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IPO

IPO

China’s embrace of Foxconn unit’s US$4.3 billion IPO has a tinge of desperation to it. Here’s why

PUBLISHED : Tuesday, 29 May, 2018, 12:16pm
UPDATED : Tuesday, 29 May, 2018, 12:16pm

Just look at that list of investors in Foxconn Industrial Internet’s IPO.

Forget BAT. It was obvious that Baidu, Alibaba Group Holding and Tencent Holdings would take minor stakes in the Foxconn Technology Group affiliate’s blockbuster Shanghai listing. Those three are in the bottom tier of cornerstone buyers anyway.

Leading the line-up is the Shanghai State Development & Investment, which is subscribing for 73 million shares, or 3.7 per cent of those expected to be sold. Central Huijin Investment, China Railway Investment, China Structural Reform Fund and China Life Insurance round out the top five.

Note the pattern: All are state-owned enterprises. In fact, the list of 20 strategic placements is dominated by state-affiliated investors. The top 14 have shorter lock-up periods – half of the shares can be sold after 12 months, half at 18 months. Those lower on the totem pole, like Shanghai Oriental Pearl Group and the BAT collective, are stuck for 36 months.

I don’t imagine Foxconn boss Terry Gou had a lot of choice in the allocation, but he’s a savvy political operator and would probably have come up with a similar list himself.

This isn’t so much a case of companies being called in for national service – Taipei-based Foxconn and its FII listing would have done just fine without state help – as ensuring Chinese flag bearers join the spoils, and maybe even learn a thing or two about the business of technology.

Foxconn is pitching FII as a leading-edge company at the forefront of future trends. In reality, it’s a more mundane manufacturer whose bread and butter is making metal iPhone casings and internal frames, while industrial robots barely show up in its revenue data.

Infographic: Anatomy of an iPhone, what’s in it and where the parts come from

Nevertheless, maybe just standing close to a Foxconn unit will allow SOEs to be sprinkled with some of that hi-tech fairy dust. It does make Apple phones, after all, not to mention supplying to Amazon.com and Cisco Systems.

China needs a few more hardware heroes, so co-opting one from across the Taiwan Strait plays well into two core Xi Jinping policies: building technological capability, and limiting Taiwan’s independence.

The billions of dollars China has thrown at the technology hardware industry – notably semiconductors – has done little to dent the dominance of US, Japanese, Korean and Taiwanese companies.

Huawei Technologies is a notable exception, while the case of ZTE – whose survival was threatened by a ban on buying US components – merely highlights the gap.

Analysis: China’s long march for the soul of the nation’s digital future faces an ever-shifting end point

Foxconn’s Hon Hai Precision Industry is Taiwan’s second-largest company, behind Taiwan Semiconductor Manufacturing. Luring FII to list in Shanghai, with a Shenzhen domicile, is a great coup for China. It allows Beijing to claim FII as a Chinese company – not unlike the approach taken to Taiwan as a whole.

Cries of hollowing out are a little overplayed: Taiwan gave up on manufacturing decades ago. China may assemble most electronics devices, but don’t forget that all of Apple’s assemblers are Taiwanese companies with Taiwanese executives dominating the top layers of management.

FII shows the closest Beijing can get to matching Taiwan in technology is to buy into a rare mainland IPO and hope to find some leverage, while picking up some business tips along the way. Dealing with Terry Gou though, it may learn that you can’t outfox the Fox.

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