Foxconn’s progress towards EV dominance

by Vested Team
June 13, 2022
6 min read
Foxconn’s progress towards EV dominance

Foxconn’s progress towards EV dominance


It’s been a while since we talked about Foxconn and its efforts to become the Android of EVs. In a previous article, we argued that:

  • The hardest part about making internal combustion engines is the engine itself. The capability to design and manufacture the state of the art motors that meet ever-increasing emission standards is so hard to master. Over the past century, only three countries have truly mastered it: the United States, Japan, and Germany,
  • China, while it has become the world’s factory and the largest car market in the world, has not become a dominant global car player. 
  • That is poised to change due to the shift to EVs. In many ways, because EVs do not need an internal combustion engine, they are much simpler to produce. 
  • Seeing this paradigm shift, Foxconn (Hon Hai Precision), the maker of iPhones, are moving aggressively to be the white label manufacturer of EVs in the near future. It wants to do to EVs what it has done to smartphones.

In a recent shareholder meeting, the company shared its progress on developing its EV capabilities. The company purchased an EV plant in Ohio, USA, from the struggling EV company Lordstown. It’s spending $8 billion in Indonesia to build EVs and batteries there. The company also opened other factories and signed deals in Mexico, Thailand, and China. Here’s a snapshot of their recent development agreement (Figure 1).

Figure 1: Foxconn’s EV development progress. Source

In addition to signing customers and expanding manufacturing capabilities, the company is also vertically integrating and securing chip supply (see Figure 2).

Figure 2: Foxconn’s building its own chip supply. Source

The semiconductor investments are largely focused on older technologies. For example, Foxconn’s investment in Malaysia is to build 28 and 40 nm nodes (decades old technology when you compare to TSMC’s latest 5 nm node that is in the latest macbooks and iPhones). This is because the chip shortage in the car sector is focused on these older technologies. Two years into the pandemic, the chip shortage is still prevalent, with no clear end in sight. From the perspective of the chip makers, these old technology nodes do not have high margins, so they cannot justify building new manufacturing capacity just to meet the demands for low margin commoditized chips. From the perspective of automakers, this is extremely frustrating, being unable to sell $50,000 cars because of being unable to source a $1.00 chip. This is why Foxconn is vertically integrating to secure long term supply while aggregating the demand at the same

Foxconn’s ambition is big. Within three years, the company wants to produce between 500,000 to 750,000 EVs (or 5% of global market share) and generate $34 billion in total EV revenue. This is a very ambitious goal. To give you perspective, since starting production last year, Rivian, the much hyped EV truck maker, has produced a little over 3,500 vehicles, and the company is slated to make only about 1/20th of those targets in 2022

US inflation hits 40 year high

From WSJ ($):

“The Labor Department on Friday said that the consumer-price index increased 8.6% in May from the same month a year ago, marking its fastest pace since December 1981. That was also up from April’s CPI reading, which was slightly below the previous 40-year high reached in March. The CPI measures what consumers pay for goods and services”

The high inflation rate in the US is due to a combination of multiple factors, creating the almost perfect inflation storm:

  • Although there’s a broad increase in prices observed across multiple segments, the year-over-year increase in energy prices is the core driver. Due to the war in Ukraine, energy prices went up 47.5% when compared to the same month last year
  • Energy prices, as input, have a secondary impact resulting in increased cost of food and travel. Oil prices staying about $120 per barrel for the rest of the year translates to more than $1,000 in additional expenses for the average US household.
  • Bad weather, drought and diseases are impacting output of citrus, wheat, palm oil, and chicken.
  • China’s zero covid policy further fuels inflation globally, as it contributes to disruptions. The average container shipping rates from China to the US is up 10x (from ~ $1,500 to about $15,000) since the beginning of 2020 to now. 
  • Summer travel is roaring back. Increased demand and fuel costs have pushed up prices. The average airline fares jumped 37.8% from a year ago. Hotel prices are on average 19.3% higher. Meanwhile, restaurant prices went up 7.4%, the largest increase since 1981.

The persistent high inflation is rapidly decreasing consumer sentiment. Consumer sentiment is an important leading indicator of the economy. As a group, the US consumer contributes to ~70% of the GDP. If sentiment is negative for too long, consumers will decrease their spending. See Figure 3 below for historical data on the consumer sentiment index. Consumer sentiment is reaching lowest recorded values, comparable to the bottom reached in the late 70s recession.

Figure 3: Index of consumer sentiment by the University of Michigan. Gray regions are recessions. Source

Despite the difficult macroeconomic conditions that the US is experiencing. Many emerging markets face even more challenging headwinds

  • They face similar inflationary pressures outlined above. 
  • Their capital markets experience capital flight, as foreign investors move capital back to the US (as the Fed has been increasing interest rates in the US to combat inflation at home).
  • This leads to the weakening of their currencies (compared to the USD). 
  • Which is bad for servicing their dollar denominated debt.
  • And doubly bad for countries that import a lot of oil (which are paid in USD). The expensive imported oil is even more expensive when their own currencies are weakening. 
  • Which in turn, further fuels inflation at home.  

To counter the vicious cycle, emerging markets must increase their interest rates at home. But this has a cooling effect on economic growth at home. As a result, the World Bank forecast emerging economies’ expansion to be much smaller in 2022 – about 3.4% this year, almost half as fast as observed in 2021 (6.6%)

Reflexivity in supply/demand

Imagine yourself as a widget maker. When there’s more consumer demand for the widget than supply, prices go up. Therefore, you are compelled to make more widgets. So you invest more capital, build factories, produce more widgets, and generate more revenue. Other widget makers, seeing the increased sales you’re enjoying, decided to do similar manufacturing expansions. They even undercut your prices. And before you know it, there’s an over supply of widgets. Prices go down. Many widget makers go bust. 

This self-reinforcing feedback loop is an example of reflexivity theory in economics, popularized by George Soros, and helps explain cyclicality and the boom and bust cycles in various industries. 

You can see this phenomenon playing out in many sectors. Target (the retailer) is currently  struggling with excess inventory. The company, like other retailers, expected increased demands during covid periods to persist, so they increased inventory levels, only to see demand faltering at a much faster than expected rate. Target saw inventory levels increasing 43% as of the end of April. So now, it is canceling orders and using promotions to clear excess inventory. Walmart is also in a similar conundrum.

The oil companies are not making the same mistake, however. Despite the high oil prices, they are not investing in long term projects to generate future supply. Why would they? The oil sector has been a pariah as it faces rapidly growing EV adoption and increasingly difficult government policies on emission. The world is so eager to transition to a post fossil fuel environment that it forgot to manage the transition effectively. So, in the face of tight supply and high demand resulting in high prices, the industry is cashing out

In Q1 2022, despite bringing in $39.5 billion in excess cash Q1 2022, the Western world’s five largest oil companies didn’t increase their capex meaningfully for long term supply increase (Figure 4).  

Figure 4: The western world’s five largest oil companies are reporting the highest cash flow ever. Source

How are they spending the cash then? Returning it to shareholders of course. 2013 was the last time oil prices breached $100. At the current pace, both Exxon and Chevron combined are expected to exceed the 2013 buybacks and dividend amount by 28% (Figure 5).

Figure 5: Rather than spending cash on large projects, they are returning the profits to investors. Source

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