November 18, 2010 5:34 pm

Hon Hai cements Silicon Valley alliance

Hon Hai on Thursday cemented an alliance with three major Silicon Valley venture capital companies in a move that reflects the world’s biggest electronics contract manufacturer’s ambitions to acquire new technologies and move into new areas.

Under the memorandum of understanding, signed between the Taiwanese company and NEA, Onset and DCM, Hon Hai will provide support to the three venture capital firms’ portfolio companies. These range from manufacturing trials, to researching Asian markets for their products.

Terry Gou, Hon Hai chairman, said his company would act as an “incubator centre” for Silicon Valley start-ups. “We can create prototypes, we can help them find clients, we can ensure they have sufficient capital and we can even help them develop markets in Asia as they develop their market in the US,” he said.

“This is just a start. We could have many [such agreements] in future quarters,” he added.

In return, Hon Hai would receive privileged access to new technologies being developed by such companies, which would boost its manufacturing and give it an edge over rival contract manufacturers.

The agreement, the first such signed by Hon Hai in its 35-year history, reflects Mr Gou’s ambitions to add value to Hon Hai’s core business of assembly and manufacturing on contract for companies like Apple, Dell and Hewlett-Packard.

The already-thin margins in that industry are threatened by the rising cost of labour in China. Hon Hai’s consolidated net profit margin for the first 9 months of this year was 2.7 per cent, down from 3.5 per cent a year ago.

Following a spate of employee suicides this year, Hon Hai, the parent company of China-based Foxconn, offered a 30 per cent pay increase to its 800,000 workers in China and Mr Gou in September lowered his target for Hon Hai’s average annual sales growth by half.

The 12 start-ups represented at Thursday’s signing ceremony are all from areas of technology that go beyond Hon Hai’s existing expertise.

They included Splashtop, a software company providing an “instant-on” platform for computing devices, Enovix, a developer of rechargeable batteries and AuthenTec, a developer of biometric security devices such as fingerprint scanners for laptops.

Mr Gou said Taiwan could play a greater role in the development of new technology companies in the US because of the island’s pool of experienced and relatively cheap engineers, its proximity to the growing market for technology goods in Asia and the fact that raising financing has become more difficult in the US recently.

Peter Moran, general partner of DCM, said part of the agreement included the possibility of Hon Hai providing financing to some, but not all, DCM-invested companies. “For some companies that’s the right level of support – for some it’s too forward,” he said.

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