On June 11th, Foxconn International Co., Ltd. (under Hon Hai Group) announced that its two subsidiaries Shenzhen Futaihong Precision Industrial Co., Ltd. and Hongfujin Precision (Shenzhen) Co., Ltd. were suing BYD in Hong Kong for stealing trade secrets.
A year ago, Foxconn and BYD went to court in Shenzhen over trade secret violations, which emerged after several Foxconn senior executives left for BYD in 2005. Foxconn claimed compensation of over HK$5 billion (US$640 million), as it believed numerous confidential documents taken in the move helped BYD develop a similar production process.
Foxconn is the world’s largest mobile phone OEM manufacturer. Its reported annual revenues reach more than ten billion US dollars, which overshadowed BYD with only RMB12.9 billion (US$1.7 billion) annual income. However, a report delivered by Nomura Securities offers another perspective. It believes that Foxconn’s prospects in mobile phones are unpredictable this year due to problematic orders from its two major clients, Motorola and Nokia. New clients, meanwhile, won’t be able to fill the holes that remain. Foxconn’s margins for 2007 are expected to be 9% lower than previous estimates.
Meanwhile, BYD is delighted to see its business on the rise. Three years ago, BYD started mobile phone OEM operations and now covers almost all related components except chips. It is also certified for mobile phone assembly. The company’s mobile phone industry structure and OEM model are surprisingly similar to Hon Hai. And they both started the integration of the entire industrial chain in reverse: Hon Hai began with core components like connectors, while BYD with mobile phone cells.
An important task for BYD in 2007 is carving out its mobile phone business for an IPO (initial public offerings). But plans to go public on the Main Board of the Hong Kong Stock Exchange at the end of July prompted Foxconn to launch the suit against the company. Wang Chuanfu, BYD’s headman, reckons the move is a dirty trick played by competitors and has put his IPR (intellectual property rights) department in charge of the problem.
Other observers hold the Foxconn lawsuit is less of a scoundrel’s last stand and more of a long battle between two strategically similar enterprises.
On Foxconn Road
Wang Chuanfu is a fighter. BYD’s (1211.HK) 2006 annual report released in March 2007 shows that the group’s pre-tax profits reached RMB1.428 billion (US$189 million) on revenues of RMB12.9 billion (US$171 million), including RMB900 million (US$1.2 million) profits from mobile phone business on revenues of RMB5.1 billion (US$675 million). The company’s mobile phone cell business, meanwhile, saw profits of RMB411 million (US$54 million) from revenues of RMB4.567 billion (US$604 million). And its fast growing automobile division proved to be a performance highlight in 2006.
Four years ago, BYD purchased a 77% stake of Xi’an Qinchuan for RMB269 million (US$35 million). The public was doubtful of BYD’s risky strategy and Wang Chuanfu, to assuage doubts, worked out a three-year schedule that promised to see the release of the company’s first vehicle upon completion. The target has since been realized and after suffering losses for three consecutive years, BYD Auto broke even in 2006. The annual report from the same year shows the automobile business profiting by RMB116 million (US$15 million). This is largely attributed to the sales of 50,000 F3 model bringing in revenue of RMB3.23 billion (US$427 million), up 414% year-on-year. The latest data from the China Association of Automobile Manufacturers backs this up as well. In March 2007, the BYD F3 model broke into China’s top 10 best-selling sedan brand list with sales of 10,300 units in a single month. With the R3-R, F6 and F8 now on the market, BYD is targeting sales of 150,000 units in 2007.
After three years of suspicion and uncertainty, BYD has completed the basic groundwork for strategic diversification and the expansion of its mobile phone and automobile operations. The business expansion has placed BYD on a diversified path similar to Foxconn’s. In its self-labeled 3C operations (computers, communications equipment and consumer products), Foxconn has started the fourth “C” business-cars. With the exception of computers, the two rivals will butt heads in three fields.
As a latecomer, BYD is at a major disadvantage to Foxconn. When attempting to solve the problems of designs and technologies with low costs, it often has to climb over patent-barriers built by other enterprises. This is where its imitation strategy comes from.
Foxconn also used an imitation strategy early on. But it has since attached importance to developing independent patents and built its patent portfolio around a core patent, a strategy popular among Japanese enterprises. And once disputes emerged, it launched counterclaims and settled out-of-court. Foxconn ranked among the top five on the list of patent applications in Shenzhen in 2006, while BYD wasn’t featured on the list.