Faulty iPhones could cost Foxconn millions

Foxconn may end up spending up to 1.6 billion yuan (US$256.8 million) to replace as many as 8 million pieces of faulty iPhones.

According to a China Business Journal report published on Saturday, Apple on March 15 returned 5 million iPhone units to Foxconn due to problems over appearance and functions. Citing a source from Foxconn who spoke on the condition of anonymity, the report said the total number of returned iPhones could be as many as 8 million.

Foxconn may have to pay a labor cost of 200 yuan (US$32) a piece, which adds up to about 1.6 billion yuan (US$256.8 million) for 8 million faulty units, if the company is required to "re-manufacture" the faulty phones by using some of the original parts and replacing faulty ones. It is equivalent to two thirds of the 2012 profit generated by Foxconn's integrated Digital Product Business Group (iDPBG), which makes iPhones for Apple and is the company’s most profitable group.

"It is not the first time that such quality control problems occur," said the source. "The fast growth and expansion of the production brings huge challenges to the newly promoted and management staff."

The iDPBG has been trying to address quality control issues since end-2012 by changing its directors from Michael Chung to Chung Chengyu, and to the current Chen Huilong. However, Chen was said to lack experience in dealing with Apple, Foxconn's top customer, noted Ben Reitzes, a Barclays Capital analyst, in a Business Insider report on Saturday.

Foxconn suspended the production of iDPBG's three factories in the Chinese cities of Shenzhen, Zhengzhou, and Taiyuan, from April 7 to 15. Apple also sent in investigative staff to help increase the quality production rate. Currently, only 1,000 to 2,000 pieces of iPhones are produced each day by every production line, but the final production rate remains at a low level of 95 percent.

In a separate report by Focus Taiwan last Saturday, a Hon Hai spokesperson, Simon Hsing, denied the figures mentioned in the China Business Journal report. He did add the company will look into issues of management and product yield rate mentioned in the report. 

Hsing was responding to the China Business Journal report which also noted a Foxconn subsidiary, Futaihua Precision Electronics, had begun producing iPhones with each of its assembly liness expected to manufacture up to 2,000 units a day. The plant's yield rate is only at 95 percent though, the report noted.