April 29, 2011 4:48 pm

Hon Hai operating costs rise 80%

Hon Hai on Friday revealed the financial impact of its landmark wage hike by announcing that its operating expenses had risen more than 80 per cent from a year ago.

The world’s biggest contract manufacturer of electronics, and a key producer of Apple products ranging from the iPod to the iPad, raised wages for its nearly 1m staff by 30 per cent last year following a spate of suicides that tarnished the company’s image.

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Hon Hai’s move last May sparked a wave of similar wage increases for other manufacturers in China and called into question the continued existence of a so-called ‘China Price’.

Hon Hai said its operating margin halved as a result, falling to 1.1 per cent in the first quarter of this year compared to 2.2 per cent a year ago. While revenues increased by a third to T$554bn ($19.3bn), before-tax profits fell by a fifth to T$15.8bn. Edmund Ding, vice president and spokesman, said the “results were as expected and remain seasonal.”

Hon Hai did not elaborate on the reason behind the cost increase, although the wage hike, which started to take effect near the end of last year, would have been a key factor. Another was likely the Taiwanese company’s continued efforts to move production further inland away from Southern China.

The spike in expenses was the first indication of the wage hike’s financial impact, coming just days after Hon Hai reported that operating margins had actually increased slightly in the fourth quarter of last year compared to the third quarter.

The fact that Hon Hai’s margins had fallen shows how the company had been unable to pass on the full increase in labour costs to its clients, which also includes Nokia and Dell.

Jenny Lai, analyst for HSBC, said in an earlier note that Hon Hai’s profitability may also be hurt in the first quarter by the transition from the first iPad to the iPad 2. Apple had said iPad shipments had fallen by 30 per cent quarter-on-quarter in the first quarter of this year, although iPad 2 shipments is expected to greatly increase from the second quarter onwards.

“The smaller economy of scale is likely to hurt [Hon Hai’s] profitability,” Ms Lai said.

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