The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic.
By Katrina Hamlin
HONG KONG, Aug 8 (Reuters Breakingviews) - Apple AAPL.O has been diversifying from its core iPhone business, so why shouldn't key supplier Foxconn 2317.TW? The electronics giant’s cash cow has long been contract manufacturing for the company run by Tim Cook. But the artificial intelligence boom has made servers its fastest-growing product. A deal announced last week with $4 billion engineering specialist TECO Electric & Machinery 1504.TW helps it seize the opportunity to branch out.
Foxconn, formally known as Hon Hai Precision Industry, and fellow Taiwan-headquartered TECO want to become a one-stop shop for clients setting up large-scale AI data centres. The two are cementing the strategic partnership by taking a $400 million equity stake in each other.
The server business accounted for nearly a third of Foxconn's roughly $230 billion in revenue last year. The $86 billion group’s management estimated in March that sales will surpass those from iPhones within two years. It's vital that happens, because other core businesses have flatlined, and new ventures like electric vehicles have yet to contribute much. On Monday, Foxconn said it had decided to sell a U.S. car factory for $375 million to focus on other strategic priorities.
Pairing up with TECO could increase the chances of success. Foxconn brings servers and related hardware such as cooling systems to the venture, while TECO can cover the equipment that wraps around the computer room, particularly electrical infrastructure. Its expertise in air conditioning, fibre optics, microgrids and renewable energy are all relevant, too. The smaller partner has worked on more than 700 MW of completed data centre projects so far, the company says. For context, the entire Asia Pacific region added about 500 MW of capacity in the first half of this year, Cushman & Wakefield reckons.
The ultimate goal is to jointly build and sell modular data centres – standardised designs that can be built faster than rivals’ bespoke offerings. The hope is that this will win more clients, removing what at present is a huge concentration risk for Foxconn. Its work producing servers for Nvidia NVDA.O drove the company's overall topline sales growth in 2024 and 2025, according to Morningstar analyst Dan Baker.
There's not much room for error in Foxconn's new venture: the company's overall net profit margin has hovered around 2% for several years. But investors are optimistic and sent shares up 6% the day after the deal was announced. At the very least, diversifying from smartphones is a good call.
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CONTEXT NEWS
Hon Hai Precision Industry, also known as Foxconn, will form a strategic partnership with industrial motor maker TECO Electric & Machinery to boost development in the AI data centre market, they said on July 30.
After the pair exchange shares worth some $400 million, Foxconn will hold a 10% stake in TECO, which will hold about 0.5% of Foxconn.
Foxconn's server business is driving sales growth https://www.reuters.com/graphics/BRV-BRV/klpybmzdzvg/chart.png
(Editing by Antony Currie; Production by Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))
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