Apple makes billions of dollars with fat margins, while most of its products are made by a Taiwan company with slender margins. But the balance of economic power between the two companies is gradually shifting, which is one big reason why we like Hon Hai Precision Industries and are adding it to our Conservative Portfolio.

The split between Silicon Valley and Asian tech in the past has been that Silicon Valley dreamed up the new products and marketed them to a public that was led by the younger generation of Americans, while Asians set up large factories using cheap wages and made the products.

This arrangement is epitomized in the long-standing and important relationship between Apple and the world’s biggest maker of consumer electronic products, Hon Hai, which carries out a high percentage of Apple’s worldwide manufacturing.

Another reason is that much of the technical, manufacturing, tooling and detailed design expertise is held in Asia, and we are seeing Asian companies gain more control over the entire design, production and even innovation process.

And Hon Hai is looking to the future. Earlier this month it announced an ambitious 10-year investment plan in India. Terry Gou, chairman of Hon Hai, better known as Foxconn Technology Group outside Taiwan, said that India will be more than a location to assemble products, and will be a hub for long-term, strategic investment that will both sell to Indians and use Indian expertise to develop products.

So we expect to see Hon Hai’s $45 billion in market value and Apple’s $700 billion converge to some extent. In the long run, we want to own the companies such as Hon Hai that control the production process, as well as those that have the links to consumers. Apple’s legendary operating margins have tended to decline in the last few years, from 35% in the year ended September 2012 to 28% in the last quarter, whereas Hon Hai’s have increased from 2.4% in 2011 to 3.4% in 2014.

Hon Hai Precision Industries (ADRs OTC: HNHPF, each representing 2 Ordinary shares) has a 41-year history of rapid growth since it was founded in Taiwan by Gou in 1974 with $7,500. Its major breakthrough came in 2001, when Intel decided to concentrate on its core competency, chip-making, and subcontracted motherboard manufacturing with Hon Hai. Hon Hai has now grown to $133 billion in 2014 sales, $78 billion in assets, $45 billion in market capitalization and TWD 4.1 billion in net income. The company also has $23 billion in cash on hand.

Hon Hai does most of its manufacturing in China, where it has 12 factories in nine Chinese cities, employing about 500,000 people. In addition, it has factories in Japan, Australia, India, Malaysia, South Korea and Pakistan, as well as Europe, Brazil, Mexico and Indianapolis. Overall it makes about 40% of consumer electronics products sold worldwide.

Hon Hai is primarily a contract manufacturer, manufacturing products including the iPad, iPhone, Wii, BlackBerry, Kindle, PlayStation 4, Xbox One and Wii U. It partners with global computer, communication and consumer electronics companies in joint design, joint development, manufacturing, assembly and after-sales services for their products.

The company has an active research operation in nanotechnology, wireless connectivity, material sciences and green technology, and has accumulated over 55,000 patents worldwide.

Hon Hai in 2014 became active in Taiwan’s mobile-telecom market, buying two 4G licenses and merging with Asia Pacific Telecom, the country’s fourth-largest operator.

Beating Expectations

Hon Hai’s first-quarter net income climbed 55% over the previous year to $959 million, beating analysts’ estimates, while first-quarter revenues were up 15%. It is currently trading on a historic P/E of 9.4 times and a prospective P/E, based on 2016 earnings, of 9.3 times. It has a dividend yield of 4.2%, based on the TWD3.8 per share declared in respect of 2014 earnings, more than double the level of the previous year. The shares are expected to go ex-dividend in late August. Since Taiwanese dividends bear a 20% withholding tax, U.S. residents should probably buy the shares in a taxable account to reclaim this.

Hon Hai is a central participant in the tech revolution that is changing our lives. We should own it.