Must-Read: Justin Fox: High-Tech Manufacturing Isn’t Worth Much:
These are the world’s five largest technology companies, ranked by revenue:
How about that Hon Hai!?! The full name is Hon Hai Precision Industry Co., but you probably know it as Foxconn…. Foxconn is really big, and it’s about to get bigger after completing the acquisition Friday of once-great Japanese electronics maker Sharp. But before you get all excited (or worried) about tables turning and China rising, here’s how profitable those same five companies are:
You know the story about Amazon.com… it’s really a consumer discretionary company, with peers such as Macy’s and McDonald’s… [and] Amazon has been investing more money in research and development than all but one or two other companies on earth–which is why I’ve included it here among the world’s tech giants, and also another big reason its margins are so low…. It just so happens that contract manufacturing of electronics is a really low-margin business. Foxconn’s profit margin is 3.1 percent; at the No. 2 contract manufacturer, California-based Flex (formerly Flextronics) it’s 2 percent. Foxconn’s acquisition of Sharp is an attempt to boost those margins…. Still, it’s fair to say that investors around the world aren’t expecting a whole lot from these efforts:
Part of the difference in market caps may be… overvalued U.S. equity… that U.S. corporate executives care more about keeping investors happy…. But the main divide I see here is that Samsung and Hon Hai manufacture things… while Apple, Amazon and Microsoft all sell products with their brand names on them, they contract out all the manufacturing…. In 2009, Harvard Business School professors Gary Pisano and Willy Shih argued in the pages of the Harvard Business Review that technology companies that outsourced production were making a big mistake, and that the U.S. was being permanently harmed as high-tech manufacturing know-how moved to Asia. They may still turn out to be right about the geographical impact…. But for individual tech companies, getting out (or staying out) of the low-margin, high-investment business of manufacturing just keeps paying off.