Hon Hai, Foxconn boxed in after Apple boom

Hon Hai, Foxconn boxed in after Apple boom

Summary: Hon Hai and Foxconn need to diversify from Apple in a hurry. That move is easier said than done.

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Hon Hai and its Foxconn unit are reportedly trying to diversify away from Apple, which accounts for 40 percent of the company's production according to analysts. Diversification, however, isn't going to be easy for Hon Hai.

According to the Wall Street Journal, Hon Hai is looking to add new contract manufacturing customers, looking into media and software investments, and may launch its own branded wares. Here's the problem: Hon Hai added a massive amount of production in recent years to manufacture the iPad and iPhone.

honhai

The move looked good until Apple started facing increased competition. Hon Hai can't grow forever just like Apple can't. Hon Hai makes PCs, game systems and TVs too, but it's unlikely that it can add enough business to offset Apple.

Fubon Research analyst Arthur Liao said in a note that Hon Hai is in a downward spiral and won't manufacture a low-cost iPhone. Liao said:

We are still concerned about falling iPhone 5/5S demand and the cannibalization of 9.7” iPads because of the iPad Mini. Moreover, the TD-LTE version of the iPhone 5S has design issues which may impact Apple’s China market share in Q4 2013. According to our model, Hon Hai’s 2Q/3Q sales will decline or be flat to reflect soft demand for the iPhone 5/5S and the loss of the “iPhone Mini.”

On May 14, Hon Hai reported first quarter net income of NT$16.35 billion, which was well below estimates, on sales of NT$809 billion.

Macquarie Capital analyst Daniel Chang said in a research note:

We continue to believe Hon Hai needs a major restructuring to make it a more efficient company. Apple accounts for 40-50% of sales while Apple is diversifying its high-growth products to Pegatron. The rest of Hon Hai's businesses are all struggling. Hence, we believe Hon Hai will remain challenged to grow its large revenue base.

In other words, Hon Hai wants to diversify, but the demand for computing devices overall won't be enough to offset the Apple boom in recent years.

Topics: Tech Industry, Apple, Smartphones, Tablets

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4 comments
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  • Chain, Chain, Chain

    Fubon starts with the premise that iPhone demand is falling and that 7" tablets are cannibalizing 10" Apple sales. Cannibalizing is an opinion word: the real problem would be declines in units sold. Is that happening?

    Also Fubon talked about a product that doesn't exist, the 5S.

    The Wall Street Journal says Hon Hai would like more customers. I think everyone, except for that hipster night club without the sign, wants more customers all the time. But we'll cede to WSJ that motivation has been reported accurately. Still, if the customers they don't have are struggling, it doesn't seem very promising. Plus, is 40% really undiversified? I know it could be better, but we also know that the mobile business seems to be Apple, Samsung and lots of also-rans, some of whom have their manufacturing partners well in place.

    Meanwhile Macquarie Capital opines. They say the problem is that Apple is moving some business elsewhere, not that Apple will be needing less manufacturing. Based on the three sentences, I see Macquarie as arguing that because Apple is diversifying its manufacturers, it is not going to drive growth at Hon Hai. Meanwhile, nothing else they manufacturing (not other customers or non-customers) is growing. In order to achieve profit growth, Hon Hai needs to cut costs, which is the simplest meaning of restructure.

    Which is fine, it's all reporting until your analyses, which I find problematic for a few reasons.

    I think there are serious ways in which Fubon's analysis is not credible. You include it at face value without any discussion of its merits. Apple's has increased competition, true, but has continued to have annual growth in its mobile products. Apple could give Hon Hai more business, but don't we understand why it would be wise of Apple to not be reliant on a single vendor, where it can.

    Your final summary doesn't fall out naturally from the Macquarie quote. Hon Hai would like to diversify. It could be a distant doom sighted. It could be prudence. As with many aspirations, it isn't a matter of wanting making it so. But wouldn't it be more likely that the primary impediment would be the very few customers who can replace Apple's volumes, and those that could are clearly handling their increased demands through their current array of manufacturing partners or capital assets?
    DannyO_0x98
    • Thank you

      Your excellent analysis of the opinion posting by Larry Dignan is of the quality that I used to expect from technology publications. However, quality journalism seems to have died - replaced by reports that rely on doom-and-gloom reports of Apple to drive page views.

      Thank you for taking the time to post a response that clearly shows the poor quality of the report.
      JScottA44
  • So what about

    Sony, Nintendo, Toshiba, Dell, and others who also use Foxconn/ Hon Hai?
    athynz
  • Diversify

    Apple sales hasn't grown as expected. They are feeling pressure to create more jobs in the US as well as from competition from other areas [such as the smartphone market]. Mac sales have declines [partially because of the increased iPad & iPad Mini sales. the iPad itself has had slower sales because if it's junior version eating up sales [why spend $600 on an iPad when you can save yourself about $200 and get a junior version (a bit slower) with a smaller screen].
    You don't put all your eggs in one basket. As such, you don't want to depend on just one company, just like you don't want to buy stock in one company.
    Gisabun