. Additionally, if sales start to lag, retail outlets will host various sales and promotions, but they have to get the brand owner to buy into the program. Rebates are such a paperwork nightmare that many companies actually outsource that function to a third party.
Then there is post-sales support. Some manufacturers actually continue to support their products; a Hewlett-Packard Co. (NYSE: HPQ) laptop you buy at BestBuy, for example, is sent back to HP, which repairs it and sends it back. All of this adds to the dollars consumers must pay for both products and services.
But if the manufacturer controls that process from concept though delivery, how many costs can be eliminated? The possibilities are endless.
Of course, there are challenges associated with property ownership, construction, renting retail space, and many of the other things Foxconn is dealing with as it builds shopping malls. Companies have been known to become stretched too thin by trying to be too many things to too many people. But Foxconn has bucked some of those trends so far: It remains a force in the components business, even as it manufactures end products for other companies. I wouldn't bet against its ability to figure this one out too.