“Shares in Hon Hai Precision Industry Co Ltd took a beating on Monday after lackluster quarterly profits, in sharp contrast with the booming fortunes of its main client, Apple Inc, highlighting one of the main downsides of life as a maker of others’ high-end products,” Jonathan Standing and Clare Jim report for Reuters.
“The chasm between the two companies’ margins illustrates the challenges facing contract makers that specialize in quick and reliable turnaround but have no brand cachet of their own, because of increasing competition and pressure from electronics companies to decrease manufacturing costs,” Standing and Jim report. “Hon Hai’s operating margins slid to 0.9 percent in the January-March quarter while Apple’s was 39.3 percent… Other reasons for the weak first quarter included a worse than expected loss from affiliate Foxconn International Holdings and low yield rates on the new iPad in January and February, analysts said.”
“Hon Hai’s operating margins slid to 0.9 percent in the January-March quarter while Apple’s was 39.3 percent,” Standing and Jim report. “The margin squeeze for Hon Hai could worsen in coming months because of a 16 to 25 percent wage increase for workers, via a deal worked out between Foxconn Technology Group, of which Hon Hai is the flagship listed unit, and Apple,” Standing and Jim report. “At an event on Saturday unrelated to its earnings announcement, Chairman and founder Terry Gou acknowledged the difficulties of the company’s business model. ‘Labor cost is a problem everyone faces. Every Chinese city has a regulation on minimum wages … we’re paying more than other companies, it’s hurting our profit,’ he said.”
Standing and Jim report, “Rising labor costs in China, where millions of devices are assembled, could increase the pressure on Apple and other electronics manufacturers to help pay for it. While neither Apple nor Foxconn has said what the cost-sharing arrangement, if any, is between the two companies, Wall Street is assuming that Apple will have to cover at least part of the increase in wages.”
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