Global contract manufacturer Foxconn (Hon Hai Precision Corp) conducted its annual meeting of shareholders last week and continued to reinforce a business transformation strategy. The company’s chairmen indicated to shareholders that revenues and profits will grow 10 percent this year.

According to the Wall Street Journal, Foxconn’s $130 billion in revenues for 2013 were but a one percent increase over 2012 levels, while operating margins have flattened to 2.76 percent. The contract manufacturer’s direct labor costs have more than doubled since 2009, compelling the company to accelerate initiatives directed at robotics and factory automation.

Founder and CEO Terry Gou indicated to the company’s shareholders: “Business transformation is crucial for Foxconn’s sustainable growth in the next ten years.” That is the similar message delivered at last year’s stockholder event. Mr. Gou indicated that the contract manufacturer will continue to test new business models that integrate hardware, software and services initially in Taiwan, and then in global markets. According to a published report by China Post, the current investment plan reflects the company’s determination to go beyond its status as the world’s biggest contract electronics manufacturer and move into new generation businesses. Gou indicated a strategic focus on development in four key areas — smart grid networks, smart broadband networks, smart Information networks and cloud computing-based artificial intelligence networks.

Initiatives underway include the offering of mobile accessories under the Coverbank brand name, a Bluetooth headset branded under the name of Candyard along with smartphone related distribution and inventory management services including local distribution of Blackberry smartphones.

A recent posting by PC World indicates that earlier this month, Japanese tech company Softbank unveiled Pepper, a personal robot that Foxconn helped develop. Pepper is designed to interact with humans, and can talk and even read people’s emotions: “I believe it will become a huge platform for human companionship” Gou indicated, noting that additional software services could be bundled with the robot. According to PC World, Foxconn is already a partner with U.S.-based Tesla Motors, having built the touchscreen found inside the company’s vehicles. But last week, Foxconn’s CEO revealed that his company is developing its own electric cars, with a target price of less than $15,000.

However, the company continues to indicate that it has no plans to enter the smartphone market as a branded competitor since over half of current revenues come from being a key contract manufacturer for Apple. In a recent Supply Chain Matters commentary, we noted rumors that Foxconn is being tapped as the lead manufacturer for Apple’s next release of the iPhone.

As Foxconn , the most dominant global contract manufacturer continues at its efforts towards business diversification, the implications for other contract manufacturers are also evident.  Contract manufacturing is a low margin business without product diversification or increased investments in factory automation.  The China advantage for direct labor savings is fast evaporating.

The world of contract manufacturing is rapidly changing and so will the manufacturing outsourcing dynamic.  Supply Chain Matters has noted in prior commentaries, a new model of manufacturing will evolve over the next five years, one with different regional manufacturing capabilities and perhaps different global players. The inter-relationships will be dynamic and so will the notion of brands, products and services.  OEM’s will have increased pressures for opening up more customer value-chain opportunities to key suppliers, or else, suffer the consequences.

High tech and consumer OEM’s can no longer lean on past assumptions related to outsourced manufacturing business models.

Bob Ferrari