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Foxconn Gets Into the Mall-Building Business

{complink 2125|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 {complink 379|Apple Inc.}. 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 {complink 2376|Hewlett-Packard Co.} 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.

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12 comments on “Foxconn Gets Into the Mall-Building Business

  1. Taimoor Zubar
    July 8, 2011

    Would Foxconn be selling Apple's products on their stores? If so, it would become really interesting as Foxconn would be in the front and back of Apple's supply chain and would in a way surround Apple. I think it would be a unique supply chain model in this case. Any other instance where this has happened?

  2. t.alex
    July 9, 2011

    Foxconn probably is the first one with this model. As a customer to Foxconn like Apple, what would be the advantages if selling via their stores? Is it likely Foxconn knows the cost better and hence can set their own prices?

  3. DataCrunch
    July 9, 2011

    This doesn’t surprise me and after thinking about it more, it kind of makes sense.  After reading about Foxconn in the past about their campuses, which include schools (universities), supermarkets, food courts, game rooms, movie theaters, apartments, etc., they already seem to be in the real-estate business.    With the mall business, they can provide additional services to their customers as well as receive more revenues on the actual sales of the products.  Plus they will have an army of customers with their own employees, who will probably have incentives (discounts) to shop at the Cybermarts.

  4. eemom
    July 9, 2011

    This is an interesting model but it brings up several questions.  Why would Foxcomm invest so much money in building its own Mall rather than lease a space in an existing mall, similar to Apple's model.  Also, is Foxconn leasing out space in the mall its building or do they plan to utilize it strictly for the customers and products they support?  Running a mall with all the added time and expense raises a question as to Foxconn's ultimate goal.  Unless they just believe in widening their investments and having more control over the entire cycle, this may be a little too diversified.

     

  5. DataCrunch
    July 9, 2011

    From what I have read about Foxconn’s Cybermart mall projects is that the first location in Tapei will 12 floors as Barbara mentions, with most of the floors dedicated to the IT mall.  What is even more interesting is that 3 floors are to be rented out to enterprise businesses for R&D purposes, like an entrepreneurial innovation zone.

  6. eemom
    July 9, 2011

    That's very interesting.  With the entire mall dedicated to IT and R&D, Foxconn is investing a lot of money to control the retail end of its business.  If they succeed, they can be a force to reckon with.

  7. Anand
    July 10, 2011

    “If Foxconn also builds and owns the storefronts through which it sells products, can anyone possibly beat that cost model?”

    I dont think anyone can beat that model. Now Foxconn has started Mall-Building business, in future they  might start online shopping business. I guess they will be in position to give tough competition to ebay and best buy.

  8. Anand
    July 10, 2011

    Is it likely Foxconn knows the cost better and hence can set their own prices?

    I dont think Foxconn will set it own price, because if the it sets prices too less compared to existing market rates Apple would be forced to slash the prices.

  9. t.alex
    July 10, 2011

    You are right. Foxconn should not be allowed to set any price lower than the one given by Apple.

  10. Daniel
    July 11, 2011

    We have to encourage the price war between brands, then only able to slash the prices. Companies are fixing the prices not only on component basis; we are paying even for the brand name too. So price war can help the companies to fix the price at a lower justifiable level.

  11. mfbertozzi
    July 11, 2011

    It seems we are assisting to many different approaches to the market. On one hand we have the new one from Foxconn (a physical mall to reach end users), on the other hand we have for example Dell ( virtual market to reach end users abroad using Internet). We could say Foxconn is a chipset producer (in principle), Dell is a vendor. First model, in line with Apple Store, brings the company close to people, second model could guarantee more saving: any channel (marketing, sales, post-sales support) is based on e-commerce rules. It is quite difficult to look for a general model which runs successfull worldwide. I didn't find it. Maybe region-by-region, it is better to think in terms of right trade-off to conceive, considering also different people/end users culture and habitude.

  12. AnalyzeThis
    July 11, 2011

    1) I think it is incredibly unlikely that Foxconn will sell Apple products in their retail stores, and even if they did, they certainly would not undercut Apple's prices.

    2) This is even more bad news for electronics retailers hoping to expand into the Chinese market; obviously Foxconn already has an advantage because they've already been doing business there for over a decade. Then again, as you mention, electronics retail is a tricky business to begin with, so maybe this will only help discourage disastrous expansion.

    Obviously, Best Buy's foray into China did not go as expected… they shut down all their Best Buy-branded stores there earlier this year and focused on expanding the domestic chain they acquired instead.

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