The rising tide at Apple Inc. (Nasdaq: AAPL) isn't lifting all boats. Foxconn Electronics Inc. should be getting a financial boost from being a contractor to the world's biggest consumer electronics company by market value, but that has not been the company's experience in the last several quarters.
Foxconn, which is also known as Hon Hai Precision Industry Co. Ltd., is the world's biggest electronics manufacturing services provider, largely because it is the main manufacturer of iPhones, iPads, and iPods. According to a Reuters report, Apple accounts for about 45 percent of Foxconn's sales, but that relationship has been largely unequal to say the least.
Today, Foxconn announced disappointing first-quarter results. Profits of $509.2 million were well below analysts' forecasts, and the company's operating margin slipped to 0.9 percent. Contrast Foxconn's results with the numbers Apple published last week, including revenue of $39.3 billion and a quarterly profit of $11.6 billion. When Apple announced its record-breaking results, its share price surged above $600 after falling more than 10 percent over the previous week. Today, however, shares of Foxconn International fell almost 3 percent in regular trading in Hong Kong.
Foxconn has been hit hard by reports about its hiring and compensation practices in China. In recent months, the company has had to increase salaries for many of its workers (as much as 25 percent in some cases), and this has hit its margins hard. Foxconn is also being forced to hire thousands of workers while it adds plants in China's hinterland to keep costs down and reduce the psychological problems for employees working thousands of miles from home.
The Reuters report indicates that Foxconn has yet to transfer much of its higher costs to its customers, including Apple. Until it does, the margins will remain under pressure, analysts told Reuters.
This situation is not isolated to Foxconn. Many suppliers to Apple have not benefitted strongly from the company's huge growth. This reinforces the notion that Apple has prospered at the expense of its supply chain. Foxconn needs to be able to transfer some of its added costs to Apple and other customers. Apple needs to protect its margins while being seen as fair to suppliers. What's the best solution for all parties?
Foxconn's increased costs will need to be reflected to Apple at the end of the day. It may not be ideal for Apple but that is the bitter truth. Apple will then have to pass the added cost to its customers. This may make Apple products a bit less desirable and less competitive, however Apple has already been reaping the benefits of really low costs of manufacturing for a long time now. The profits will take a hit but all in all the game will be a much fairer one for all those involved I think.
It's hard to sympathise with Apple who has banked $98B already !! I am sure it will survive. As a matter of fact, this development will heat up the competition and as result, the end users will benefit.
Apple prices its products not just base on cost but other factors such as ecosystem (appstore, iCloud, etc.). I think it should absorb the cost, and not pass down to customers.
Prabhakar, Apple has obligations only to its shareholders. It's not the company's job to protect suppliers. During negotiations, a supplier must look to present a case that is in its own shareholders' interest. Did Foxconn negotiate its contract with Apple with that in mind, that is, to maximize shareholder value? If it failed to make that case because it just wants to get the contract then the management has a problem.
Prabhakar, this is like two sides of a coin. They want to get maximum profit at one end and other end they don’t want to shell out anything for other reasons.
Anna, I think they have to share from the profit. Apple is a customer of Foxconn and if they increase the selling price, Apple may look for alternate sources. So I don’t think Apple may share a part of it.
"I doubt Apple will be able to find a cheaper alternative to Foxconn, though"
@Barbara: I don't think it's all about cost in this Apple's case. Foxconn has been there since Apple started producing iPhones and iPods. Part of the success that Apple has got is because of Foxconn. On papers it may just seem to be another EMS that Apple has a contract with, but I think it's a very risky move if Apple decides to make a transition away from Foxconn. There may be lots of factors that go against Apple which cannot be predicted in advance.
By moving to the core of the industry and offerings services that keep the system humming, a group within the electronics market has rendered irrelevant the question of ownership and control of the supply chain.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
To save this item to your list of favorite EBN content so you can find it later in your Profile page, click the "Save It" button next to the item.
If you found this interesting or useful, please use the links to the services below to share it with other readers. You will need a free account with each service to share an item via that service.
Tweet This