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Foxconn Technology Group’s finance arm partnered with Dianrong earlier in 2017 to launch a blockchain-based supply chain finance platform that effectively left banks on the sidelines. Erika Morphy reports on its impact.

Earlier in 2017, Taiwan-based conglomerate Foxconn Technology Group completed a proof of concept and pilot project to test new technology that was not manufacturing related. Rather, the multinational electronics contract manufacturer had been experimenting with a new finance platform that would allow it to provide working capital to its supply chain base. By March, it was ready to launch.

The platform, Chained Finance, is based on blockchain technology. To manage it, FnConn, the financial services arm of Foxconn, has partnered with Chinese online lending marketplace Dianrong.

Blockchain, briefly, is a distributed cryptographic ledger (another way to think of it is as akin to a type of relational database) that is being used to support a wide range of transactions across multiple industries. The technology has been called transformative because it is secure, transparent (there is an audit trail) and cost-efficient, because it disintermediates the middleman – which in Foxconn’s case is a bank.

Put another way, Foxconn was able to set up a financial apparatus from which its suppliers can easily get working capital instead of sapping time and energy (not to mention the possibility of low credit resources) trying to procure this money on their own.

Outfoxing the banks

“Foxconn was able to use its large capital reserves to cut costs for its vendors and make its supply chain healthier, all the while leaving banks out of the equation entirely,” says Dion Lisle, vice-president and head of fintech at CapGemini. “It is a fascinating model.”

Indeed, a healthier supply chain is a concept that even a conglomerate such as Foxconn can appreciate. Most large manufacturers have, at one point or another, been burned by a hapless supplier that has not had the capital to buy the raw materials to meet its obligations on time. The result is that manufacturers often follow the example of a German auto parts company operating in China that Mr Lisle described, which routinely doubles the orders it places with smaller vendors to ensure it has what it needs to meet its own orders.  

Nelson Petracek, chief technology officer at software integration company Tibco, says there is another reason why an enterprise such as Foxconn would appreciate a blockchain-based supply chain finance initiative: namely the smart contracts that it can enable. Smart contracts are able to automatically track the providence of an asset through the many different steps of the supply chain and pay out money when a good has been marked as received. “The distributed aspects, the immutability, the security – all of those things are relevant of course,” says Mr Petracek. “But it’s really the smart contract piece that seems to be getting the most interest from enterprises.” 

A higher profile

Most businesspeople are aware of blockchain, and recognise that it has become a force to be reckoned with in the financial and transportation sectors. In October, for instance, IBM reported that it and a network of banks were using digital currency and blockchain software to send money across the South Pacific in near real time. In another example, earlier in 2017 IBM and Maersk launched a blockchain platform to track shipping documents.

It should be noted that there are three types of blockchain: public networks (Bitcoin’s being a widely known example), permissioned networks and private ones. The private networks are the ones making inroads in the business community, usually through group efforts such as the ones IBM is facilitating.

But it is still relatively rare for a private company to try this entirely on its own. Foxconn, though, has proved that it can be done. “It’s good that organisations are getting involved but the fact is that markets are moved by market makers, and Foxconn, in this case, is a market maker that is changing the way that [the game] is played,” says Mr Lisle. 

Now other companies are considering putting a similar structure in place, he adds. Many more wish they could but have reluctantly concluded they cannot because, for all the advantages that a blockchain-based supply chain finance solution can offer, it also comes with some disadvantages. The company must have both sufficient excess reserves and a robust IT infrastructure. Ideally, it should also be a company with many tier two and tier three suppliers, otherwise it might not be worth the cost. 

A question of capital

This is not an initiative to waste on tier one suppliers, says Mr Lisle, as they probably do not need the working capital – and if they did, they would easily suck up most of your reserves. Indeed, having the necessary capital on hand is key to any supply chain finance programme a company may want to set up, whether it is based on blockchain or not. Simply put, if a company invests its reserves in a supply chain initiative then it may not have cash available for such short-term investments as bonds or Treasury bills. Corporate treasurers do not always look kindly on putting reserves to work in such a manner. 

The German company in China that doubles its orders, for example, has considered putting a blockchain-based supply chain finance structure in place but eventually concluded it did not have the capital reserves in place to execute it properly, according to Mr Lisle. 

Finally, to be able to deploy blockchain a company must have a strong technology profile. “There are other considerations that go into this type of project,” says Mr Petracek. “IT is going to be heavily involved.” For starters, the IT department must coordinate how to get the data into the blockchain and then back out again, and how to synchronise the blockchain processes with other critical back-end systems, he adds.

Perhaps most importantly, it must align the smart contracts with other business processes. On the other hand, as the appeal of smart contracts grows, this particular step may well become an easily replicated task. 

This article is sourced from fDi Magazine
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