Foxconn's Loss-Leader-to-Lock-In Playbook

“Foxconn began offering final assembly on the cheap for the same reason Costco sells hot dogs: It gets people in the door. Foxconn then upended the world of tooling by giving it away for free. That is, Gou would offer to pay the up-front costs of establishing the custom molds, dies, fixtures, and other equipment necessary to start building a product at scale. “That can be half a million or a million dollars,” says a former Apple engineer. “And that was absorbed by the manufacturer—by Foxconn. So Apple just paid for the production parts.” Then Foxconn would work to integrate all procurement, manufacturing, and logistics into a one-stop shop. It made its money back the same way a mobile carrier might—giving customers a free phone but earning fees in a two-year contract.”

“The Foxconn officials proposed to help in the development of the next iPod. They offered to do schematic layouts of the factory and perform much of the grunt work, like creating detailed digital models of the needed parts in CAD, or computer-aided design. Because it had such confidence in Apple’s future, Foxconn said it would take on this work for pennies on the dollar. Tony Fadell credits Terry Gou with understanding the value of working with Apple better than anyone. “Terry was all about the relationship. He knew he needed to be with somebody whom he could grow with,” Fadell says. “He just knew that if he had a really good relationship with us, he would be able to grow with it and get the capital he needed to be able to build the infrastructure ahead of everyone. And the other thing is, we trained all his engineers.””