Hon Hai, Foxconn squeezed on demand, rising salaries

Hon Hai, Foxconn squeezed on demand, rising salaries

Summary: Foxconn's handset unit is seeing lower demand as parent Hon Hai's earnings fall short of expectations.


Hon Hai and its Foxconn unit are feeling the financial squeeze as labor costs increase and customers---notably handset makers---are paring orders.

Foxconn is Apple's primary manufacturer and an effort to improve working conditions has led to higher labor costs.

In an exchange filing via Bloomberg, Hon Hai said that its first quarter net income came in at NT$14.9 billion, up from NT$14.4 billion a year ago. The bad news for Hon Hai? That profit was lower than estimates.

Specifically, Foxconn raised wages 25 percent in February. The unit is also building factories.

In addition, Foxconn International Holdings, which makes handsets as a third party manufacturer, said it will show a "significant increase in consolidated net loss" in the first half of 2012 compared to the same period a year ago.

Also see: Apple's Foxconn flap may pinch contract manufacturersApple's supply chain: A profile of a Foxconn factory employeeNew Foxconn regulations will ripple through Apple's supply chainSupply chain wars: Hon Hai's Sharp investment helps Apple vs. SamsungWith Apple's new iPad, supply chain is the hero

According to a profit warning PDF put out by Foxconn International:

The Board believes that the expected significant increase in consolidated net loss of the Group for the six months ended 30 June 2012 was primarily attributable to lower demands from some of the Group’s major customers thus resulting in lower sales of the Group’s products, and decline in the Group’s gross profit margins principally as a result of unfavourable pricing changes and increased costs associated with product migrations.

Worries about Hon Hai and Foxconn have been percolating among analysts in Asia. For instance, Macquarie analyst Daniel Chang noted that Apple's iPhone inventory levels were up in its most recent quarter.

Those inventory levels, which aren't worrisome for Apple per se, translate to fewer orders for Foxconn. Chang said in a research note:

Apple reported 1Q12 iPhone shipments at 35.1m units, which was inline with our shipment estimate for Hon Hai and Pegatron. However, we found Apple’s comment about iPhone inventory rising to 8.6m units a bit concerning. In addition, based on several iPhone related component makers’ 2Q12 tone, we see downside risk to our iPhone assumption for Hon Hai. We expect Hon Hai’s 2Q12 iPhone shipments to drop below 20m units (-40% QoQ) and much lower than the street’s 24-26m forecasts.

Topics: Hardware, Apple, iPhone, Mobility, Smartphones

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  • What about...

    All those Lumia phone made by Foxconn? Surely since the Lumia 900 is such a success, they should easily sell enough of them to Nokia, to make up for the shortfall.
    Jumpin Jack Flash
    • They produce only the outer casing for Nokia

      with rest of the phone built in Sriperumbudur, India.

      On an interesting note, Steve Wozniak says of WP7: [i]Woz revealed how he considered the platform to be easy-to-use, and complimented how apps look ???more beautiful than on Android or iPhone???. In fact, he had a great deal of praise for Windows Phone, and WPCentral highlighted a few of his most positive comments

      "Compared to Android, there's no comparison"
      Intuitive and beautiful"
      "Just for looks and beauty, I definitely favour the Windows Phone over Android"
      "I???m just shocked; I haven???t seen anything yet that isn???t more beautiful than the other platforms"
      "It makes me feel ???Oh my gosh, I???m with a friend, not a tool???" (referring to UI interactions and graphics)
      "I just really like the experience and will be carrying the Windows Phone everywhere"[/i]
      Tim Cook
  • Next quarter will be worse...

    With Apple's sales cycle, there are no major product launches coming until the end of Q3. This means that Apple product sales typically drop during this period. And with inventory already high, that means orders will be even lower.

  • Boo-hoo

    How dare workers earn a decent wage... And given our own political leaders (in the past) acknowledged "labor creates all wealth", the CEOs to hoard it all is tantamount to "redistribution of wealth" or "stealing".

    Then again, all of the poorly-applied thermal paste is tantamount to sloppy work ethics on the part of the workers, unless they are dictated to keep exceedingly high quotas, at which point fingers get pointed back to "management".

    And for all the flapdoodle about Chinese workers wanting to take jobs for less pay than we do, the high suicide and dissatisfaction rates promptly squash that belief too. (look it up, web searching is your friend.)

    And the "law of supply and demand" - more people knowing about these issues might hopefully engender less demand. If not, lower wages ensure there is less demand because nobody can spend on these things... funny how that works...
  • thanks

  • nice topic

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