Foxconn’s shares dip on profit alert

Shares in Foxconn International fell sharply on Wednesday after the handset manufacturing unit of the world’s largest contract electronics manufacturer issued a profit warning.

The company issued a statement late on Tuesday saying losses in the first half of this year would widen because of price erosion and a change in its product mix.

The surprise warning sent its Hong Kong share price down sharply, closing at HK$5.11, a drop of 7 per cent. Sentiment was also hit after Morgan Stanley downgraded its rating on the stock from “overweight” to “underweight”.

The warning comes as Hon Hai Precision Industry, its Taiwan-based parent, struggles to deal with one of China’s highest-profile labour disputes. A spate of suicides at its facility in Shenzhen led to heavy criticism of its management style, leading to demands by workers for better treatment and higher wages.

Foxconn International, an affiliate of Foxconn Technology – best known for making Apple devices – is to raise wages for its workers in Shenzhen by 30 per cent from Thursday, a move analysts have said could put further pressure on its margin in the second half.

The company has also said it would offer a 66 per cent performance-related pay rise to factory workers from October 1.

In its statement, Foxconn International did not refer to rising labour costs as a reason for the profit warning. The company, whose big customers include Nokia and Motorola, said: “The expected increase in loss was primarily attributable to lower pricing for the group’s products, changes in product mix and higher depreciation expenses.” It made a net loss of US$19m in the first half of last year.

Lu Chia-lin, an analyst at Macquarie in Taipei, said: “It’s a surprise on the downside. The handset industry has recovered quite healthily in the first half. I didn’t expect FIH to do very badly. I think [the profit warning] has to do with its execution problems and falling margin.”

Foxconn’s operating margin stood at a slim 1.9 per cent last year.

the Financial Times reported this week that Foxconn Technology was preparing to shift part of its production of Apple devices from Shenzhen to cheaper locations in China in order to contain costs.

Foxconn International is also planning to shift some of its production away from southern China and aims to pass on “as much as possible” of the increased labour costs to its clients, who will remain in price negotiations with the company for the next few months.

But analysts doubt its ability to do so because of heated competition among contract manufacturers in China. “Nokia can always turn to another manufacturer,” said Mr Lu.