By Clare Jim
TAIPEI Nov 13 Hon Hai Precision Industry's
decision to move away from major client Apple Inc
and the lower-value electronics contract manufacturing
business is a long-term bet that will improve margins and offset
rising labour costs.
The Taiwanese company, better known by its trading name
Foxconn, is building an integrated service package ranging from
electronic devices to apps to cloud computing as it strives to
become more consumer-driven.
This strategic shift is in its early days: Hon Hai still
draws an estimated 40-50 percent of its revenue from assembling
iPhones and iPads, a slight decline from 60 percent a year ago.
But analysts said the move is likely to boost profit margins
this year for the world's largest assembler of electronic
devices as well as balance out rising wages, and costs, at Hon
Hai's China facilities in the longer-term.
"Its enlarging scale will help Hon Hai's margins in Q3 and
Q4," said Kylie Huang, Taipei-based analyst at Daiwa Securities.
"This has a leverage effect: in the very long run, working
closer with the carriers will help Hon Hai to understand the
needs of consumers when introducing TVs, tablets, game consoles
and smartphones," she added, citing the fourth-generation (4G)
mobile licenses the company recently bought.
Hon Hai is due to report its third-quarter earnings on
Wednesday and analysts forecast operating profit margins to grow
to 3.21 percent from 2.1 percent in the previous three-month
period. Margins in the same year ago period were 3.4 percent.
Net profit in the third-quarter is also seen rising to
T$25.99 billion ($883.4 million) in the third quarter from
T$16.98 billion in the previous quarter, helped by higher
revenues from assembling new Xbox and PlayStation gaming
consoles for Microsoft Corp and Sony Corp.
The figure, however, is likely to be lower than the T$30.36
billion net profit in the same-year ago period, largely due to a
temporary dip in Apple orders.
So far this year, Hon Hai has teamed up with Chinese online
and mobile video provider Le TV in a bid to sell large
Internet-enabled television sets in China. The company is also
setting up a factory in the U.S. to build TVs there.
In June, Hon Hai announced a partnership with Mozilla to
launch devices that run on the U.S. company's Firefox operating
system. It also recently purchased a licence for the faster,
Internet-enabled 4G mobile network in Taiwan, a $311 million
investment aimed at linking its software and devices.
Hon Hai is also reaching out to regional clients to
diversify its revenue sources, a move analysts said would help
its expansion drive.
"We believe Hon Hai is actively addressing this issue,
focusing on developing business partners among Chinese handset
makers and investing in technology and channel business, aiming
to move up the value chain," said Goldman Sachs analyst
Liang-chun Lin in a report.