Produced by | Entrepreneurship Frontline

Art Editor | Xiao Qing

Reviewer | Song Wen

A contract manufacturer once known for making routers and switches has now become a core supplier commanding more than half of the global AI server ODM market—and its performance has soared.

On October 29, Foxconn Industrial Internet (601138.SH) released its 2026 third-quarter report. In the first three quarters, the company posted operating revenue of 941.414 billion yuan, up 55.88% year on year, and net profit attributable to shareholders of 40.375 billion yuan, up 79.55% year on year—both growing rapidly.

Yet beneath this impressive growth, fully shedding the old "contract manufacturer" label is easier said than done. In the first three quarters, Foxconn Industrial Internet's consolidated gross margin was only 7.09%. Although it edged up 0.33 percentage points from a year earlier, it remains relatively low for the 2026 AI industry chain.

In addition, business expansion has pushed accounts receivable ever higher, tying up substantial funds with downstream customers. Continuous capacity expansion also demands relentless capital investment, creating a huge gap between book profit and operating cash flow.

These practical difficulties continue to haunt Foxconn Industrial Internet.

1. Performance Surges, Cloud Computing Becomes Core Business

Foxconn Industrial Internet, formally Foxconn Industrial Internet Co., Ltd., is a listed company under Foxconn Technology Group. Its parent, Hon Hai Precision, is the world's largest electronics manufacturing services (EMS) provider, with more than 40% of the global contract manufacturing market, and is best known for consumer electronics contract manufacturing.

In 2018, Foxconn Industrial Internet listed on the Shanghai Stock Exchange under the halo of the "first industrial internet stock." At the time of listing, its core main business was contract manufacturing communications and mobile network equipment, mainly supplying high-precision structural parts for smartphones to top brands such as Apple, while also contract manufacturing network communication products such as routers, switches, and telecommunications equipment. At that time, the company's overall gross margin hovered around 8% year-round, earning processing and manufacturing fees, and the "contract manufacturer" label was deeply entrenched.

2024 marked an important turning point.

Before 2024, communications and mobile network equipment was the company's largest main business, covering network equipment, high-precision structural parts, telecommunications equipment, and more. Although the categories were numerous, growth was slow. From its listing in 2018 to 2024, revenue from this business crept up from 259.154 billion yuan to 287.898 billion yuan—overall, sluggish growth.

As industries accelerate their AI transformation, demand for computing power has exploded. Servers, the basic units providing computing power in data centers, have seen demand surge alongside the scale of large model parameters.

Foxconn Industrial Internet keenly seized this window and bound itself tightly to leading overseas cloud vendors. A Goldman Sachs research report predicts that Foxconn Industrial Internet's global AI server ODM market share is expected to rise from 55% in 2026 to 69% in 2028.

Beyond AI servers, Foxconn Industrial Internet has built a complete AI infrastructure construction chain. On the computing end, the cloud computing segment covers GPU/ASIC servers, AI racks, and liquid cooling systems, handling the production and support of computing power; on the transmission end, the communications segment covers high-speed switches and smart network cards, enabling efficient interconnection between computing nodes.

Specifically, the cloud computing business began to become the main performance growth engine in 2024. By 2025, revenue from this business reached 602.679 billion yuan, a year-on-year surge of 88.7%, accounting for 66.75% of total revenue.

(Chart / 2025 financial report)

In the first three quarters of 2026, AI-ASIC server shipments increased 1.5 times year on year and 80% quarter on quarter, while AI-GPU rack shipments rose 70% year on year and 15% quarter on quarter.

In addition, a new generation of AI racks has begun shipping, and its overall market share continues to increase compared with the previous generation of products.

(Chart / Third-quarter report)

The second-largest segment, communications and mobile network equipment, is the company's traditional stronghold and includes two major directions. Among them, high-speed network equipment for AI data centers is an easily overlooked "hidden gem."

AI infrastructure relies on servers. GPUs handle computing, and servers carry computing power. Thousands of computing nodes must work together, which requires switches and network cards to build high-speed data channels. The larger the AI cluster and the more nodes there are, the more obvious the data transmission bottleneck becomes—and the stronger the demand for high-speed network equipment.

