BlackBerrys tie-up with Foxconn signals priority shift

Written by New York Times | Jakarta | Updated: May 20 2014, 12:16pm hrs
BlackBerryBlackBerry CEO John Chen with the company?s Z3 smartphone, designed by Foxconn
Indonesians have long loved BlackBerry devices. When the company introduced a new phone two and a half years ago, a crowd at shopping mall here became so unruly in part because of a half-price offer for the first 1,000 buyers that riot police were rushed in to stand by.

But even in Indonesia, BlackBerrys fortunes have changed. Last week, when the company started selling the Z3, a smartphone it made specifically for this market, consumers reacted with a collective shrug.

Nevertheless, the arrival of the Z3, a touch-screen device mainly notable for its budget-friendly $190 price, signals a new path for the struggling company.

BlackBerry, like most phone makers, has long contracted out the manufacturing of its phones, but the Z3 has also been designed and distributed by Foxconn Technology Group, the Taiwanese manufacturer.

BlackBerrys partnership with Foxconn, a company perhaps best known as a builder of iPhones and iPads, comes at a critical time for BlackBerry. Although sales of the companys devices have plummeted globally in recent years, the revenue from the phone business remains vital as John Chen, BlackBerrys chairman and chief executive, tries to shift the organisations focus to services and software.

By reaching a deal with Foxconn, Chen may have bought himself some time if only a little.

John Chen is just sustaining the handset business as he sorts out the way ahead, said Nick Spencer, an analyst with ABI Research in London.

But at these low volumes, you wonder about BlackBerrys viability. Consumer electronics is about scale, he added.

While a four-hour tour of stores in Jakarta last week found no lines for, and relatively little shopper interest in, the phone, BlackBerry said in a blog post that the Z3 had attracted substantial interest and had sold out by Friday. It did not provide any sales figures.

During its last quarter, the company sold 1.3 million phones, compared with six million during the same period a year earlier. But without the phone business, BlackBerry would be a significantly smaller company.

In the last quarter, the ailing hardware business still generated 37% of BlackBerrys $976 million in revenue. A year earlier, phones accounted for 61% of $2.7 billion in sales.

While Foxconn cant do anything to reverse BlackBerrys popularity slide, the partnership will eliminate several financial uncertainties for Chen.

A large portion of the $5.9-billion loss that BlackBerry reported for last year came from writing off unsold phones and unneeded phone parts. Foxconn now assumes that risk.

In an interview last week in Jakarta, Chen offered his theory about Foxconns interest in the partnership.

Sixty to 75% of all phones is common parts, Chen said. Things that we order and that they dont use, they can be used somewhere else. They could be in an HP printer or a Canon whatever or a Dell computer or an iPhone and vice versa.

Two representatives for Foxconn declined to comment directly on its relationship with BlackBerry. We are focused on supporting our customers by providing services such as research and development, design, manufacturing and logistics support, the company said in a statement. Moving up the value chain to provide a full suite of services has been our ongoing strategy.

Michael Palma, an electronics manufacturing services analyst at IDC, said that by no longer sourcing parts by itself, BlackBerry will benefit from Foxconns buying power while having a clearer idea of the final cost of handsets from the outset. I think thats smart, he added.

Foxconn will also help BlackBerry shorten development cycles. BlackBerry has a long history of being slow to develop new products BlackBerry 10, its most recent flagship product, was repeatedly delayed.

Chen said BlackBerry employees handled the software development for the Z3 and supervised Foxconns work on its hardware in a process that took four months. This is probably the fastest in the industry, he said.

It also is a fortuitous time for Foxconn. Palma said BlackBerry was dealing with a Foxconn subsidiary, Foxconn International Holdings, which is known in the industry as FIH. The subsidiary, however, has been struggling. In the past, the subsidiarys main client was Nokia, another company whose phones have fallen out of favour with consumers. (Nokia is now part of Microsoft.)

Palma said FIH had since turned mainly to small phone companies in China for its business. BlackBerry becomes a nice add-on, he added.

Chen offered his opinion of what Foxconn hopes to gain.

Profits from manufacturing, a highly competitive business, are slim. But by developing its design and engineering business, Chen said, Foxconn was starting to get more and more into the value-added part of the equation.

Despite what he views as the success of the Z3s development, Chen said BlackBerry would continue to design the hardware and software for more expensive phones aimed at the European and North American markets, at least for now.

As for BlackBerrys slump in Indonesia, several analysts say the blame rests largely on the company. IDC estimates BlackBerrys market share in Indonesia was 4% during the first quarter of this year, down from 25% a year earlier.

The companys BlackBerry Messenger, or BBM, instant messaging service remains exceptionally popular in Indonesia. But once BBM became available on Android phones, many Indonesians decided they could do without BlackBerry handsets, said Ryan Lai, an IDC analyst in Kuala Lumpur, Malaysia.

Cheaper handsets and a larger apps ecosystem also pulled Indonesian consumers toward Android, he said.

The Z3 may be less costly than previous BlackBerry offerings, but that may not be enough. Ruby Alamsyah, an independent technology analyst in Jakarta, said that Android phones now are sold in Indonesia for as little as the equivalent of $88, less than half the price of the Z3.

I think the Z3, with the optional engraving of Jakarta on the back, is only a marketing gimmick, he said. They still want to recover in the Indonesian market but I dont think theyll get it back if the price is still higher than most cheap Androids.