Hon Hai's consumer-led shift to boost margins, cut costs

Reuters

By Clare Jim

TAIPEI, Nov 13 (Reuters) - Hon Hai Precision Industry's decision to move away from major client Apple Inc and the lower-value electronics contract manufacturingbusiness is a long-term bet that will improve margins and offsetrising labour costs.

The Taiwanese company, better known by its trading nameFoxconn, is building an integrated service package ranging fromelectronic devices to apps to cloud computing as it strives tobecome more consumer-driven.

This strategic shift is in its early days: Hon Hai stilldraws an estimated 40-50 percent of its revenue from assemblingiPhones and iPads, a slight decline from 60 percent a year ago.

But analysts said the move is likely to boost profit marginsthis year for the world's largest assembler of electronicdevices as well as balance out rising wages, and costs, at HonHai's China facilities in the longer-term.

"Its enlarging scale will help Hon Hai's margins in Q3 andQ4," said Kylie Huang, Taipei-based analyst at Daiwa Securities.

"This has a leverage effect: in the very long run, workingcloser with the carriers will help Hon Hai to understand theneeds of consumers when introducing TVs, tablets, game consolesand smartphones," she added, citing the fourth-generation (4G)mobile licenses the company recently bought.

Hon Hai is due to report its third-quarter earnings onWednesday and analysts forecast operating profit margins to growto 3.21 percent from 2.1 percent in the previous three-monthperiod. Margins in the same year ago period were 3.4 percent.

Net profit in the third-quarter is also seen rising toT$25.99 billion ($883.4 million) in the third quarter fromT$16.98 billion in the previous quarter, helped by higherrevenues from assembling new Xbox and PlayStation gamingconsoles for Microsoft Corp and Sony Corp.

The figure, however, is likely to be lower than the T$30.36billion net profit in the same-year ago period, largely due to atemporary dip in Apple orders.

So far this year, Hon Hai has teamed up with Chinese onlineand mobile video provider Le TV in a bid to sell largeInternet-enabled television sets in China. The company is alsosetting up a factory in the U.S. to build TVs there.

In June, Hon Hai announced a partnership with Mozilla tolaunch devices that run on the U.S. company's Firefox operatingsystem. It also recently purchased a licence for the faster,Internet-enabled 4G mobile network in Taiwan, a $311 millioninvestment aimed at linking its software and devices.

Hon Hai is also reaching out to regional clients todiversify its revenue sources, a move analysts said would helpits expansion drive.

"We believe Hon Hai is actively addressing this issue,focusing on developing business partners among Chinese handsetmakers and investing in technology and channel business, aimingto move up the value chain," said Goldman Sachs analystLiang-chun Lin in a report.

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