Apple’s Original Equipment Manufacturer (OEM) partner Foxconn’s production capacity has tightened amid high global iPhone 6 sales. The company, however, intends to turn around its outsourcer image in theLED business, according to China-led.org report.

From LED chip to package applications, LED displays to LED lighting end-products, Foxconn has carefully setup a LED lighting strategy. The LED industry will be a key to Foxconn’s transition from an OEM to a self-owned brand, said the company chairman and founder Terry Guo. The transition will also be extended to traditional electronics and emerging industries.

Yet, the manufacturer’s LED strategy in recent years still indicate it will take a while before the company can achieve its goal. The company’s self-owned brand is still to be established, while it is moving further down the road as an OEM.

Fewer OEM orders

As Foxconn deployed its LED supply chain strategy, the company made new breakthroughs in its OEM business. In 2009, the company became an OEM for international lighting giants Philips and GE. In less than one year, Philips and GE OEM orders exceeded RMB 200 million (US $32.51 million).

But further observation is required to determine whether Foxconn can advance in the LED business.

As China’s labor costs increase, many LED lighting manufacturers are transferring their orders to Southeast Asian countries, which has reduced Foxconn’s LED lighting OEM orders.

In the past, Foxconn was the only Philips and GE OEM, but nowadays Foxconn’s OEM orders are being diverted as Philips transfers some of its orders to other Chinese LED lighting manufacturers. Even Apple’s OEM orders outsourced to Foxconn have dropped from 100% to 80%. Apple’s decision to diversify its suppliers has reinforced Guo’s worries.

As China gradually loses is worker advantages and business costs increase, OEM is no longer a long-term business strategy, said Yang Guoqing, General Manager, Shenzhen Ruisipu Lighting.

Compared to listed LED manufacturer Elec-Tech International (ETI) and San’an Opto’s recent activity, Foxconn’s LED investments are relatively small.

Foxconn’s advantages are diminishing, as Chinese manufacturers quickly catch up and establish automated production lines, and establish industry standards. Some Chinese manufacturers’ costs and manufacturing technology are already more advanced than Foxconn.

According to industry insiders, Foxconn’s LED lighting industry strategy is at a crisis, the company’s OEM trend has become increasingly unobvious. Many industry insiders were scared at first that the technology behemoth entering the LED industry would become a major threat, but manufacturers no longer view Foxconn as a major competitor.

This is mainly because there are a growing number of LED lighting manufacturers, which has further lowered production costs. Companies with OEM capacity that meet Philips and other lighting manufacturers demands have also increased. For instance two years ago, Taiwan’s Lite-On Technology formed a partnership with Epistar and local system manufacturers to overtake Lextar’s Philips LED lighting orders. Chinese lighting manufacturer CNLIGHT and others have also become Philips LED lighting OEM.

A couple of years ago, Taiwanese LED manufacturers controlled LED package technology, but Chinese LED package technology has caught up in a short period. Many manufacturers are now outsourcers for European, American, and Japanese manufacturers. It is increasingly difficult for Foxconn’s OEM model to survive.  

More importantly, Foxconn’s strategy implements both OEM and self-brand models, which makes leading lighting manufacturers more cautious.

The road ahead to Foxconn’s LED branding

In the LED sector, Foxconn is trying to establish its own brand and establish a comprehensive LED production line, but this kind of transition is very difficult.

Foxconn, which has been a long term outsourcer is unsatisfied with the “OEM” label. The company chairman hopes to make a breakthroughs in a certain product to leave the label behind. However, there are already too many manufacturers in the electronic consumer market which is difficult for Foxconn to enter.

LED lighting is an emerging and trending industry, but the emergence of a strong brand is yet to be seen in this sector. For Foxconn this is a potential breakthrough point.

Only LED products have been branded with Foxconn’s brand. While being an OEM for Philips, GE and other international lighting manufacturer, Foxconn has also launched its own LED display and lighting product brands. These also remain Foxconn’s main products.

Despite launching its own LED brand, Foxconn’s transition in the last three years has been anything but smooth. The company’s LED lights and brand name are not that well-known.

As an OEM, Foxconn has a solid manufacturing foundation, but since it has never managed its own product brands, the company lacks experienced sales team and distribution channels. These are the manufacturers Achilles Heel in its business transition.

Foxconn Chairman and founder Guo is very aware of these disadvantages, and has been working on establishing distribution channels. The company had considered setting up a comprehensive new business empire by integrating ecommerce, modern logistics and technology services.

According to Foxconn’s plans, the company intends to build a comprehensive channel. The company’s subsidies Media Markt has deployed its business strategy in top tier cities in China, while Cybercity is focused on the IT market. The company also launched an initiative “Dreams of Being Rich Come True” to encourage Foxconn employees to become entrepreneurs in their hometowns in third or six-tier cities in China. Other subsidiaries such as Ganchuang Digital (敢創數碼) is expanding its presence in large retail shops or supermarkets, while Feihu has turned its attention to B2C ecommerce.

All these channels have prioritized electronic digital products, a couple of Foxconn LED lighting product models can be found on the e-commerce website. At current stage, Foxconn LED products sales channels are mostly established by developing distributor channels or through tenders. The company has not entered traditional electronic distributor channels yet.

Currently, Foxconn’s main revenue source is mostly from government orders, OEM, and the group’s own lighting replacement projects. Although, Foxconn has invested in LEDs in many areas throughout China, it is still very difficult to find Foxconn LED products on the market.

Foxconn is a huge ship, and its very difficult for it to turn towards another direction, said renowned Hong Kong economist Lang Xianping. It is very difficult for OEMs to transform their business model, and establishing one’s brand can be an especially rocky road. There is still a long road ahead before Foxconn can become profitable.