TAIPEI Taiwan's Hon Hai Precision Industry Co plans to split off its connector business into a separate entity next month as the unit struggles with dull computer demand, according to two sources familiar with the matter.
The connector-making operation, which generated $2.7 billion in revenue last year or 2.5 percent of the company's total, was Hon Hai's primary line of work when it was founded in 1974 and contributed the "conn" in its trading name Foxconn.
But as margins come under pressure in Hon Hai's traditional business of assembling gadgets for other companies such as Apple Inc - which alone provides 60 percent of its revenue - the world's largest contract electronics manufacturer is shifting its focus to high-margin, sophisticated components.
The Network Interconnection Business Group (NWinG), which makes connectors and cables largely for the stagnant PC sector while more high-tech smartphone connectors tend to come from Japan, will become an independent entity from July 1, the sources said.
The business group, one of 13 in the company, generated T$80 billion ($2.68 billion) in revenue last year, they said. It returned to the black last year with a small profit and is expected to continue that performance this year, one of the sources said, adding that the company will lay off some staff this month before it becomes a stand-alone entity.
"Orders have dropped a lot compared to a few years ago; those from Apple have also been declining," the source said.
Other NWinG clients include Intel Corp, Nokia Oyj, Sony Corp and Google Inc unit Motorola.
Hon Hai spokesman Simon Hsing said the company would make an announcement related to the unit's future at the annual shareholder meeting on June 26 but declined to comment further.
MARGINS UNDER PRESSURE
Hon Hai has also split off its touch panel and camera module businesses into separate companies over the past two years, saying that initial public offerings were possible in the future. But those two units, unlike NWinG, are highly profitable.
The sources said they did not know the company's long-term plans for NWinG.
Hon Hai Chairman Terry Gou first laid out a plan to split off businesses at an annual shareholders meeting in 2011, along with other measures to bolster future growth - including the possible adoption of a holding company structure.
"Splitting the unit off would let Hon Hai's financials look better," Fubon Securities analyst Arthur Liao said. "Selling it off could be one option in the future."
Liao said the move would not have much impact on Hon Hai's hefty share capital, which now stands at T$118 billion.
Market researcher Gartner said global PC shipments in the first quarter dropped to their lowest in nearly four years while Barclays Capital forecast second-quarter notebook PC growth would be muted and might be the worst in 12 years, as the industry shifts to smartphones and tablets.
Hon Hai's revenue in the first four months of this year tumbled 16 percent compared with the same period a year ago, well behind its annual target of 15 percent growth. Net profit also eased in the first quarter as sales of iPhones and iPads slowed.
Hon Hai shares have shed 15.6 percent this year, compared with a 5 percent rise in the Taiwanese benchmark index.
Among its efforts to diversify away from its core contract manufacturing business, Hon Hai announced on Monday that it aims to develop and make devices and applications that build on Mozilla's Firefox operating system.
(Editing by Edmund Klamann)