Inside Innoconn: Foxconn's new hardware startup incubator

BEIJING, China -- Foxconn subsidiary FIH Mobile quietly opened its doors last month to select hardware startups from the West. Despite Foxconn's usually secretive nature, CNET was given an exclusive look inside the company's Beijing campus as a preview of FIH Mobile's bet on hardware startups -- an initiative it calls Innoconn.

China's biggest manufacturers are well aware of the hardware crowdfunding trend that has the potential to change the future of commercial manufacturing. By opening up its own incubator for hardware startups, there's a definite sense that Foxconn -- best known as the contract manufacturer of Apple's iPhone -- is searching for its next big hit.

Ideas require execution

For evidence of the exponential growth in hardware crowdfunding initiatives, look no further than the increasing number of projects on Kickstarter. "We are seeing amazing enthusiasm from hardware creators," a Kickstarter spokesperson told me. "We had 4,823 product design and technology projects in 2013, up from 2,730 in 2012."

Foxconn sees the current landscape in a harsher light, however. To set the tone of the presentation, Foxconn official Jack Lin opened his address to visiting Western hardware entrepreneurs with this warning: "Sexy products are not the same as commercial products."

Lin went on to claim that 80 percent of Kickstarter hardware projects have failed, a figure that's disputed. According to research conducted by University of Pennsylvania-Wharton Assistant Professor Ethan Mollick, more than 75 percent of hardware projects on Kickstarter are delayed, but fewer than 4 percent fail to deliver.

When questioned about its track record, a Kickstarter spokesperson defended the reputation of its hardware campaigns by pointing out the success of Oculus , Pebble , Toymail, and 3Doodler.

"Sometimes the unexpected success can make the project more complicated to execute. For a hardware project, more backers mean more things to make. That can cause delays," the spokesperson explained. "But countless great ideas like these have come to life thanks to Kickstarter, and many have turned out to be the foundations of thriving companies. We're incredibly excited about that."

Regardless of Foxconn's claims about crowdfunding, its Innoconn division is capable of playing a key role for aspiring hardware startups, with an aim to "support hardware innovation in early stages".

Innovation meets world-class manufacturing?

The Western startups that crowded into a cramped conference room had, of course, all heard about Foxconn, whose clientele includes Apple, Nokia, Xiaomi, and Huawei to name but a few. Foxconn also boasts that it delivered more than 50 mobile products to market between 2006 and 2013.

Knowing the hurdles often thrown up by the manufacturing process, Foxconn's appeal to hardware startups is apparent on paper. The founders in the room ranged from neophytes to veterans weary of the search for a reliable manufacturing partner. But they all understood the complexity of the process.

Mike Kasparian, CTO of Atlas Wearables, explained that his woes were simply in finding the right manufacturer in the first place. "There are networks like Alibaba and Thomasnet and many more, but these are just directories," Kasparian says. "Finding a good contract manufacturer with experience in the product line that we are working on is proving to be a difficult task."

Other common issues include low-quality products from manufacturers, unanticipated delays (a Western company may not realise when Chinese New Year is, for example), high costs, multiple rounds of prototyping, shipping, and scope creep.

Foxconn is home to state of the art machinery, R&D services, and design prowess. The equipment and manpower it houses is impressive, including buildings dedicated solely to testing equipment that meets international safety standards. And since the company by itself doesn't excel in pure "innovation", it hopes pairing its manufacturing nous with groundbreaking startups will be an ideal match.

Startup culture clash

The manufacturer has a long way to go before its culture is inviting to Western startups, however. Innoconn's co-working space in Beijing, which sits adjacent to an empty Nokia production floor, is musty and uninviting. It's not somewhere you'd want to spend hours holed up, especially as the Foxconn campus is two hours south-east of Beijing city. Walking anywhere outside the conference room required a minder.

Then there's the red tape. A company that manages 1.3 million employees has plenty of rules and regulations that can make it difficult -- particularly for a startup.

"It would be great to work with a contract manufacturer that has incredible volume buying power and one we'd almost certainly never outgrow," Josh Chan, CEO of Lightup.io, told me, "but on the other hand we'd be concerned about our work orders getting pushed aside by larger companies' requests."

In the end, despite receiving positive feedback from Foxconn, Atlas Wearables decided to request quotes from smaller manufacturers in Taiwan, Shenzhen, and Suzhou who "would be able to provide more attention to us" and had experience in wearables, Mike Kasparian told me.

Thinking big

The tour made it clear that Foxconn wants to be in on the ground floor for the next big thing. "I don't know who will be the next Lei Jun [the founder of Xiaomi]," Jack Lin admitted, "so we're looking at this trend."

What's fuelling its need to invest in these new players is perhaps the growing threat coming from this hardware startup scene. Foxconn will be competing against smaller manufacturers, venture capitalists, competing incubators, and angel investors as they all jockey to scoop up the same hardware startups Innoconn is vying to attract. FIH Mobile recently launched online platform Kick2real in a bid to speed up the discovery of hardware startups amid this growing competition.

Foxconn has also been faced with investor concerns over its slowing growth and declining revenue. Its bet on attracting hardware entrepreneurs isn't all too different to China Mobile's experimental subsidiary China Mobile International, responsible for launching the Skype competitor Jego. Foxconn, similarly, is seeking additional ways to expand its core business.

If Innoconn cannot convince hardware entrepreneurs they will receive personal attention as well as its high-end manufacturing capabilities, it will struggle to seal many deals. But if this is just a proving ground to find the one small idea that becomes an international sensation, Innoconn might only be looking to seal a very select few deals anyway.