Bach Seat

Foxconn is now the biggest exporter out of China. The firm churns out products like iPads,  iPhones and PlayStations for Americans. Among its clients are Apple, Cisco (CSCO), Dell, HP, IBM, Microsoft (MSFT), Nokia (NOK) and Sony (SNE).  Most American consumers never head of Foxconn, which is also known as Hon Hai Precision Industry, until employees began to commit suicide by leaping off its buildings. However the firm has a longer history.

Terry Gou aka the ‘general’ founded Foxconn in 1974 with a $7,500 loan from his mother. According to a recent Buisnessweek article his first world headquarters was a rented shed in a gritty Taipei suburb called Tucheng, which means Dirt City in Mandarin. Mr. 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).

Mr. Gou’s first step into American consumer electronics 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. Buisnessweek says Mr. 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.

In the early ’80s, Mr. Gou took an 11-month tour of the U.S. covering 32 states, during which he dropped in on companies unannounced. Buisnessweek reports that during this trip, he spent three days in Raleigh, N.C., motel close to an IBM (IBM) facility to get an appointment after which he came away with a firm order for connectors. “He is really one of the top sales guys in the world,” Max Fang, the former head of procurement for Dell in Asia who did business with Mr. Gou and was his regular golf partner told Buisnessweek. “He is very aggressive and always on your tail.”

Mr. Gou was early to recognize that China offered an almost limitless supply of cheap labor and was not deterred by  the primitive infrastructure or the Communist government. He set up shop in a suburb of Shenzhen across the border from Hong Kong.  In 1991, Mr. Gou listed Hon Hai Precision on the Taiwan Stock Exchange to fund expansion, mostly into China. By 1996, Mr. Gou told Buisnessweek, it was clear to him that China would become a manufacturing juggernaut, and he started investing heavily in his facilities at Longhua Science & Technology Park aka “Foxconn City.”

In 1996, Mr. 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.  “He had this vision and the guts to do anything in a big way,” Mr. Fang is quoted in Buisnessweek. “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.”

Buisnessweek says that to sustain an efficient Chinese workforce, Mr. Gou quickly discovered that he had to offer 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 Mr. 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.”

Foxconn was transforming the industry. It was shipping bare-bones computers to IBM, Hewlett-Packard (HPQ), and Apple (AAPL). In 1998, when Mr. Gou won his first order from Dell (DELL) to make the chassis for its desktops, Dell insisted he do it in the U.S., close to the final market. “I bought a company in Kansas City. We quickly needed tooling shops and stamping,” Mr. Gou told Buisnessweek. “That factory was a money loser, but Terry had to build it to accommodate Dell against his own will,” recalls Mr. Fang. “For Foxconn, it bought a ticket into the Dell business.”