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.
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.