This week, Hon Hai Precision Industry, the parent to global contract manufacturing leader Foxconn, disappointed equity markets by posting a 19 percent decline in calendar Q1 revenues. Financial media was quick to correlate Hon Hai’s revenue decline with previously reported disappointing demand for Apple’s iPhone5 phone, compared with the earlier model.
The fallout from this announcement has already begun with reports that Hon Hai has dependence on 60-70 percent of its revenues on a single major customer. An analyst at KGI Securities is widely quoted as indicating: “A quarterly decline was expected, but not a yearly decline … This shows that Hon Hai’s revenue depends too much on Apple, and iPhone orders corrected more than expected.” Keep in mind that the first three months of the calendar year includes planned shutdowns for the Chinese Lunar holiday period in early February. None the less, equity markets have already factored that reality, and have taken a keen eye to the global leader in manufacturing services.
Hon Hai had actually reported a decent Q4 in terms of revenues and profits, but this latest announcement deflates history. Hon Hai stock has declined considerably since the December period.
As Apple’s supply chain re-positions itself for potential new products and new sources of supply in 2013 and beyond, Hon Hai is caught in the middle. While Apple continues to feel pressure from the investment community for a perceived slowing down of product innovation cycles and failure to buffer competitor Samsung, Hon Hai must continue to deal with the challenges of fluctuating product build schedules and increased social responsibility pressures from the direct labor force. We have previously commented on plans for more investment in robotics to mediate direct labor complaints of monotonous work and to buffer increased wage rates across Foxconn’s China based facilities.
A consensus of equity analysts expects Hon Hai to grow revenues by over 5 percent and profits by over 16 percent in 2013. Judging from the Q1 result, more challenges remain for this global based contract manufacturing and technology development firm, including finding new customers that can buffer the demands of Apple.