Hon Hai Makes Push Into Software Development, Telecom Services

Hon Hai Makes Push Into Software Development, Telecom Services

Company Plans to Hire More Than 2,000 Software Engineers and Build a Data Center

LORRAINE LUK

Oct. 31, 2013 8:21 a.m. ET

TAIPEI—In a strategy shift, Hon Hai Precision Industry Co. 2317.TW -0.67% is making a push into software development and telecom services, its latest efforts to seek new avenues of growth as revenue from contract manufacturing slows. Chairman Terry Gou said Thursday the company plans to hire more than 2,000 software engineers to beef up content, software development and build a data center in Taiwan.Hon Hai, also known as Foxconn Technology, 2354.TW +0.14% is the main assembler of Apple Inc. AAPL +0.38% ‘s iPhones and iPads, and the world’s biggest contract manufacturer of electronics. In recent years, the company has been diversifying its business and client base as Apple and other clients look to place more orders with smaller competitors such asPegatron Corp. 4938.TW +0.25%

“The future is about integrating software with hardware. That’s why MicrosoftMSFT +0.28% and Amazon have made their own hardware devices,” Mr. Gou said.

To improve its profitability and regain growth momentum amid rising competition, the Taiwan-based company has also branched out into the retail market by selling its own brand of mobile accessories for new iPhones.

On Wednesday, the company said it has secured a fourth-generation high-speed mobile spectrum license in Taiwan, reflecting its ambitions in expanding into the more profitable services industry.

Taiwan’s National Communications Commission said Hon Hai unit Ambit Microsystems Corp. will pay $9.20 billion New Taiwan dollars ($312 million) for the high-speed mobile spectrum. Taiwan’s major carriers including Chunghwa Telecom Co. CHT +0.54% , Far Eastone Telecommunications Co. 4904.TW +4.81% and Taiwan Mobile Co.3045.TW +1.52% were among the six winners of the mobile spectrum auction.

Ambit Microsystems makes routers, modems and wireless products. Taiwan’s mobile penetration is more than 100% but the island’s carriers only offer 3G services.

“A high-speed 4G network is a crucial platform where we can run the next-generation tablets and smartphones manufactured by Hon Hai,” said Mr. Gou. “Taiwan’s mobile market is just a showcase. We will partner with other carriers to offer international data roaming services around the world as we see huge potential in the data roaming market.”

Analysts said Hon Hai’s strategic foray into the mobile services market makes sense but they raised concerns about the hardware maker’s lack of experience in services.

“Possibly, Hon Hai could be looking at an experiment like Google GOOG +0.52% Fiber, in providing wireless services plus content plus hardware in select cities. However it still raises the question of capital allocation, as the company goes into capital intensive areas that are beyond its core competitive advantage of manufacturing,” CLSA analyst Chitra Gopal said in a recent report.

Hon Hai has invested in a variety of companies providing telecom cables, broadband and satellite communications equipment. However the latest 4G auction is the largest investment to date. Mr. Gopal said Hon Hai could be looking at 4G services as an avenue to design its own brand equipment including base stations and handsets.

“Given Hon Hai already provides contract manufacturing services for all major telecom equipment vendors, the need to go direct raises questions. Also, the cost of license fees, recurring costs to build and maintain a network raises the capital intensity of the business. This comes at a time when sales and profit growth is lacking,” said Mr. Gopal.

Hon Hai’s second-quarter net profit rose 41% to 16.98 billion New Taiwan dollars, helped by strong iPhone sales. But the profit jump failed to soothe concerns that the company which earns more than 40% of its revenue from Apple, faces challenging times ahead as Apple is seeking to add new assemblers for its iPhones and iPads.