Apple's iPhone 5 likely to stress Foxconn

Apple is prepping a third quarter launch for its iPhone 5, but that fact is likely to give Hon Hai Precision, which manufactures the iPhone via its Foxconn unit, a big headache.
Written by Larry Dignan, Contributor

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

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 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 and predict 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 No.1 customer, with 26% sales contribution in 2010. We forecast sales from Apple to grow by 52% and 33% in 2011 and 2012 to account for 30 and 36% of total sales, respectively. This translates into 61-65% of Apple’s total COGS (excluding iTune 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% 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 Apple is cooking up may squeeze Hon Hai some more.

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