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The Titan From Tucheng


Move over, Flextronics. For years, the Singapore giant claimed the top spot among the contract manufacturers that churn out laptops, printers, cameras, and all manner of electronic gadgets for the likes of Hewlett-Packard (HPQ), Apple (AAPL), and Dell (DELL). But a new champion is sweeping past Flextronics International Ltd. (FLEX) to claim the world title of No. 1: Hon Hai Precision Industry Co., a low-profile Taiwanese company based in the gritty Taipei suburb of Tucheng.

In the cutthroat world of Taiwan's electronics makers, Hon Hai is a rarity: It's a profit machine. Most Taiwanese companies these days enjoy healthy sales growth but suffer from anemic earnings, because of relentless pressure from customers to cut prices. But even as Taiwanese blue chips such as Quanta Computer Inc. and Compal Electronics Inc. have struggled, Hon Hai has thrived. The company ranks No. 2 on this year's BusinessWeek IT 100. That makes it four straight years in the top 10, a performance matched only by fearsome Dell Inc. It booked sales of $16.2 billion last year, up 34%, and profits increased 18%. Although its margins are shrinking, Hon Hai remains well ahead of rivals, and its stock price is up 38% in the past year, compared with a scant 1% rise in the Taiex Taiwanese electronics index. "In Taiwan, there is no comparison with Hon Hai," says Tony Tsai of Taiwan Ratings Corp., a Taipei agency.

A key factor in Hon Hai's success is its ability to make everything from components to finished products. The company was founded in 1974 by current Chairman Terry T.M. Gou, who started with 10 employees in the back of a garage making plastic parts for black-and-white TVs. In 1981, Gou branched out into the unglamorous business of making connectors and other parts that fill the guts of PCs. Then in the late 1990s, Hon Hai added more sophisticated products. Today it makes everything from desktop PCs for HP and cell phones for Nokia (NOK) to PlayStation game consoles for Sony (SNE). Since Hon Hai continues to manufacture many components on its own, it can work with fewer suppliers. As a result, it can undercut rivals' prices by as much as 20% -- and generate better margins, estimates brokerage UBS (UBS).

Then there's Hon Hai's global profile. Lots of companies, including Flextronics, have shifted production to low-cost locations in China. But Hon Hai is unquestionably the leader, employing more than 100,000 workers in China alone, brokerage Merrill Lynch & Co. (MER) estimates. Hon Hai keeps a big presence in the Czech Republic, has plants in Brazil and Hungary, and is expanding in Mexico. In 2003, it bought a Motorola Inc. (MOT) mobile-phone factory in Chihuahua and has purchased a big tract of land for a new regional headquarters in Ju?rez, across the border from El Paso.

Now, Gou is working to solidify Hon Hai's lead. In January, Hon Hai raised $433 million in an initial public offering in Hong Kong for its handset subsidiary, Foxconn. On May 13 the company bought the cell-phone manufacturing arm of the Chi Mei Group for $80 million. On May 18, Hon Hai agreed to take over an HP plant in Australia. The HP alliance could boost Hon Hai's revenue by as much as 10% by 2007, brokerage Daiwa Institute of Research estimates.

Gou is hoping to diversify Hon Hai's offerings even further. The company has invested in liquid-crystal display manufacturing and is boosting production of Internet telephones and set-top boxes. It's adding a new, $350 million research and development center in Tucheng. And Gou wants Hon Hai to become a major supplier of electronics for automobiles, too. Many other Taiwanese companies have similar aspirations. But considering Hon Hai's track record, the chances are good that Terry Gou and his company will once again be leading the pack.

By Bruce Einhorn in Hong Kong and Matt Kovac in Taipei


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