Foxconn Intl slides deep into red on rising costs

HONG KONG Mon Aug 30, 2010 10:30am EDT

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HONG KONG (Reuters) - Foxconn International Holdings (2038.HK), the world's top contract cellphone maker, slipped deeper into the red, hit by falling prices and higher depreciation costs as it moves production to inland China to cut labor costs.

A key supplier to cellphone brands such as Motorola MOT.N and Sony Ericsson (6758.T) (ERICb.ST), FIH said on Monday its January-June loss widened to $142.6 million from $18.7 million a year ago.

It lagged JP Morgan's estimate for a $30 million loss.

Costs for buying new properties more than doubled to $169 million as it embarked on a broader drive to move production facilities to lower-cost areas.

"(The) global handset environment continues to be difficult during the first six months of 2010," the company said. "With intensifying market share shifts among global OEM brands, as well as gray market players, the industry remains volatile and challenging for players in the handset supply chain."

It said such challenges would continue and that it will put priority on moving into the increasingly popular and more lucrative smartphone space.

"With industry consolidation continuing, we believe the ability to broaden value-added offerings will be the key to industry players' competitiveness," it said.

The unit of Taiwan electronics giant Hon Hai (2317.TW) has struggled with a wave of labor unrest in China, where increasingly assertive migrant workers are calling for better conditions and higher pay.

Revenue rose 2.1 percent to $3.23 billion despite falling prices for its mainstay feature phones as consumers increasingly turn to smartphones such as Research in Motion's RIM.TO RIMM.N BlackBerry and Apple's (AAPL.O) iPhone.

Clients such as Nokia (NOK1V.HE), which still depend on feature phones like ones made by Foxconn for much of their sales, have also been pulling back on outsourcing as they concentrate on developing smartphones.

FIH had said in June it expected its loss to widen due to weaker pricing and higher depreciation costs.

Rising labor costs in its main production facilities in southern China also prompted the company to say in June it may be forced to seek higher prices from clients.

"It has really been a difficult year for FIH," Bonnie Chang, an analyst with Yuanta Securities in Taipei, said before FIH released its results. "It has had to deal with falling demand, rising cost, while having distractions like the suicides (of workers) and having to move its production inland."

Foxconn shares are down 38 percent so far this year, lagging the benchmark Hang Seng Index's .HSI 5 percent decline.

(Additional reporting by Kelvin Soh; Editing by Michael Shields)

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