iPhone...Made in China

Hottest gadget + Hottest country = Prosperity

On the most southern tip of China, just across the border from Hong Kong is the Hon Hai Precision Industry Co. (Ticker: TEF). That typically dull industrial name hides that fact that the company is one of the world's leading electronics manufacturers and a key partner to many household names like Apple, Motorola, Nintendo and Sony Playstation.

$40 billion and growing...

What can be said about this Taiwanese company that has grown revenues by over 50% a year for the past decade to $40.6 billion revenues in 2006 alone? Billion! Imagine that kind of money...that's close the price that Cingular paid to acquire AT&T Wireless back in 2005! (Or to put it another way, Hon Hai is expected to add another $14 billion in revenues this year...the same as the entire sales of CBS Corp.!!)

Expand your share of the Value Chain

How has Hon Hai managed to grow (and keep growing) at such a rate when its rivals have struggled to manage overcapacity? I mean, Hon Hai is larger than its 10 closest competitors combined?! By leveraging the fact that it can produce many of the components that are used in its clients' products and therefore create off-shored sub-assembly production lines that are far more efficient than those of its clients. This encompasses a whole heap of manufacturing and production management acronyms like CEM, EMS, ODM and CMMS.

Dell case-study

Back in 1995, when Michael Dell first met Gou, Dell and other PC manufacturers bought the components and assembled them in their own factories. That is, until Gou built a production line that allowed Hon Hai itself to do this - everything from making the PC steel cases to building the completed PCs - thereby reducing overall costs without reducing profit margins.

Also, it doesn't hurt to have a firm grasp of expenses either. One Hon Hai executive joked that the founder, Terry Gou, is "worth $2 billion in nickels and dimes". Although today, that number has grown...Gou is personally worth about $10 billion!

Where next?

The phenomenal Taiwan/China growth story has been achieved by taking this strategy horizontally across other Computer, Communication and Consumer-electronics industries like digital cameras and LCD panels.

So where's the next growth area for this Taiwan/China partnership? Expect a 'Made in China' label on the next-generation of medical equipment soon.