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?