Apple's iPhone 5 likely to stress Foxconn

Summary:Apple has reportedly lined up components to manufacture its next-generation iPhone as it preps a Q3 launch, but the device appears to be tricky to make. That fact is likely to give a big headache to Hon Hai Precision, which manufactures the iPhone via its Foxconn unit.

Apple has reportedly lined up components to manufacture its next-generation iPhone as it preps a Q3 launch, but the device appears to be tricky to make. That fact is likely to give a big headache to Hon Hai Precision, which manufactures the iPhone via its Foxconn unit.

The Wall Street Journal reports that the latest iPhone will be thinner and lighter than the iPhone 4. The Journal story, which is more of a catch-up piece aggregating previous reports (that are mostly from DigiTimes), cited two sources noting that the iPhone could be delayed if Hon Hai can't improve yields. The next-gen iPhone is reportedly "complicated and difficult to assemble".

Last month, Hon Hai Chairman Terry Gou acknowledged that the iPhone was difficult to make. The company is betting that it can improve its profit margins and diversify into new markets.

Analysts generally aren't impressed with Hon Hai, predicting that its margins will continue to get squeezed. Morgan Stanley analyst Jasmine Lu said, in a research note, that Hon Hai has delivered strong revenue growth — largely tied to Apple — but faces a rough bottom line. She said:

Apple has been Hon Hai's number one customer, with 26 per cent sales contribution in 2010. We forecast sales from Apple to grow by 52 per cent and 33 per cent in 2011 and 2012 to account for 30 and 36 per cent of total sales, respectively. This translates into 61 to 65 per cent of Apple's total COGS (excluding iTunes and other software parts). Robust growth stems from Apple's strong secular growth and share expansion alongside enlarged volume of iPhone and iPad for which Hon Hai serves as the sole source, except for iPhone CDMA that is shared by Pegatron. We believe Hon Hai remains the primary supplier to iPhone 5 and iPad 3, with nearly 100 per cent share allocation. That said, Hon Hai's growth from Apple is derived purely from Apple's organic growth rather than Hon Hai's share gains, which might only have more downside than upside.

Lu adds that Hon Hai also counts HP, Dell and Sony as top customers, but diversification efforts are mixed at best. In other words, Apple and Hon Hai are tethered, and it's pretty clear which partner has all the leverage. That new iPhone that Apple is cooking up may squeeze Hon Hai some more.

Via ZDNet US

Topics: Apple, iPhone

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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