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Hon Hai's consumer-led shift to boost margins, cut costs

Tuesday, 12 Nov 2013 | 3:59 PM ET

TAIPEI, Nov 13 (Reuters) - Hon Hai Precision Industry's decision to move away from major client Apple Inc and the lower-value electronics contract manufacturing business is a long-term bet that will improve margins and offset rising labour costs.

The Taiwanese company, better known by its trading name Foxconn, is building an integrated service package ranging from electronic devices to apps to cloud computing as it strives to become more consumer-driven.

This strategic shift is in its early days: Hon Hai still draws an estimated 40-50 percent of its revenue from assembling iPhones and iPads, a slight decline from 60 percent a year ago.

But analysts said the move is likely to boost profit margins this year for the world's largest assembler of electronic devices as well as balance out rising wages, and costs, at Hon Hai's China facilities in the longer-term.

"Its enlarging scale will help Hon Hai's margins in Q3 and Q4," said Kylie Huang, Taipei-based analyst at Daiwa Securities.

"This has a leverage effect: in the very long run, working closer with the carriers will help Hon Hai to understand the needs of consumers when introducing TVs, tablets, game consoles and smartphones," she added, citing the fourth-generation (4G) mobile licenses the company recently bought.

Hon Hai is due to report its third-quarter earnings on Wednesday and analysts forecast operating profit margins to grow to 3.21 percent from 2.1 percent in the previous three-month period. Margins in the same year ago period were 3.4 percent.

Net profit in the third-quarter is also seen rising to T$25.99 billion ($883.4 million) in the third quarter from T$16.98 billion in the previous quarter, helped by higher revenues from assembling new Xbox and PlayStation gaming consoles for Microsoft Corp and Sony Corp.

The figure, however, is likely to be lower than the T$30.36 billion net profit in the same-year ago period, largely due to a temporary dip in Apple orders.

So far this year, Hon Hai has teamed up with Chinese online and mobile video provider Le TV in a bid to sell large Internet-enabled television sets in China. The company is also setting up a factory in the U.S. to build TVs there.

In June, Hon Hai announced a partnership with Mozilla to launch devices that run on the U.S. company's Firefox operating system. It also recently purchased a licence for the faster, Internet-enabled 4G mobile network in Taiwan, a $311 million investment aimed at linking its software and devices.

Hon Hai is also reaching out to regional clients to diversify its revenue sources, a move analysts said would help its expansion drive.

"We believe Hon Hai is actively addressing this issue, focusing on developing business partners among Chinese handset makers and investing in technology and channel business, aiming to move up the value chain," said Goldman Sachs analyst Liang-chun Lin in a report.

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