Apple investors brush off China blast impact

SAN FRANCISCO/TAIPEI Mon May 23, 2011 7:33pm EDT

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SAN FRANCISCO/TAIPEI (Reuters) - Shares of Apple Inc regrouped on Monday after Wall Street brushed off the impact of an explosion last week that shut a Foxconn factory in China producing its popular iPad.

Production at the plant in the southwestern city of Chengdu was suspended by Foxconn Technology Group, Apple's biggest manufacturing partner, after three workers died in a Friday blast blamed on combustible dust in a duct.

The incident stoked fears that production of the seminal tablet -- already constrained by shortages of components and rabid demand -- would again be disrupted.

But the impact should be minimal because of Foxconn's ability to rapidly shift output elsewhere in its sprawling network, coupled with Apple's relying mainly on other locations, investors and analysts said.

Shares in the world's largest technology company by market value closed down 0.24 percent at $334.40, after slipping as much as 1.7 percent in morning trading.

"This seems to be a manageable situation," said Channing Smith, Managing Director at Capital Advisors Growth Fund, which owns Apple shares.

"The evidence of that is in the share price today."

Foxconn -- whose main listed flagship is Hon Hai Precision Industry -- plans to resume operation at the plant after it completes an investigation. No timeframe was given.

Market research firm IHS iSuppli forecast that production of half a million iPads could be at risk if the shutdown continues until the end of June.

Foxconn's plant in Shenzhen, which is seen as the main assembly plant for the iPad 2, may not be able to make up for the production loss at Chengdu, iSuppli said, which expects 7.4 million iPad 2s to be shipped in the second quarter.

The Shenzhen plant has the capacity to produce 7.5 million units during the quarter and so tablet shipments could fall short of expected levels -- which are slightly higher than forecast to account for damages and higher demand -- by between 300,000 and 600,000 units, the research firm said.

Apple sold 4.69 million iPads last quarter and is scrambling to meet staggering demand, coping with what company executives have called "the mother of all backlogs." Some analysts predict more than 6 million could ship this quarter.

There remains a 1- to 2-week waiting period for iPads in most major regions. Production had been expected to ramp up during the present quarter to meet demand with the Chengdu plant seen as a newer base for the assembly.

Stern Agee analyst Shaw Wu played down the impact on Apple. saying even at the Chengdu location itself, production was spread out among assembly lines in several unaffected buildings.

"This is definitely a setback," Wu said. "At the same time, it's not that big a deal."


While the impact on Apple is deemed minimal, investors in Hon Hai were worried about the fallout of the blast on the electronics supplier.

The incident marked the latest worker deaths at Foxconn, which last year grappled with a barrage of criticism after a spate of suicides tore the lid off what some called dismal conditions for its mostly migrant labor population.

A potential loss of orders from Apple could amp up the pressure on Hon Hai, which is already facing rising costs.

Shares of Hon Hai in Taipei closed nearly 3 percent lower on fears Apple may shift orders to its rivals. They had dived as much as 5.2 percent following the news of the blast, to their lowest since late August.

"Foxconn Group makes 70-80 percent of Apple's parts, and Apple may reconsider concentrating production with one contract maker," said Hua Nan Securities Chairman David Chu. "This could hurt Hon Hai in the long run."

But the brokerage said the explosion happened in a machinery room for cutting metal and, given that no assembly line or inventory was involved, the blast was unlikely to cause any meaningful production disruption.

Hon Hai said Monday the company was assessing the damage and local authorities were investigating the explosion. The plant would resume operation once the investigation finished, it added in a stock exchange filing.

"A majority of iPad2 production is still done in Shenzhen, and that even if the whole Chengdu iPad2 production line is damaged, the impact should be less than 20 percent of iPad total production," UBS said in a research report.

The Chengdu facility was set up late last year in an effort to lower labor costs which are cheaper in the inland areas.

Chengdu city government has said last October that Foxconn Technology Group would invest $2 billion on a new plant in Chengdu.

Many manufacturers, including PC contract maker Quanta Computer Inc and Compal Electronics Inc, have also been moving operations in China away from coastal regions such as Guangdong and Fujian to inland areas.

(Additional reporting by Faith Hung and Argin Chang; Editing by Edwin Chan, Lincoln Feast, Bernard Orr and Sofina Mirza-Reid)

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Comments (1)
kc10man wrote:
No big deal. A thousand Chinese peasants could die from fires or “suicides” and it wouldn’t impact Apples profit margin.

May 23, 2011 9:02pm EDT  --  Report as abuse
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