Hon Hai Precision Industry Co., Ltd. (TPE:2317) which is more commonly known as Foxconn Technology Co., Ltd. (TPE:2354) is the world’s leading electronic components manufacturer and has a star-studded customer list, which includes names like Apple Inc. (NASDAQ:AAPL), Hewlett-Packard Company (NYSE:HPQ) and Microsoft Corporation (NASDAQ:MSFT). In fact, you name any IT/mobile manufacturer and it is likely that it is one of Foxconn’s clients.
Berenberg Bank’s recent ‘flash note’ speculates on Apple Inc. (NASDAQ:AAPL)’s role in the adjustment of rising wage costs at Hon Hai. The quick background on the wage issue is that the Taiwanese company has been facing multiple accusations of poor working conditions, rising worker suicide rate, and low wages for some time now. Apple has previously requested the Fair Labor Association, FLA, to scrutinize the working conditions in Foxconn’s factories. Apple Inc. (NASDAQ:AAPL) also agreed to share the costs of these wage adjustments in May of this year. The analysis observes that the gross margins for the electronics manufacturer recovered, but they were down from 47 percent previous quarter to 42.8 percent in the June quarter. Hon Hai’s improvement in profits came at a time when iPhone 4 sales and shipments declined on a quarter over quarter basis. While Apple’s capital expenditure increased between 2011-2012, Hon Hai’s expenses decreased. The analysis notes the tight relationship between the two companies, with Hon Hai taking up 60-70 percent of Apple’s cost of goods and Apple Inc. (NASDAQ:AAPL) contributing to about 40 percent of Hon Hai’s business.
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The opinion also contests the bullish take on Foxconn Technology with Nintendo’s upcoming launches. It observes that Nintendo is simply too far behind in its race with Microsoft’s more popular Xbox, and it is even harder to compete when the whole gaming platform has shifted to phones and tablets.
The analyst’s note also comments on Catcher Technology Co., Ltd. (TPE:2474), the metal casing manufacturer. Catcher will be consistently affected from the issues that plague the smartphone manufacturer, HTC Corp (TPE:2498). HTC accounts for 15 -20 percent of Catcher’s revenues. The problems with HTC are structural, and suppliers like Catcher and Foxconn Technology will continue to take heat. Catcher also did not get a share in iPhone 5, and as the company steps into carbon fibre and fibreglass casings, new competition will spring up from competitors like Foxconn Tech, Ju teng, and Getac.
TPK Holding Co., Ltd. (TPE:3673) is still recovering from Apple’s transition to in-cell touch technology from the previous display touch mechanics. It also does not help that TPK derives 65 percent of its revenues from Apple Inc. (NASDAQ:AAPL). The bullish view on TPK focuses on the company’s stakes in WP8, Surface tablets, and Huawei phones. On the other hand Apple’s transition in touch technology will benefit LG Display Co Ltd. (ADR) (NYSE:LPL), Japan Display, and possibly Sharp Corporation (TYO:6753).
Foxconn International Holding (HKG:2038)’s problem arises from reliance on mobile kings of the past, i.e. Motorola Mobility Holdings Inc (NYSE:MMI), Sony Corporation (ADR) (NYSE:SN), and Nokia Corporation (NYSE:NOK). Motorola has shifted focus to high end smartphones, and Nokia Corporation (NYSE:NOK) has structural problems and is failing to compete with the Android market.
In the end, the analysis advises on steering clear of the aforementioned Asian supply chain, in terms of investment in Apple’s market share, due to lack of pricing power. It favors investing in Apple Inc. (NASDAQ:AAPL), Samsung (LON:BC94), and ARM Holdings plc (NASDAQ:ARMH).