These products fall within the communications and mobile network equipment segment, including 800G/1.6T Ethernet switches, NVLink switches, SuperNIC network cards, CPO optical switches, and others—the "information superhighways" of AI data centers.

In the first three quarters of 2026, the company's shipments of 800G and above switches increased 80% year on year and 25% quarter on quarter, with products covering multi-chip platform Ethernet switches, CPO switches, NVLink switches, and SuperNIC network cards.

The third-largest segment, industrial internet, was the flagship concept when Foxconn Industrial Internet listed, mainly providing intelligent upgrade solutions for manufacturing factories, such as industrial software, automated production lines, and remote operation and maintenance systems.

But for a long time after listing, the scale of this business remained limited. In 2022, full-year revenue from this business was only 1.9 billion yuan, accounting for less than one segment of total revenue.

By 2025, this business accounted for only 0.08%, with revenue falling to 694 million yuan; in the 2026 third-quarter report, the company also did not separately describe this segment among specific business segments.

2. Scale Surges but Profit Is Thin—Hard to Change Contract Manufacturing DNA

Behind the rapidly growing revenue and global market share, has Foxconn Industrial Internet completely shed the contract manufacturer label and completed its transformation into a technology company?

Looking at the profit structure and position in the industry chain, its contract manufacturing foundation has not undergone a fundamental change.

The most intuitive manifestation is gross margin. In the first three quarters of 2026, the company's consolidated gross margin was only 7.09%. Although it increased by 0.33 percentage points year on year, it remains at an extremely low level across the entire AI industry chain.

By business, in 2025, the cloud computing business with the highest revenue share had a gross margin of only 5.73%, while the traditional communications and mobile network equipment business had a gross margin of 9.28%.

(Chart / 2025 financial report)

By comparison, upstream chip leader Nvidia's gross margin is around 75%, while midstream optical module manufacturers generally have gross margins of 20%–30%—a very obvious gap.

The reason is mainly that Foxconn Industrial Internet's material costs remain high. The 2025 annual report shows that direct material costs for the company's 3C electronic products accounted for 92.50% of total costs, direct labor only 2.19%, and depreciation and amortization 0.69%. Labor and equipment depreciation combined account for less than 3%.

(Chart / 2025 financial report)

In other words, for every 100 yuan of cost the company incurs, 92.5 yuan is spent on purchasing raw materials and core components, and the value added in the actual manufacturing and processing stage accounts for an extremely low proportion.

This matches the "smile curve" that exists in the industry. Most profits in the industry chain are concentrated at both ends: upstream core chips and core components, and downstream brands and software services; the middle manufacturing and assembly stage is precisely the lowland with the thinnest profits.

In a high-end AI server, GPU chips alone account for more than 60% of the whole machine cost. Add CPU, memory, storage, switch chips, and other core components, and purchased parts account for the vast majority of the whole machine's value. Almost all of this profit is taken by upstream chip manufacturers.

What Foxconn Industrial Internet masters are capabilities such as structural design, whole-machine integration, liquid cooling and heat dissipation, precision manufacturing, and test verification. Core GPU chips, switch chips, and high-speed network card chips all rely on external procurement.

In essence, it is still doing a "high-end contract manufacturing" business, earning processing and assembly fees. When the unit price of AI servers rises due to chip price increases, the company's revenue expands accordingly, but processing fees do not grow in sync. This is one of the important reasons why gross margin is difficult to improve.

The company's profit growth is driven more by the rapid expansion of shipment scale than by an increase in per-unit value added. Under this model, gross margin is highly susceptible to upstream chip price fluctuations, downstream customer price pressure, and intensifying industry competition—and profitability is not stable.

In addition to the inherent limitations of the profit model, high customer concentration is another hidden concern.

Foxconn Industrial Internet's high growth is deeply tied to leading global technology companies. In 2025, revenue contributed by the company's top five customers accounted for more than 62%.

The benefits of binding to leading customers are obvious: the company can capture industry growth dividends first, order scale is guaranteed, and technological iteration can keep up with the most cutting-edge demand. But conversely, it also means the company's operational lifeline is largely in the hands of major customers.

