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01 April 2021

Foxconn Earnings Highlight Apple Reliance

Since Apple released its first iPhone model in 2007, the company’s market capitalisation has risen over 25,000%, making it one of the largest companies in the world by market capitalisation. Throughout this 14-year rise to the top, Apple has relied on a company known as Hon Hai Precision Industry, which trades as Foxconn Technology Group, to assemble its devices each year. The relationship fuelled the development of Foxconn; which is now the largest contract manufacturer in the world, boasting a workforce of more than 700,000 employees and assembling components for other famous electronic goods including the iPad, Kindle, PlayStation 4, Xbox One and Nintendo Switch.

Foxconn’s position as Apple’s chief manufacturer of course came at a cost, and despite strong revenue growth over the last ten years, profit margins have suffered at the formidable demand for Apple products. The company’s gross profit margins have fallen from c.6% in 2007 to around c.2% today, whereas Apple has maintained margins c.40% across the same period. The drastic difference between the two highlights the challenge Foxconn currently faces, with roughly 50% of its revenue coming from Apple’s business, the dependency has flipped to the point where Foxconn is reliant on Apple to sustain its high-volume, low-margin strategy in the near-term.

The electronics manufacturing giant’s latest earnings reports is reflective of such challenges; net income decreased by 4% which missed analysts’ estimates for the third time in three quarters, while revenue rose 15%. Over the full year, revenue increased to NT$5.36tn from NT$5.34tn a year earlier, and net profit fell 12%, which the company relates to production and demand constraints due to the pandemic. Despite higher revenues in a year of regression for the smartphone industry, Foxconn’s profit declined mainly due to thinner gross profit margins and increased operating costs, which being a theme for several years must concern some shareholders.

Nonetheless, Young Lui, Foxconn’s Chief Executive Officer who took control from founder Terry Gou in 2019, is taking a pro-active approach to facing these challenges. The company now plans to enter faster-growing industries such as electric vehicles (EV), robotics and 5G communications equipment in rather ambitious long-term goals. If Foxconn can penetrate the EV market as a contractor, this could transform the business away from small electrical goods and prove to be lifeline from the grasp of Apple. Foxconn’s share price has risen almost 50% since Liu announced in December that the EV business is already showing promise and will continue to boost revenue in 2021.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Foxconn Earnings Highlight Apple Reliance
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