Once core customers adjust capital expenditure plans, cut orders, or divert capacity to other contract manufacturers, it will directly hit the company's performance. In the consumer electronics era, precedents of contract manufacturers rising and falling sharply with major customers' order cycles are not uncommon—and this is also a risk Foxconn Industrial Internet must always guard against.

3. Profit Stuck on Paper, Massive Capacity Expansion Under Industry Cycle

If low gross margin is an inherent attribute of the contract manufacturing model, then cash flow quality and capacity rhythm under rapid expansion are more noteworthy practical issues.

In the first three quarters of 2026, Foxconn Industrial Internet's net profit attributable to shareholders exceeded 40 billion yuan, but net operating cash flow was only 3.216 billion yuan—a difference of more than ten times. Most of its profit remains on paper and has not turned into cash actually pocketed.

One of the core reasons for this divergence is the rapid rise in accounts receivable. At the end of June 2026, the company's accounts receivable were 127.5 billion yuan, and by the end of September they had increased to 197.5 billion yuan. In just three months, they grew by nearly 70 billion yuan, an increase of nearly 55%.

This means that as the scale of AI business expands rapidly, the company's accounts receivable are also accumulating rapidly.

However, the company also alleviates funding pressure by occupying upstream supplier payables. At the end of the third quarter of 2026, the company's accounts payable were 220.66 billion yuan, an increase of nearly 60% from the end of 2025 (137.96 billion yuan). It can be seen that the company is not entirely weak in the industry chain.

It is worth noting that the company's inventory fell from 192.109 billion yuan at the end of June 2026 to 188.940 billion yuan at the end of September, indicating relatively restrained stockpiling.

But overall, the substantial growth in accounts receivable remains the main driver of the company's capital occupation, and the scale of capital tied up at the operating level is still expanding rapidly with business expansion.

At the same time, in order to consolidate market share and undertake subsequent continuously growing orders, the company is still accelerating capacity construction, which undoubtedly further squeezes cash flow.

In the first three quarters of 2026, the company's capital expenditure was approximately 14.088 billion yuan, a year-on-year increase of 40%; construction in progress reached 13.43 billion yuan, a substantial increase from 7.83 billion yuan at the beginning of the year.

It is reported that these investments are mainly used for capacity expansion related to AI servers and high-speed network equipment, with the purpose of undertaking subsequent continuously growing orders and consolidating market share.

(Chart / Third-quarter report)

But this expansion is essentially a bet against the industry cycle.

After deducting capital expenditure, the company's free cash flow for the first three quarters—defined as cash generated from operating activities minus the capital expenditure required to maintain and expand capacity, representing the remaining funds available for discretionary use—was approximately -10.872 billion yuan. In other words, the cash generated from operations is insufficient to cover capacity expansion investments.

This reflects a typical characteristic of the contract manufacturing industry: capacity is the core competitiveness of contract manufacturers, especially during an upcycle driven by the AI computing power boom, where customers prioritize suppliers with sufficient capacity and strong delivery capabilities. To win large orders from more leading customers, the company must first invest in expanding production lines and purchasing equipment. Only by building capacity first can it secure orders, and only then can cash be gradually recovered through economies of scale.

However, this "invest first, recoup later" model is inherently exposed to the risk of industry cycle fluctuations. Global cloud vendors' capital expenditure will not grow rapidly indefinitely. Once the commercialization of large models falls short of expectations and demand for computing power cools, capacity brought online ahead of schedule may face the risk of idling.

How can Foxconn Industrial Internet anticipate the turning point of the industry cycle and avoid repeating the mistake of overcapacity seen in consumer electronics? Regarding this question, "Entrepreneurship Frontline" also sent an interview letter to the company, but as of publication, the company had not responded.

From the perspective of revenue scale, global market share, and industrial layout, Foxconn Industrial Internet has indeed completed a remarkable turnaround, leaping from a consumer electronics contract manufacturer to a core supplier of global computing infrastructure. But in terms of profit model, technological discourse power, and financial quality, it still has a long way to go before becoming a true technology giant.

*Note: The header image and uncredited images in this article are from the official WeChat public account of Foxconn Industrial Internet.